Year: 2011

A dynamic evolution

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First Bank of Nigeria Plc (FirstBank), established in 1894, is a premier bank in West Africa and the leading financial services solutions provider in Nigeria. The bank was founded by Sir Alfred Jones, a shipping magnate from Liverpool, UK. With its head office originally in Liverpool, the bank commenced business on a modest scale in Lagos under the name Bank of British West Africa.

In 1912 the bank acquired its first competitor, the Bank of Nigeria, which had been established in 1899 (as the Anglo-African Bank) by the Royal Niger Company. In 1957 the bank changed its name from Bank of British West Africa to Bank of West Africa. In 1966, following its merger with Standard Bank, UK, the bank adopted the name Standard Bank of West Africa Limited and, in 1969, it was incorporated locally as the Standard Bank of Nigeria Limited in line with the Companies Decree of 1968. Changes in the name of the bank also occurred in 1979 and 1991 to First Bank of Nigeria Limited and First Bank of Nigeria Plc, respectively.

FirstBank has international presence through its subsidiary, FBN Bank (UK) Limited in London with a branch in Paris, and its representative offices in Johannesburg and Beijing. With 1.3 million shareholders globally, FirstBank is the second most capitalised stock on the Nigerian Stock Exchange. The bank also has an unlisted Global Depository Receipt programme.

Leveraging experience that spans over a century of dependable service, FirstBank has continued to build relationships and alliances with key sectors of the economy that have been strategic to the wellbeing, growth and development of the country. With its huge asset base and expansive branch network, as well as continuous re-invention, FirstBank is one of Nigeria’s strongest banking franchises, and remains a market leader in the nation’s financial services industry.

Strong returns,  superior value
The ongoing consolidation in the Nigerian financial services sector, which started in 2005, has shown FirstBank to be one of Nigeria’s strongest and most profitable financial services groups.

In repositioning the bank for both domestic and global competition, it had recourse to raise additional capital. FirstBank’s Hybrid Offer, popularly called ‘The Big Offer,’ set an unprecedented landmark with a subscription in excess of 750 percent, and was lauded as the biggest and most successful in the history of public offers in Nigeria. The bank’s epoch-making achievement was again reinforced when it became the first quoted company in Nigeria to achieve the feat of hitting the trillion naira mark in market capitalisation, the clearest evidence of the market’s estimation of its worth.

FirstBank’s strategy is driven by the two critical imperatives of modernisation and growth, both organic and inorganic. The bank’s growth strategy is to leverage windows of opportunity presented by the ongoing reforms in the industry and the global economies, which have allowed it to better position its strengths and value proposition, while raising the industry’s competition stakes.

With over 600 business locations in Nigeria, the bank has one of the largest domestic sales networks in the country, all online and real time. As a market leader in the financial services sector, FirstBank pioneered initiatives in international money transfer and electronic banking in the country, and is arguably Nigeria’s most diversified financial services group, serving more than five million customers.

Progressive globalisation
In its early years, FirstBank worked closely with the colonial governments of British West Africa by performing the traditional functions of a central bank, including the issue and distribution of specie in the West African sub-region. Subsequently, the bank recorded impressive growth, opening its first branch office in Accra, Ghana in 1896, and a second branch in Freetown, Sierra Leone two years later in 1898. By 1963, the bank had 114 branches in West Africa. These marked the beginning of the bank’s international banking operations.

In 2002, FirstBank established FBN Bank (UK) Limited – a wholly owned subsidiary and the first Nigerian-owned bank in the UK regulated by the Financial Services Authority. In 2007, FBN Bank (UK) obtained authorisation to set up its Paris office to serve as a marketing base to service francophone West Africa. FirstBank also has representative offices in Johannesburg, South Africa (established 2004) and Beijing, China (since 2009).

With this global reach FirstBank provides prospective investors wishing to explore the vast business opportunities that abound in Nigeria with an internationally competitive world-class brand and a credible financial partner.

FirstBank has 10 subsidiary companies in Nigeria, which provide a comprehensive range of retail and corporate financial services, including capital market operations, private equity/venture capital, pension fund management, registrarship, trusteeship, mortgages, insurance brokerage, bureaux de change, life insurance and microfinance. These diverse operations, delivered through widespread service outlets, ensure the foothold of the FirstBank group as a leading financial services provider in Nigeria.

A nation-building model
In the last decade, by playing key roles in the Nigerian government’s privatisation and commercialisation scheme, FirstBank has led the financing of private investment in infrastructure development in the Nigerian economy.

A key element of the bank’s strategy is its continued focus on retail banking/consumer financing, gradually shifting towards a high-yield diversified portfolio by aggressively targeting the middle class consumer market.
The market opportunity is evident from the fact that consumer spending – which is a major driver of domestic demand in developed economies – still constitutes a relatively low percentage of GDP in Nigeria.

The business of FirstBank is operated through branches which serve as comprehensive product engines, overseen by business development offices and regional directorates. These are designed to facilitate and give direction to market activities within the region, and to better serve customers nationwide.

Other channels of service delivery include a modern centralised customer response centre available 24 hours, seven days a week (FirstContact), ATMs, internet banking (FirstOnline) and banking on mobile phones (FirstMobile).

Leading governance standards
FirstBank’s corporate governance practice remains at the industry’s leading-edge. Its continuing commitment to strong corporate governance and improved disclosure levels in the reporting of its financials was reinforced in November 2008 when it won the Nigerian Stock Exchange Quoted Company of the Year Award.

FirstBank is one of the first two quoted companies in Africa to adopt the International Financial Reporting Standard (IFRS). Consistent with its pace-setting good governance principles, the IFRS regime facilitates transparency, understanding, relevance, reliability and comparability of the bank’s qualitative financial statements comparable with global standards.

The bank’s prime status has been reinforced with the recent award of the prestigious ISO/IEC 27001:2005 certification, the world’s highest accreditation for information protection and security from the International Organisation for Standardisation (ISO). By this certification, FirstBank has distinguished itself as the first organisation in Nigeria to achieve ISO 27001, which is an affirmation that the bank has adopted and complied with the highest known standards in information security globally.

Strength in people
As the bank grows its footprints locally and internationally, contributing positively to its customers’ value chains, it hires personnel with the unique skill sets needed to fully leverage its operations. FirstBank is one of the leading private sector employers of graduate-level personnel in the country.

FirstBank’s staff development policy recognises the invaluable contribution that human resources make to growth and development. Consequently, its human capital management initiatives are focused on providing the necessary support for staff, departments and various business drivers to enable the bank to achieve its goals and objectives.

Industry support
In further evidence of the bank’s strength, Standard and Poor’s and Fitch, have rated the bank highly. Standard and Poor’s assigned the bank a long term rating of BB- and a short term rating of B, mirroring the country’s long term BB and short term B ratings by the same agency. S&P notes that “the ratings on FirstBank are supported by the bank’s good market position, adequate capitalisation and moderated financial performance.”
Fitch assigned the bank ratings of B+ (long term) and B (short term), while also affirming the bank’s A+ and F1 (nga) national long-term and short-term respective ratings for the past seven years up to 2009.

Global Credit Rating Company Limited, a Securities and Exchange Commission licensed rating agency, also assigned the bank national long-term and short-term ratings of A and A1+ respectively, with positive outlook, for three successive years.

FirstBank has indeed reinforced its role as a leader in the financial services sector in Nigeria and sub-Saharan Africa with activities and interventions to depict the brand pillars of Leadership, Enterprise, Safety and Security, and Service Excellence.

And the bank has received recognition for its achievements. FirstBank was first listed on the Nigerian Stock Exchange in March 1971 and has since won the exchange’s annual President’s Merit Award for the best financial report in the Nigerian banking industry 13 times. The bank has won the Global Finance magazine awards for Best Bank in Nigeria, Best Trade Finance Bank in Nigeria and Best Foreign Exchange Bank in Nigeria for six consecutive years, as well as EMEA Finance Magazine award for Best Bank in Nigeria in 2009 and 2010.

Grasping the strategic opportunities from Solvency II

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It is now 18 months before Solvency II, the new solvency regime for European insurers and reinsurers, is due to come into force. Insurers have been preparing for a long time, in some instances many years, to implement the regime which will come into effect on 1 January 2013 and which will have far-reaching consequences for those trading in Europe. Financial institutions will also be indirectly affected as they will need to adjust their businesses to meet the changing needs of their insurance clients.

At its heart, Solvency II aims to implement solvency capital requirements that better reflect the risks insurers face, encouraging them to implement appropriate risk management systems and sound internal controls and introduce improved transparency through consistent public disclosure of capital and risk information. It also delivers a supervisory regime that is harmonised across all members of the European Economic Area, providing a consistent level of policyholder protection.

Its impact will also be felt beyond the EEA, as similar models are being implemented or considered elsewhere, such as in Bermuda and South Africa, because of the perceived benefits in having a regime that is equivalent to Solvency II.

The rules are still being finalised and it is likely that a number of Solvency II’s provisions will be phased-in over a number of years to allow an orderly transition into the new regime. But forward planning for capital adequacy and risk management will be vital in order to satisfy the new regime. Investment banks and asset managers should also be considering the strategic opportunities for their businesses to provide products and services that meet the Solvency II requirements of their insurance clients.

A changing strategic landscape
Effective compliance is not the only objective for European insurers: Solvency II has significant strategic implications and presents opportunities for companies to add considerable value to their business. So while companies must not only work to become compliant with the rules, they should also consider the potential long-term impact of the regime, and the strategies necessary to ensure success once Solvency II has gone live. Insurers should therefore, if they are not already doing so, reassess the broader capital and risk implications of Solvency II on their businesses, and plan to harness the opportunities that this new regulatory regime will generate. There are four key dimensions which should be considered.

1 Product portfolio
One area that insurers should be looking at is their portfolio of products. Certain product lines will become more capital intensive under Solvency II, such as annuity business and long-tail liability lines like employers’ liability insurance. In order to become more capital efficient, insurers should consider how they allocate capital between the different product lines in their portfolio and the returns they are generating.

This may mean reducing exposure to the more capital intensive lines, or even exiting some of those lines completely, while increasing the emphasis on products requiring less capital such as personal lines.

Alternatively, for some, it may lead to a conscious decision to engage in more capital intensive lines, where risk-adjusted returns on capital are particularly attractive.

2 Corporate structure and location
Companies may also seek to generate capital efficiencies by changing their corporate structure. Groups with subsidiaries in a number of European countries may find that it is more efficient to restructure from a holding company and subsidiary arrangement to a head office and branch structure, which enables capital to be more easily transferred around the group. This may be of particular relevance where a company has grown through acquisition and capital is tied up in legacy companies.

But such restructuring is complex and can be a lengthy process. Furthermore, a branch structure may be less suited to certain types of business, such as personal lines – where consumers may feel more secure, perhaps influenced by their advisers, with a domestic legal entity. Additionally for life insurers, local regulations (such as on how profits are shared with policyholders) may make the transfer to a branch structure a particularly complex task.

The capital demands of Solvency II may lead international insurers to consider the global allocation of their capital, potentially reducing their emphasis on Europe, and instead turn to markets such as Asia where there is potentially a greater return on capital. Insurers should also be mindful of investors’ objectives, as Solvency II will increase the level of transparency in relation to the performance of the business.

Some companies have talked about re-domiciling to a non-Solvency II jurisdiction in order to avoid the compliance burden, but whether this is a realistic strategy remains to be seen. Other companies are considering mergers and acquisitions in order to improve their capital position. Mutual insurers, which are prevalent in Europe, particularly in France and Germany, may find this an attractive strategy; these companies often find it difficult to raise capital and, as they tend to be smaller, have a disproportionate cost of compliance and lack the benefits of diversification.

3 Capital structure
Companies may have to reconsider their capital structure. Solvency II introduces a tier-structure model to rate the quality of capital instruments and align this to capital requirements; some existing hybrid debt, for example, will not be eligible as Tier 1 (highest quality) capital and will have to be replaced by new Solvency II-compliant instruments.

4 Investment strategy
Solvency II also has implications for insurers’ investment strategies and will lead to a much greater dialogue between an insurer and its investment management function.

Solvency II requires a higher level of capital to be held against certain investment types: equities, property and long-dated bonds attract a higher capital charge than short-dated or EU government bonds. This will particularly penalise life insurers, which tend to use equities and longer-dated instruments to hedge against any inflation.

As a result, companies may need to adjust their investment portfolios in order to make them more capital efficient. An increased use of interest rate derivatives to hedge against inflation could be a possible scenario to achieve greater capital efficiency, although it should be noted that there are capital implications of using such instruments which may offset the potential gains.

The volatility of assets and liabilities is an important issue for insurers as this will affect the capital available for determining an insurer’s solvency position.

Solvency II uses a market-consistent ‘economic’ approach to valuation of assets and liabilities, which means that a firm’s available capital can fluctuate as the market value of those assets and liabilities changes.

Life insurers often hold long-term, illiquid assets which can be subject to big swings in value, and in some European countries embedded guarantees within products can lead to increased volatility in an insurer’s liabilities. It will therefore be important for insurers to pay attention to the pricing and management of their assets and liabilities in order to smooth their capital position.

New tools for strategic views
Looking beyond the macro issues, there are also opportunities for insurers to derive significant value from some of the operational elements of Solvency II. One such area is the Own Risk and Solvency Assessment (ORSA), which firms are required to undertake as part of their enterprise risk management process. The ORSA is the mechanism by which the board satisfies itself that it has a process to manage, in line with its risk appetite, the current risks to the business and the future risks arising from the business strategy, and that this process works in practice. It is the firm’s economic view of the capital required to run the business, irrespective of the capital requirement set out by the regulators.

The ORSA can be a powerful tool when linked to the strategic planning process, as it provides a forward-looking view of how the risks to the business will evolve. To take full advantage of it as a strategic tool, it is important that the board and senior managers understand it so that they can use it in decision-making. It must also be simple enough to provide answers within a short enough timescale to assist management in their analysis, and it must have the capacity to evolve in response to changes in the company’s strategy.

Synergies with IFRS 4 Phase II
A further area where benefits can be achieved is through aligning the reporting requirements of Solvency II with those of the new international reporting standards for insurance contracts (IFRS 4 Phase II). IFRS 4 Phase II is likely to be implemented in January 2015, although this has yet to be confirmed.

The two structures are predicated on a similar model, whereby valuations are based on the present value of expected cash flows and a risk margin liability. Solvency II focuses on capital, while IFRS 4 Phase II focuses on profit.

Both regimes increase the level of reporting transparency, which should make it easier to understand the risks on the balance sheet. This has benefits in that it could help insurers raise capital as investors can more easily understand the company’s performance, something which investors have historically struggled to do.

By developing a single, integrated reporting model for Solvency II and IFRS 4 Phase II, insurers can extract significant synergies in data management, modelling and investor relations. For those firms that do not have the resources or expertise to do this, then a model based on Solvency II but validated in light of IFRS 4 Phase II requirements would provide some of the efficiency gains of an integrated model.

Technology as an enabler
There are challenges to delivering a strategic solution to Solvency II and IFRS. The Solvency II programme must be seen as an integral part of the business and be underpinned by an appropriate operating model, which should include technology design, delivery and a maintenance framework. The programme requires a clearly defined and targeted approach, with architecture that can be delivered in segments.

Technology has a key role to play in delivering business compliance with Solvency II and for most organisations this will mean implementing significant IT, process and organisation change. This is an opportunity to invest in a strategic solution that can add wider value to the business beyond that which could be achieved through a tactical response. These benefits can include improved risk-based business planning, more active product governance and superior customer management.

A further challenge in implementing Solvency II is the need to bring together actuaries, finance, risk, business stakeholders and IT teams. There is a tendency for these groups to operate independently, which can make implementation difficult and limit the benefits that can be achieved. To realise real benefits these departments must work together effectively.

Beyond insurance
While Solvency II may be an insurance regime, it has implications for financial institutions that provide services to insurers, as they will need to respond to the changing needs of their clients. Solvency II presents firms such as investment banks and assets managers with the opportunity to provide tailored Solvency II solutions.

With the changing capital requirements, asset managers will be able to develop products that are more closely aligned with insurers’ needs. They should also be looking at the forthcoming data and reporting needs of their insurer clients and should make the necessary changes to ensure their systems can deliver the required information. If major IT changes are required then the work needs to begin now.

There will also be opportunities for investment banks to provide services to insurers in areas such as M&A and capital restructuring that may arise as a result of Solvency II.

Preparing for 2013
So what should insurers be doing now to maximise the value from the Solvency II regime and the investment they are making to comply?

It should go without saying that companies should be doing everything required of them to achieve compliance with the new regime, such as building their internal models and embedding risk management in the organisation. Despite some uncertainties, the rules are known well enough for detailed preparations to be made, but a close watch should be kept on how the regulations are developing, particularly in those areas where clarification is needed.

Insurers should also be assessing how Solvency II will affect their product lines and investment portfolio. Where there are areas of uncertainty in the rules, scenario planning should be undertaken so that the potential outcomes have been considered and decisions can be made quickly once the rules are finalised.

There is a risk that a herd mentality will ensue once the rules are clear, so it is desirable to have planned a course of action to avoid being caught up in a stampede in or out of certain product lines or asset classes.
Solvency II programmes tend to be led by the finance, actuarial or risk teams, so it is important that the commercial side of the business gets involved so it can understand the implications on the organisation.

The extent to which certain aspects of the rules will be phased in adds an additional layer of uncertainty. It is still not clear which areas will benefit from a transitional period and how long each of these periods will be. This uncertainty may not be resolved until Q1 2012, so insurers should consider how the various possible outcomes will affect their decision-making.

It should also be remembered that Solvency II is being developed against a political backdrop, so the rules in certain areas may not be finalised until late in the process. Insurers should take this into account in their contingency planning.

Ultimately, the full implications of Solvency II may take time to manifest. If the economy and the insurance market are healthy in 2013 then capital levels will not be of concern. But if the markets are troubled then capital will be more of an issue. The transitional measures, which could delay elements by as much as 10 years, will also draw out the impact.

Insurers should consider now the strategic opportunities that can be gained from Solvency II, assessing the potential implications on their business model and how best to capitalise on the new regime as its detail becomes clearer.

While it is important to maintain focus on the important operational elements, there are potentially major gains to be had for those firms that take a strategic approach to Solvency II.

Michel de La Belliere is Deloitte’s EMEA Solvency II Lead Partner. Rick Lester is Deloitte’s UK Solvency II Lead Partner.

For more information: mdelabelliere@deloitte.fr; +33 1 40 88 29 95 rlester@deloitte.co.uk; +44 20 7303 2927

Other available media:
Michel de La Belliere and Rick Lester discuss Solvency II with World Finance’s Nick Laurance (7m 47s, mp3, 7MB)
Francesco Nagari explains the similarities between Solvency II and the IFRS changes (3m 26s, mp3, 3MB)

Sinosteel halts Australian $2.1bn iron ore project


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Chinese iron ore trading developer Sinosteel Midwest suspended work on its $2.1bn Australia-based Weld Range iron ore mining project due to uncertainty surrounding the proposed Oakajee port and rail project.


The $5.2bn joint venture between Mitsubishi and Murchison Metals has been inundated by delays recently and Sinosteel, one of the largest investors by a Chinese company in Australian mining, said it will halt the project until certainty surrounding the port development is resolved.
Continuous delays saw the completion date for the port move from its forecast in 2012 to 2015 and have cost an estimated $100m a year, Sinosteel said.


The COO of Sinosteel, Julian Mizera, said: “We are certainly not closing the door on Weld Range, however we must make the right business decisions in order to protect our assets and ensure a realistic future for our organisation.”

‘Pillars’ strategy pays dividends

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As a leader in the Mexican market in investment banking, government banking and infrastructure project finance, Banco Interacciones has provided its clients with tailor made solutions for the last 17 years.

Banco Interacciones is celebrating its first 17 years as a part of the Mexican financial landscape, a period characterised by continual growth, perseverance and learning. The bank is the fourth largest creditor to the Mexican governments (be it federal, state or municipal), and these types of markets have payment sources with the lowest credit risk which allows the bank to maintain a healthy balance and a high degree of payment certainty for its loan portfolio.

The bank is a major player in the niches it has carefully selected; these niches demand a high degree of specialisation in designing flexible financing mechanisms. Banco Interacciones is dedicated to those niches where its experience and high quality services can create the most value to its clients.

Having a very well defined strategy and adhering to it in a strict way, the bank has consistently recorded new highs in Credit Loan Portfolio, Total Assets, Total Revenue and Net Income year after year.

Measured by profitability, Banco Interacciones has ranked among the top three banks in Mexico for the most part of the last five years, having had a Return on Equity (ROE) of over 20 percent annually over that period, being 26.11, 29.00 and 22.94 percent for 2008, 2009 and 2010 respectively.

Despite the great results the bank has achieved, Banco Interacciones is aware of the constant challenges that a global economy possess and is always on the lookout for new opportunities that emerge in the financial markets. That is why by the end of 2010 the bank started a new strategic plan called “V4, transforming for transcendence and sustainability,” a four year plan aimed at strengthening the key aspects for building a better bank. Focused on Corporate Governance, Internal Control, Information Technology and Processes Reengineering, “V4” will lay the foundations upon which the bank will operate in the future.

This plan is built around three main pillars: process reengineering, funding and growth and results optimisation. These pillars are divided in 17 strategies (or circuits) which are designed to bring greater stability to processes, services and products.

After the first six months of the plan, the bank has started to be ruled by processes, to increase its liquidity and to expand its presence all across the Mexican territory.

Through Process Reengineering, the management is creating a mindset that is leading the bank to greater efficiency. Making a complete assessment of the things as they function right now, the team’s project works towards the way they should be: business process management.

The second pillar, funding, has managed to broaden the spectrum of financing sources for the bank. In the last few months, Interacciones has had three successful issues for a combined $320m. These issues have produced a slight increase in the funding cost but in exchange, allowed the bank to increase its liquidity to levels well above those expected by this time of the project.

The third pillar, regionalisation, aims to duplicate the strategy implemented in Mexico City all across the country. The main focus is to make available the expertise and confidence that the bank’s team provides to every local government. Through seven region offices, the bank aims to offer one on one attention to every potential client.

Within these strategic guidelines, Banco Interacciones is ready to expand its markets and products and it is ready to explore new opportunities as they present in the ever changing financial markets.

Banco Interacciones owes its solid growth to a clear and well defined strategy based on its deep knowledge of the market, stemming from being a Mexican institution, and it is dedicated to support the development of the country and to raise the quality of life of the Mexican people.

For more information Email: iro@interacciones.com; www.interacciones.com

Change is the only constant

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From a humble beginning as a trading house in 1977, Al-Tuwairqi Holding Company (ATH) is now one of the leading businesses in the Kingdom of Saudi Arabia.

The company has shown a phenomenal growth over the last two decades and today is among the top five private sector industrial concerns in the Kingdom.

Dr Hilal Hussain Al Tuwairqi, the chairman of ATH, has developed the company into a well-known name in Saudi Arabia, mainly due to its large-scale steel manufacturing activities – its primary focus being the steel sector – but also in a number of related engineering fields after successfully diversifying the business.

Growth and expansion
The company has grown and expanded vastly since its emergence in 1977, Dr Tuwairqi explains. “Change is the only constant in Al-Tuwairqi Holding,” he says.

“We always remain focused on developing, as far as possible, the know-how in-house, while continuously striving to remain abreast with the latest technologies, in order to remain competitive and overcome the challenges of a cut-throat competition in today’s competitive world.”

Whatever ATH earns, Dr Tuwairqi explains, is primarily re-invested for augmentation in capacity, modernisation, automation and expansion projects.

 “In steel manufacturing, we firmly believe that our value addition chain must be complete, starting from the mining of the basic raw material up to the finished products directly going into the hands of the end users.”

Core values
The company’s core values of honesty, integrity and team work are  reflected in everything ATH is involved with.

“Al-Tuwairqi Holding basically is a pro-people organisation,” Dr Tuwairqi says. “We have this strong faith that human resource is the true asset of any successful organisation, and the human resource develops and nurtures in a work culture of trust.

“As management our job is to provide an ‘enabling environment’ and inspire in our people our core values, leading of course by example,” he says. “Making profits and reasonable profits, we cannot deny, is the motive of any commercial organisation. And the same applies to us. As without it, both survival and expansion is not possible.”

Family values are also very much present within the company and are adhered to as much as their work ethics.
Once the core values are properly adopted as a work style, Dr Tuwairqi says, the people working with Al-Tuwairqi Holding become more than simply employees: they become the family members of Al-Tuwairqi.

“That’s the reason that those who share the vision, mission and the value system of Al-Tuwairqi, are always considered and treated as the members of Al-Tuwairqi family,” he says.

“However, our primary focus always is to carry out a successful venture and money comes as a by-product of a successful business. Our aim and objective always is the well-being of the people working with us, besides their intellectual, technological and career growth.”

Commercial integration
Since the very beginning and the emergence of ATH, the company has always managed to focus on, and contributed to, the commercial integration with GCC and the Middle East, devising a step-by-step strategy to achieve this.

“In the first step, we focused on the Kingdom and then started diversifying to the GCC. Today ATH has gone beyond the boundaries of Saudi Arabia and encompasses areas of the Middle East, South Asia and Europe.”
To be truly commercially integrated, ATH always supported the bilateral trade among GCC and the Middle Eastern countries and extended the same working and growth opportunities for all the citizens of the GCC countries, without any distinction or discrimination. 

“We will continue our efforts for greater integration of business and commercial activities in the GCC, and to promote the benefits of increased efficiency of production, through an optimum utilisation of resources,” says Dr Tuwairqi. “Knowledge always increases through sharing and whatever knowledge we have, we always love to share that with the GCC countries and Middle East as a region. To achieve this, I opted to become Chairman of the Arab Iron and Steel Union.”

Technology advances
ATH has always been very technologically advanced, but of late, the company has experienced a number of communication resource advances.

“All our manufacturing processes are cutting edge and state-of-the-art technology based, comparable to any international steel manufacturing companies.”

ATH has now launched an applied research centre, along with a technology centre and a design and engineering house, all geared to offer these engineering services to other companies in Saudi Arabia, UAE and Pakistan, with plans to expand into other regional countries.

‘Making a difference’
Every company also has its social dimensions, and corporate social responsibility has become an integral part of business today. Having become one of the largest business houses in the Kingdom, Al Tuwairqi Holding has not overlooked the expectations of its stakeholders, and realises its national and moral obligations.

“With a strong sense of corporate social responsibility, we at ATH believe in making a difference in lives – a difference that is able to permeate the very fabric of society towards uplifting the economic well-being of the people wherever they are,” says Dr Tuwairqi.

“We are one of a few companies in Saudi Arabia to start renewable energy projects, such as solar and waste-heat recovery from our process-gases. We are also working to capture carbon-dioxide from our sponge-iron factory to contribute positively for the reduction of carbon-dioxide gas.”

Innovative social responsibility
When it comes to CSR, ATH takes a number of measures to ensure it acts responsibly.

Dedicated to achieve service and technical excellence, the group envisages an image that constitutes its core strength and basis for a growing base of satisfied customers. ATH is one such major business enterprise that has taken a passionate and innovative approach to social responsibility.

“We don’t compromise on the environment aspect of the technologies in use; we set up business units by investing heavily in developing countries like Pakistan, participate heavily in philanthropist activities and proactively contribute to job creation in the MENA region,” says Dr Tuwairqi.

“Our long-term vision is to create a better cost-effective community and reduced wastage of human capital, which reflects our determination in building an economically and socially balanced society.”

Sustainability goals
The phenomenal growth of Al Tuwairqi Holdings is based on the principles of sustainable development with high-technology value-added engineering industries. While keen on further consolidating its position in Saudi Arabia, the company is focused on geographical and commercial diversification of ATH. Accordingly, ATH has developed strategic alliances with the world’s leading industrial and trading houses.

“ATH is internally consistent and externally a credible name in the business circles and therefore we foresee similar growth and expansion in future,” says Dr Tuwairqi.

“Our latest approach is to develop competent young, qualified entrepreneurs, with seven to 10 years experience, within the group, giving them management and financial support and training them to manage medium-size local manufacturing companies.

“Through this concept, we hope to provide sustainable employment opportunities to the maximum number of the local people and help in developing middle class based societies in each country we operate in.”

Environmental practice
Sustainable enterprise means combining economic success with environmental protection and social responsibility, according to Dr Tuwairqi, thus contributing to a future worth living for coming generations.

“ATH is fully committed to the environment friendly practices related to material handling, production and waste disposal methodologies.

“Major steps taken in this direction by us include the availability of detailed and clearly understood guidelines on the Environmental Performance Indicators related to particular matters; integration of various units in the steel production chain to form an integrated steel complex – thus reducing the atmospheric emissions and wastes – and a focus on alternative methods, technologies, designs and procedures to minimise the adverse environmental effects associated with steel complexes. 

Loyalty, success and prosperity
So why is ATH so successful in its field? Dr Tuwairqi explains that he is inspired by religion and his company’s success is ultimately down to having faith in people.

“Al-Tuwairqi primarily is a pro-people organisation, and as our business is mainly focused on steel, we derive strength from a verse in the Quran, which says ‘There is strength and benefits in Hadeed [steel] for mankind.’

“We have a firm belief that we can only accrue the benefits of Hadeed, if we remain faithful to our people, who endanger their lives and work right over the places where molten metal and red hot iron is being handled,” he says.

“Our loyalty with these people in fact is a loyalty with the steel, and the loyalty with the steel automatically brings success and prosperity to the company.

“This success means monetary benefits have to be shared by all. That’s what we believe, and that’s what we do, by adequately sharing our profits with the members of the ATH people. This is the key to our success.

“Together we have, together we are, and together we will continue making the difference.”

Russia’s funds of funds

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It is safe to say that Tera Capital Fund (Tera) is far and away one of the most innovative funds in the world.
It was and remains the only fund of funds in the world with its specific geographic focus – Russia. It is also unique in that Altima Asset Management, the investment management company that manages Tera, charges no fees other than a success fee.

We spoke to Timothy Enneking, who has been managing funds in Russia for 11 years, to get an insight into the country, Tera and the particular benefits of investing in a fund of funds.

Tera Capital Fund was launched by Altima Asset Management in April 2005 as a fund of funds focused primarily on Russia.

‘A popular idea’
The fund of funds came about when Mr Enneking was working on a private equity deal, explaining that he and his colleague at the time came up with an idea that could solve a common problem:

“We had many friends who all had a common issue: unless you had $5/10m you couldn’t develop a diversified investment portfolio in Russia.

“So we initially set the fund up for high net worth individuals who weren’t extremely high net worth, to allow them to achieve diversification with a single investment and without having to put all of the money into a single fund because of high minimum investments.

“Instead, they could invest in Tera and automatically get far greater diversification across all sectors, market caps of companies and funds, strategies, etc., with a single investment.

“That seemed to be quite a popular idea,” he concludes.

But why Russia? Why should investors choose Russia as opposed to other countries?

Mr Enneking speaks passionately about the country and its untapped investment opportunities, citing the phrase “fear arbitrage”; a term the company has in fact copyrighted, to describe the over-the-top fears people have about investing in Russia:

“There’s a reason why Russia should have some sort of discount from developed markets, but markets and investors have pushed that discount to a level – even today – that makes no sense.”

‘A tremendous place to invest’
The proof of this was in two polls taken several years ago. One poll asked major international companies, who had already invested in Russia, a simple question: do you plan to expand your exposure in Russia? The answer, in 90 percent of the cases, was yes.

“During the same time period, there was another poll which asked international companies that had not yet invested in the country whether they planned on investing in Russia. 85 percent of them said no.

“Such a distribution just makes no sense; it’s a question of being afraid of Russia or being concerned about Russia, being unwilling to invest in Russia, unless you’re already here and have an understanding of the country and how it works.

“Once you’re here and you figure out how to invest and how to make money, it’s a tremendous place to invest, and given its PE ratios, which Bloomberg ranks as the lowest in the world, it’s arguably the best place in the world – right now − to invest.”

Tera second in the world
There are a number of reasons to choose a fund of funds in particular, according to Mr Enneking, but three major reasons stand out.

“The first is country knowledge,” he explains. “If you’re trying to pick funds from outside Russia, you can’t meet the analysts, meet the managers – really understand what their approach is – as we can with a fund of funds based here.

“Secondly, all funds, even funds that claim to be generalist funds, end up developing specialties. None of the funds here have huge numbers of analysts, all the analysts inevitably develop specialty areas and favourites, they claim to be completely diversified – but they’re not.

“The third reason is performance. Tera has been able to outperform the RTS over the last several years, it’s outperformed at least 80 percent of Russian funds since it was created and last year it was the number two ranking fund of funds in the world in terms of performance out of over 2,500 funds of funds.”

So, the investor has two choices: buy volatility and performance, or get the same or even better performance without the volatility, with Tera.

Incredible advancements
When Mr Enneking first arrived in the country in 1992, he admits that it was “like living in the 1950’s or 60’s,” but the country has advanced incredibly since then.

“Literally, the country has gone from being 50/60 years behind [everyone else] to being caught up in a lot of significant ways.

“That being said, outside of the major cities, there’s a huge amount of catching up still left to do, and for that reason, Russia is an excellent place to invest.”

He also sums up the investment opportunities that Russia has to offer, with some astonishing statistics.

“The average living space in Russian per person is 21m2; that’s how much living space is currently available.

“In Western Europe it’s over 50 m2 and in the US it’s over 70m2, but here’s the amazing statistic, in China with 1.2 billion people, it’s 27m2. So in China, notwithstanding its enormous population, the Chinese have more living space per capita than Russians do.”

‘A good, long stretch of growth’
The future looks secure for those choosing to invest in Russia and a fund of funds, with further investment opportunities arising as time goes on, but it is vital that those choosing to do so know where to invest.
“I see a good, long stretch of stable growth” explains Mr Enneking, “At least three years or maybe five or six before an interruption, unless there’s an externally-generated, global crisis.
“Nevertheless, with the PE ratios still as low as they are here − they’re still under seven looking at 2011 − and even though the market has gone up this year, earnings are increasing for many companies in Russia; in many cases, they even increased during the crisis, while stock prices were falling.
“So, the opportunities here to make money on existing companies and on future growth, as the economy diversifies, are just enormous − if you know where to invest − and in order to know where to invest, you have to be on the ground here.”
For potential investors, these externally generated, global crises are on the whole unavoidable, but what is vital when it comes to these crises, is how a country deals with and overcomes them.
The global economic crisis hit Russia like the rest of the world, but it was how the country dealt with the disaster that stands out, says Mr Enneking:
“There was a tremendous drop in the RTS here and about a quarter of a trillion dollars left the country. People looked at it and said ‘Oh that’s horrible,’ but in reality, we should be looking at it and saying, ‘Oh that’s wonderful,’ because funds were redeeming money, they had margin calls, they had redemptions and they had to take money from where they could.

Overcoming the crisis
“Russia never put any controls on redeeming funds or redeeming any monies from Russia. The Ukraine and Kazakhstan both put up restrictions, as did other countries world wide.”
Russia – like every other major country in the world − financed its way out of the crisis and inched back into expansion. It spent about $250bn doing so, which was roughly the same amount of money that was sucked out of the stock market by foreign investors having to pay off other investors.
Mr Enneking does note, however, that “investors didn’t pull their money out of Russia because they didn’t like it as an investment; they pulled it out because they needed it elsewhere.”
“What happened was in stark contrast to the US, Germany, France and the UK: rather than printing any money whatsoever to finance their way out of the crisis, Russia paid cash. If you look at a country like a company, it equity financed its way, if you will, as opposed to debt financed, out of the crisis.
“So, if you look at it from a balance sheet stand point as a country, Russia, is the best macro-economically situated country in the world, despite the crisis.”

A bright future?
Russia pulled itself out of a global crisis before so many other countries, but it does have some major challenges to overcome.
Mr Enneking explains that “hands down, the biggest single problem is corruption, but despite this, people have still been able to make a lot of money here.”
“However, if the country succeeds in overcoming corruption or even significantly reducing it, easing it back, the country will simply become a more attractive business market, even as it is now a very attractive investment market, even with the problems that it has.”
Mr Enneking expects Tera to keep growing and he is confident that the success of the funds and the company in general will continue:
“Our investment goal is 20 to 25 percent per year. We grew at 24 percent last year and I think we’ll grow at more than 24 percent this year.
“In short, I see the fund doubling in just under every three years – at least quadrupling over the next five to six years.”

Oil demand rewards MENA economies

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If 2009 was the ‘Year of Hope,’ then 2010 will be remembered as the rather less pithy, ‘Year of Continued Recovery.’

Investors across the globe were seen eagerly reading and reacting to the various economic swings in various financial hubs while hoping that governments would properly prepare to tackle the many issues highlighted by the credit crisis.

Hopes of improving trade in terms of surging exports from emerging economies, better earning realisation by global companies and a continued pattern of new job creation has allayed fears of a global double-dip recession as the world economy experienced recovery in 2010.

However, the world is not immune to the plague of financial crisis, as each economic zone has faced inter-related economic problems. The western markets from the US to Europe have been focused on housing, debt and unemployment issues; in Asia, there has been concern around the massive influx of foreign institutional investors into the markets, pushing many of them up to new post-crisis highs. However, the quick market surge imported accelerating asset prices – causing a new potential real estate bubble and burgeoning inflation.

The Middle East was also affected by the depressed state of real estate prices: over-supply of commercial property, debt-restructuring by investment companies and cheering oil prices in the context of a weak dollar remained the year’s key concerns.

The Kuwait Stock Exchange in 2010
The Kuwaiti market witnessed quick-fire sessions and its weighted index cruised successfully on a critical level of 400 during the early part of 2010. The surge was largely driven by stable oil prices, better corporate announcements and the success of the valuable Kuwaiti-Corporate deal of selling the African assets of Kuwaiti telecommunications company Zain to the Indian firm Bharti Airtel. However, during Q210, the euro debt crisis emerged in Greece, prompting fears of possible debt defaults by the eurozone and taking its toll on the regional markets as well as the Kuwait market.

Battered by European debt uncertainties and a liquidity flight, the GCC markets were further shaken by looming concerns over proper debt restructuring procedure by local companies and adverse ratings by S&P and Moody’s on local Kuwaiti banks.

However, the Kuwait market reversed its direction in July, mainly sourced through better corporate earnings for H1 2010 and positive economic news – especially the government’s decision to invest KWD30bn in a new mega-infrastructure plan. This came as a major relief to the market and particularly to the banks, which learned that they would be funding the development.

Other positive business news that boosted investor confidence included rumours of an Emirati investor expressing an interest in a stake of National Bank of Kuwait, the country’s largest bank; recovery in property sales; the purchase of 39.2 percent of Gulf Insurance Co to Canadian company Fairfax Financials Holding; and Emirati telecom giant Etisalat offering $10.5bn for a 46 percent stake in Zain.

Steered by all these positive developments, the market recouped its earlier losses and the index peaked at 487.25 on December 27. The weighted index finished the year with impressive gains of 25.51 percent, making it the top performer in the GCC.

However, the KSE Price Index, the exchange’s main index, ended the year almost flat, losing 0.71 percent of its previous year closing due to weak performance of small and mid cap stocks. Meanwhile the Islamic Index (the Muthanna Kuwait Total Return Weighted Islamic Index, or MUDX) outperformed its conventional partner, witnessing a smart growth of 7.75 percent to close at 637.99 – a decent gain of 45.86 points over 2009.
Sector-wise, the banking sector topped the performers list, finishing the year at 11,893.50 – 3,547 points (42.5 percent) over 2009. Conversely the real estate sector continued to face discrimination and lost confidence from investors, ending the year down 436.5 points (15.63 percent) at 2,355.70. Islamic sectors followed the same trends as the conventional market, with just three sectors ending the year with positive growth.

Market capitalisation
A downtrend in market capitalisation was finally reversed after two years of decline, primarily due to strong performance of large market cap stocks as reflected through the performance of the KSE Weighted Index. But despite solid gains and new listings, the market is still 36.82 percent below its 2007 peak of KWD 57.59bn. The gain in market cap was largely driven by the banking and services sectors, which grew by 45.5 percent and 27.4 percent respectively during 2010.

Kuwaiti Economy
Kuwait’s key income stream – oil – enjoyed an uptrend from March 2009 and ended the year at $80/bbl, forcing economic houses to reassess their growth forecasts for Kuwait and other oil exporting countries. This trend continued through 2010, and the per-barrel price breached the significant psychological level of $90 by December – a boon for the real GDP growth of small but oil-rich Kuwait. The IMF projected Kuwait would post 2.3 percent GDP growth for 2010, but it is likely to grow by around 3.5 percent due to the higher oil prices (oil contributes 94.5 percent of total exports and around 60 percent of GDP) for FY2010.

Despite the healthy economic outlook, Kuwait needs to work hard to develop its non-oil sectors if it is to sustain economic growth. Its dependence on the energy sector means that any significant global developments will have a deep impact on the region’s economy. The recent World Energy Outlook summarises how emerging markets are exerting tremendous efforts to pursue green energy instead of relying on oil. Moreover, the outlook for 2011 also depends on the status of Europe, the GCC region’s biggest trading partner. The weakening US Dollar (due to mounting debt and quantitative easing) also carries significant risk to local currency’s purchasing power and this may put further pressure on the Central Bank to use existing reserves, in a bid to keep away fluctuations in currency exchange regime.

Economic lifeline
Fluctuations in the Kuwaiti stock exchange – and indeed in markets throughout the GCC – tend to follow the variations in the price of oil. Saying so, Oil can be termed as “lifeline” of the Kuwaiti economy, which performed better than expectations, in 2010. The commodity moved into a higher range of $80 by Q110, but the eurozone debt crisis restricted oil rising further and brought the level price down to $64.75 in May.

However, healthy GDP numbers from the emerging economies and strong manufacturing data from China, a major crude oil importer aided the product to traverse a level of $90 later during December 2010.

By the end of 2010 oil had clocked a robust gain of 202 percent from its all-time nadir ($30.28 in December 2008) – but was still around 37 percent lower than its historic peak (at $145.31), in the height of the financial crisis. From an angle of pure commodity investment this gap leaves the door wide open for further gains because most of the compared assets in equities – emerging markets – have either hit their multi-year peaks or about to do so.

2011 outlook
Going forward, 2011 carries a mixed bag of hopes and fears amid an array of continental developments. As the economic situation worldwide continues to improve, oil demand will rise – especially in emerging markets, which are expected to contribute 75 percent of total global economic growth in 2011.

Surging oil prices will contribute a surplus to Kuwait’s trading account, driving its economy to register healthy growth for the second consecutive year. And in such a favourable scenario, we expect the government to divert the oil-dollar windfall towards infrastructure projects, as approved under the first Five-Year Development Plan (and its successor, announced this year) – thus diversifying away from oil and safeguarding a sustainable future.

Shoyeb Ali is VP of the Investment Research Department at Muthanna Investment Co.

The unwavering value of precious metals

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Gold and silver have undoubtedly been the focus of investors over the recent months. The price of gold increased by more than 27 percent in a year, and silver has gone from less than $20 an ounce in September 2010 to more than $49 in April 2011, an increase of over 140 percent. Investors, policy makers and business leaders are all intrigued by the factors that have contributed to this rally. In this review, I explore some factors that have historically impacted the prices of gold and silver and look at their current combination.

The noble metal
The increasing demand for precious metals is certainly a factor, but the demand for gold is largely driven by changes in investment. Use in jewellery, medicine and technology account for just a small portion of market demand. Like most other precious metals and unlike other commodities like oil, gold is not destroyed when used and can be recycled without losing its value.

However, producers determining the supply side of the market have limited ability to adjust output levels. Proven gold reserves are scarce, and the sector is capital intensive, requiring sizable investments in technologically complex extraction methods as well as time. It is common to prepare a goldfield for years before a mine can be exploited. When producers are unable to meet the increased demand, prices surge to offset the demand level. Although supply can be affected by sales of existing gold reserves by central banks and institutional investors, production determines the market growth in terms of volume.

The demand for precious metals as an inflation-protected store of value and a perceived safe asset has driven gold prices. India has traditionally been the largest importer of gold, with 624 metric tons in 2010 – interestingly not for industrial purposes, but for cultural and religious reasons. China has more recently become a major importer of gold, while being the world’s largest producer – its imports increased fivefold in one year to reach 209 metric tons in 2010. The World Gold Council now expects China to overtake India as the largest importer of gold in 2011.

This increased appetite for the precious metal is driven not only by inflation fears, but also by the increasing wealth of the population. The demand for gold as an inflation-protected store of value and a perceived safe asset has an impact on gold prices.

The Chinese now have access to investment funds permitted to invest in gold on the international market. Private investors can also hold instruments based on the value of gold. Although gold investment is not openly encouraged by the government, it is available to proactive private investors. This trend will contribute to a shift in demand for gold on a global scale in the coming years.

A core asset
The world demand for gold is also driven by the overall shift to precious metals as an asset class in investment portfolios of Western individual and institutional investors. According to the World Gold Council, investment demand for gold stands at 31 percent as of 2010. Cost effective investment instruments, such as ETFs issuing securities backed by physical stock, make ownership of gold and silver easier. ETFs are traded like normal stocks during trading sessions, allowing flexibility and making exposure to precious metals possible for a large group of investors. The largest gold ETF, SPDR Gold, now holds 1,229 tons of gold compared to 1,143 last  year, and 1,104 tons in 2009.

In developed markets, investors have traditionally used precious metals exposure as a safe asset in times of financial crisis or constricting economies. Increasingly though, institutional investors consider gold as a long term capital growth asset. The lack of dividends or any other cash flows have kept gold out of the core assets of institutional investors’ portfolios. The consistent appreciation of the metal – most notably over the last decade – is turning the balance. Pension funds, such as the Teacher Retirement System of Texas, have started expanding their gold assets to a core holding in order to benefit from its long term appreciation and to reduce portfolio volatility. The traditional use of gold in a portfolio to hedge against inflation and as a low-risk asset has now changed to that of a core asset class.

Once again, gold became a safe haven for investors as revolutions swept through the Middle East, similar to the time of the Arab-Israeli war. Between 1970 and 1972, the price of gold reached a local maximum of about $200 per ounce, up from $34 an ounce. In 1979, the political unrest in Iran contributed to the dramatic increase in gold price to over $800 an ounce, the highest ever price in real terms. The fact is that one cannot ignore the impact of political events on asset prices and our ability to assess the dynamics of the precious metals market.

Political impact
The relationship between gold prices and the US dollar has been consistently inverse. At times of a weak US dollar, gold and other precious metals have consistently shown an upward trend. Gold, as a commodity with strictly limited supply, is priced in terms of a currency, which is subject to monetary policy manipulations.

The monetary and fiscal stimulus programmes that governments all over the world introduced in response to the global recession have increased liquidity and monetary aggregates. Most notably, the quantitative easing programme of the Federal Reserve made capital available and cheap at a near zero interest rate level. In an environment of low interest rates, the opportunity cost of holding gold, which does not bear dividends or interest, is relatively low. The ensuing inflationary pressure is an inevitable by-product of this policy, as it targets a renewal of economic growth.

A traditional function of gold has been as a hedge against inflation within a diversified portfolio. Increasing fears of inflation pushed more investors to expand their holdings of gold, causing a powerful shift on demand for gold. The rally of gold price over the past two years was to a great extent due to the fear of and protection against inflation.

Silver rush
Within the precious metals group, silver outshined gold. Over a time horizon of just nine months, the price of silver has risen from $20 an ounce range to nearly $50, a growth of over 140 percent compared to just 20 percent for gold. Silver has been considered a more affordable store of value, thus accessible to a larger group of people. This, combined with the abundance of investment vehicles that made holding silver as an asset relatively easy, drove the demand for the metal more aggressively.

Another factor contributing to this trend was the industrial application of the metal. While just 13 percent of demand for gold comes from medical and industrial application, silver is widely used in optics, for its reflecting properties, and electronics, for its exceptional conductivity. These two sectors accounted for more than 60 percent of silver demand in 2010, according to the Silver Institute in Washington DC. Silver benefits substantially from being a store of value as well as an industrial commodity – many investors have recognized this advantage and are betting on continued short and medium term appreciation of silver prices.

Market outlook
The fundamental factors that have been driving the rally in precious metals are still present and are likely to remain active in the short and medium term. Fears of market instability originating from the Middle East remain high, with the crisis in Libya in a deadlock. The potential impact of political instability in the region, which provides a sizable part of the world’s supply of oil, is daunting. Escalation of the crisis can slow the pace of global recovery and reinforce the fears of investors as they consider adjusting their portfolios by moving away from gold to equity.

The near zero interest rate policy of the Federal Reserve is likely to continue in the foreseeable future as the US recovery is slow, not irreversible, and with a persistent high unemployment. The recent downgrade of economic outlook in the US by S&P further deepened the lack of confidence in the US dollar. This will also drive investors further to the safety of the ‘ultimate currency’ – precious metals.

Furthermore, we should not forget the fears caused by the sovereign debt crisis in Europe. The government bonds, which were previously perceived as near zero risk instruments, now carry high risk premiums causing capital flight to the safety of precious metals.

Re-establishing stability requires time. Meanwhile investors are likely to keep their preference with the precious metals. Growing imports by China and India, increased acquisition of precious metals by central banks, and pension funds will be a key factor determining the dynamics of the gold price in the medium and long term. Considering the economic forces in play and fears fuelled by political instability, the growth of precious metals is far from over. Unlike the past, this time we may even witness a long term shift in the perceived role of gold as an asset in private and institutional portfolios. After all, gold has retained its purchasing power for centuries. Few currencies can compete with this.

Svetoslav Georgiev is Chief Market Analyst for Hantec Markets

A safety net with options

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The management of institutional portfolios is becoming more and more complex: on the one hand investors increasingly seek broader diversification for their investments, while on the other they are confronted with a growing range of highly specialised asset management services. Since the financial crisis, markets have been much more volatile, which has made allocation decisions more uncertain. Investors need to work on every front in order to both achieve their long-term return goals and limit the risk of short-term losses. This is exactly where overlay management can help. Just a few years ago this instrument was barely used, but it is now firmly established.

Overlay management itself is in fact interpreted in different ways throughout the market. Generally speaking, it describes a centralised approach that enables an investor’s individual risk factors and return goals to be managed systematically across the entire portfolio. A variety of overlay strategies can be employed, depending on which investment goals are the most important: risk overlays, the most widespread type, offer protection in crisis scenarios. Interest rate risks can be neutralised with overlays as part of active duration management (a duration overlay), as can inflation risks (inflation overlay) or the specific credit spread risks of a pension fund.

In addition to this hedging function, overlay management can also be used to address opportunities and to open up additional sources of income as a tactical overlay. All these variants are not mutually exclusive, but can be used flexibly on a modular basis.

Disciplined risk reduction
The overlay concept has proven to be particularly suitable for hedging market risks. Dynamic risk overlay, the version of the risk overlay concept developed by DB Advisors, provides centralised risk management for a broadly diversified portfolio, which exploits all correlation effects and therefore the risk budget as efficiently as possible. The aim is to secure a certain level of value for the portfolio: for instance a threshold of 95 percent means a risk budget of five percent. The task of the overlay manager is to ensure the total investment risk always remains below this individually determined limit. Only when the equilibrium is lost does the manager dynamically hedge the entire portfolio – mostly using simple, exchange-traded derivatives. This requires both individual risks and the risk budget to be measured on continually and managed within a purely rule-based process.

This disciplined method of direct risk reduction passed the acid test during the financial crisis, saving many investors from extreme setbacks. In “normal” markets, however, investors still participate in market upswings where continuous, market-based risk measurement allows exposure to be built up again gradually. The positive market performance in 2009 was at least partly and 2010 performance almost fully reflected in portfolios that had been completely hedged just a short time before. The important thing to note is that the fine-tuning of portfolio risks that takes place in the course of overlay management does not encroach on investors’ long-term strategic orientation or their decisions on allocation of individual asset classes.

So does risk overlay management really mean the disciplined execution of highly refined algorithms? Certainly not! Based on their knowledge of the state of the entire portfolio, the overlay manager fulfils the role of a fiduciary, who should always be consulted in matters of portfolio construction. Risk budgeting plays a key role in this regard and should be adapted to the choice of asset classes so that the overlay does not dominate the strategic allocation. For a portfolio consisting of 30 percent equities and 70 fixed-income for example, it would not make sense to allow a risk budget of just one or two per cent. Furthermore, the overlay manager can also use his or her knowledge of the entire portfolio to advise on the form the investments should take. Even though certain asset classes may appear extremely attractive at times, it is only by considering the entire portfolio that a judgement can be made on whether their purported benefits are consistent with the individual appetite for risk. Sometimes it may even make sense to reduce or increase the risk budget anti-cyclically. In this case a larger risk budget is not necessarily achieved through contributing additional funding, but can also be provided indirectly by temporarily increasing the loss tolerance. Investors who were willing to raise their risk budget in summer 2009 – when the first signs of a market recovery became apparent – were in some cases able to avoid high opportunity costs.

Looking ahead, the advisory process will continue to constitute a core element of risk overlay management. The duration of economic cycles in the 21st century will be much more condensed, and their swings will be more volatile. Risk management must continue to find an appropriate balance between protecting the investment and seizing opportunities.

Avoid losses, seize opportunities
Overlay management need not serve solely to avoid losses. A “tactical asset allocation overlay” can tap additional yield and supplement a pure risk overlay. With this approach, the asset manager uses the free risk budget and deliberately departs from the strategic allocation in order to turn short-term market opportunities into additional returns. Fundamental research can identify sources of alpha in sideways or booming markets with the lowest degree of correlation with the overall portfolio. Being able to respond rapidly and efficiently to these signals is then key to realising additional returns. Effects on the individual portfolio risk are measured directly, enabling the free risk budget to be optimally deployed.

This strategy is particularly attractive in periods of economic growth of course. In critical market phases, however, pure risk management always trumps tactical positioning in order to defend the defined risk limits consistently – as long as both value hedging and income generation are in the same hands.

Acknowledging climate change
 If overlay management represents a basic toolbox, including instruments for “beta protection” and “alpha potential”, then one might ask what other possibilities it has to offer. And though the Greek alphabet has plenty more letters, the danger of over-engineering is imminent. Rather than go for additional “engineering options”, the key is to examine other, new sources of risk and return in order to determine the extent to which they can be managed.

Environmental risks, for instance, are increasingly moving into investors’ field of focus, and modern strategic risk management needs to acknowledge the consequences of climate change. Indeed, there is a direct connection between these risks and asset management and therefore with portfolio construction.

For example, one of the EU’s most important instruments for meeting the targets of the Kyoto Protocol and cutting carbon emissions is to establish a market for trading emissions certificates. If a company emits more CO2 than it is entitled to, it must buy certificates. If the carbon market (which has now attained a significant trading volume) prices rise, the result is a direct cost for the company concerned as well as for the value of these assets within a portfolio. In addition, there are also indirect costs to be considered, such as the expense of building more efficient production facilities, higher environmental taxes, etc. Therefore, carbon markets and CO2 as a new asset class affect investment decisions, company valuations and a new way of looking at an overall portfolio. What is known as a “carbon overlay” can offset both the economic and the ecological effect by acting as a vehicle for purchasing the necessary CO2 certificates and, ceteris paribus, incentivising companies to reduce their CO2 emissions. Investors can protect themselves against the adverse consequences of climate change and contribute to protecting the environment with their investments at the same time, whether purely financial or “green” investment goals take precedence.

Alexander Preininger is Head of Overlay Management at DB Advisors

DB Advisors is the fiduciary institutional investment management business of Deutsche Bank´s Asset Management division. We offer a broad range of investment strategies – spanning the whole risk/return spectrum – to our institutional clients around the globe, including corporate, pension funds, foundations, insurance companies, central banks and supranationals. Our global network of integrated resources in combination with our product lineup provides a powerful platform, delivering superior pension solutions and consistent competitive results under all market conditions.

At DB Advisors, our institutional clients benefit not only from our own global preference, but from that of our parent firm, the Deutsche Bank group.

Unique on the European continent

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Could you give us an idea of KBL European Private Bankers’ [epb] strategy?
Since the 1980s, KBL epb has devoted its strategy to private banking and a pan-European onshore presence has been built up by putting the emphasis on well-known local private banking brands. Thanks to organic growth and successive acquisitions we have now become the only network in Europe to have private banking as its core business, a tradition going back 200 years.

With the backing of its network of pure-play private banks in Belgium, France, Germany, Luxembourg, Monaco, the Netherlands, Poland, Spain, Switzerland and the United Kingdom, KBL epb offers a response to the needs of a significant clientele across Europe which wants to entrust its wealth to a banker with an international reputation: specialised in wealth management; capable of offering made-to-measure solutions; using open architecture which allows efficient instruments from other financial players to be integrated easily; close to its clients and their culture and looking for a relationship where integrity, discretion and friendliness are favoured.

In addition to private banking, KBL epb has strengthened its investor services by basing itself on the name of the financial centre of Luxembourg which serves as a platform for the fund industry and the financial industry. We have also created synergies with private banking.

To sum up, we are committed partners. In Europe, the private bankers of KBL epb are trusted investors and trusted advisors who put the client at the heart of things. I would like to add that we are also trusted employers since our model is attractive for private bankers.

Your strategy is also based on a Hub which provides services for the whole group?
Yes, we have an operational and IT Hub which is centred on Luxembourg. The aim is to increase overall efficiency and limit risks. The platform takes care of executing transactions, custody and cash management. As a parent company, KBL epb also has central control units which extend across the group (audit, compliance, risk management).

And KBL’s expertise extends beyond private banking even though that remains your core business?
Yes, we are also active in the field of investment funds and the finance industry in general. The Grand Duchy of Luxembourg is the number one centre in Europe for the domiciliation of investment funds and the number two centre for this in the world. From this location in the heart of Europe KBL epb has developed top expertise in the creation, domiciliation and administration of undertakings for collective investment. This is in addition to our core activity as a private bank. A dedicated unit, Global Investor Services, promotes these services to our clients.

Our experts represent a well-known, solid financial institution, a pioneer on global financial markets in Luxembourg and give our institutional clients access to all the major markets as well as to our vast range of products and services, which we constantly adapt to their own specific needs. From a basket of stocks to a structured product or a fund,  KBL epb allows institutional investors to carry out their transactions easily online and in real time.  Our sales, execution and trading desks help investors get higher returns, develop new ideas and also simply limit risks by suggesting investment ideas. KBL epb offers immediate and direct access to all the major equity, bond, derivative, fund, precious metals and money markets.

Since KBL epb has a large network of sub-custodians it is in a position to offer custodian bank services to fit the needs of a varied client base such as banks, insurance companies, pension funds and external managers. Multilingual managers set up client accounts, implement operational flows and provide day-to-day assistance if there are difficulties.

What makes you stand out from your competitors in the field of private banking?
Our biggest added value is our staff. We stand out by the high quality of service that we guarantee our clients and also by the long-lasting partnerships that we create with them. We are not content just to manage our clients’ assets. The prime role of a private banker is to take a step back from what is going on now and to look at his clients’ portfolios in their entirety and over the long term.

Our private bankers will not try to impose a particular strategy or product on their clients in the global approach to their wealth. Whether it’s managing assets, structuring or passing on wealth or even optimising their tax situation, our clients will have the benefits of an open and independent service providing solutions – external ones if necessary – which will be thought out and structured around them in the long term.

To become our clients’ trusted advisor, we make the following undertaking: we will listen to their wishes and their needs, establish a long-term personal partnership, use clear and simple language and adopt a proactive aproach to management of their assets and wealth.

Why is the KBL epb model original?
The originality and attractiveness of the KBL  epb model lies in its organisation and management model. On the one hand the entrepreneurial spirit of local managers is favoured and each is allowed a great degree of latitude in commercial development. On the other hand, each entity can count on the solid support of the group through shared expertise and due to the range of services provided by KBL European Private Bankers in Luxembourg through the Hub Service Centre. The entities are freed from a whole series of operational tasks and can focus fully on their core business and objectives, providing a high quality service to clients within the framework of a mutually profitable relationship and privileged access to all products and services. This model favours the proximity and respect of cultures and identities within the framework of private client, institutional and professional services.

What plans do you have for the future?
We are aiming at selected and continued growth. KBL epb is solidly rooted in western Europe and intends to continue its development on the European markets where it is already present and also wants to explore new paths in the Middle East, Asia and South America.

Getting the boards back in control

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The board of directors are elected by the owners of a company to act on their behalf; and while taking care of their interests they are also bound by regulation aiming at policyholder protection. There are a number of different board decisions to be made, ranging from recruiting the executive team to setting the business strategy, from choosing a distributional channel to the branding of the company, from mandating the executives to challenging them.

The board work in its totality consists of a diversified portfolio of topics of which only a few are regulated. But there is indeed one area that receives high attention from both regulators and supervisors, and that is the area of risk appetite and risk management. From their perspective there is especially one question that needs to be addressed, and that is: How do you know that you can afford what you plan?

The missing link
In some elementary text books on insurance the pooling of risks in an insurance company is like setting up a betting game. But insurance is not about gambling, but rather about taking on risks in a controlled manner. Nevertheless the balance sheet is highly geared, and to protect policyholders regulators require capital. Capital to meet the bumps on the way stemming from heterogeneity in insurance risks, gains and losses in the investment arm, operational failures and so on.

Regardless of the business model chosen for an insurance company, it is pivotal to know and manage risks or potential risks. Asking executives or board of directors what is a prerequisite of running a successful insurance company, the answer will be: managing risks. Knowing your risks is not some optional business opportunity – it’s like an axiom for financial institutions. So how come politicians are now starting to regulate this area, and calling for a higher sense of capital responsibility at board level?

The financial crisis has exposed a gap that needs to be closed – and the solution has already been embedded in the Solvency II framework. This is the ORSA.

The ORSA, or Own Risk and Solvency Assessment, is a new feature in the Solvency II framework. Usually financial regulation is aimed at tasks or behaviour implemented in a bottom-up manner. In the Solvency II directive, the ORSA process is the only part that has a top-down viewing angle.

This is crucial for the thinking of the ORSA. The assessment is owned by the board and can only be carried out from the board of directors level. We are back to the question of managing risks. From a regulator’s perspective the board of directors receives the responsibility of capital from the owners, i.e. that the company will not take on more risks on the balance sheet than can be met with either capital or management intervention. And since taking on risks has a prospective orientation, sound risk management will imply that you are aware of what risks you are taking and will be prepared to navigate them.

Regulators have set the bar lower by specifying a risk-based capital regime in Solvency II with a 12 month horizon. More precisely, the board of directors has to ensure that the company can only become insolvent if a ‘one in 200 years’ event occurs. Unfortunately, it is the supervisors’ experience that the majority of boards consider capital regulation a simple compliance exercise. It is not the case that boards of directors do not understand that capital is needed; but often the linkage between the chosen business model, the risk appetite, the organisation and then the capital needed is not present.

Another observation is that it is often the case that boards cannot articulate the risk that the company is facing – the basis for proper management of risks. And without the ability to articulate risks the understanding, awareness and communication of risks with the executive team is then lost. It could then be guessed how comfortable the individual member of a board might be when signing off his or her responsibility of capital for the particular company.

The ORSA process step-by-step
With the introduction of the ORSA process in Solvency II, boards are required to identify risks that the company may be facing over the business planning period. It is about merging business strategy with capital management – and therefore the time horizon is more likely to be three or five years ahead, rather the regulatory 12 months. There is no expectation that the board will engage in detailed discussions on technical matters; nor must they be more involved in the daily operation of the company.

In essence the board members need to ask relatively simple questions to the executive team and request answers presented in a way that they, with their respective backgrounds, will be able to understand and willing to exercise their capital responsibility upon. The way that the executive team responds to the requests of the board is by use of the whole organisation. Hence the process is not an examination of the executive team, but rather a joint process of reaching a common understanding of how to run the company.

A very important aspect of the outcome of the ORSA is that the process is an assessment of overall solvency needs, and that where this number is higher than the required regulatory capital it does not in itself imply that the company needs to hold capital above that level.

Boards are free to choose their own way to conduct the ORSA process, but are expected to at least cover the following eight steps. These steps are already being taken in well managed companies today, and hence inspire good practice in this field.

Step one in the process will be initiated by the board asking, “What are the risks that this company might face during the strategic planning period (e.g. three to five years)?” Delivering a full risk picture back, presented in a way that the individual board members comprehend, will qualify a discussion of the common risk picture. This first step should not be interpreted as the probability-severity risk matrix currently exercised in the sector. The implementation of this matrix is often through a discussion of potential future scenarios rather than through a more profound understanding of the risks underlying the company.

Step two will be deciding on which risks should be met by capital and which should be mitigated by management actions only. Often risks can and should be met by capital but for some risks – like the reputational risk of the company – the mitigation is likely to be by other means, in this case by implementing a general code of conduct among employees.

In step three the organisation will quantify the risks to be met with capital, and develop suitable mitigating actions for other risks.

In step four the board asks, “How robust is the assessment of risks? What is the quality of key processes involved (e.g. claims handling)?” and will be presented with results from sensitivity analyses. At this point the board will have the basis for an initial overall assessment of the risks and be ready to stress that assessment.
Step five will be company specific stresses, i.e. “What are possible future scenarios that we will have to navigate, and what is the likely impact?” Here the competitive landscape is just one of the topics to be discussed.

Step six covers stress scenarios that affect the whole sector, which are often due to changes in legislation, high court decisions, structural changes in insurance risks, or changes in the financial markets not captured in the calculation of required regulatory capital.

In step seven the assumption of going concern is revisited, requiring a discussion of what the important aspects of remaining in going concern are. The importance of this discussion is illustrated below.

Finally, step eight is the digestion phase, considering if there is anything that has been learned about the risk profile that impacts on the assessment of regulatory capital.

As should be clear from this walkthrough, the thinking of the ORSA process is that simple questions should go from the board of directors to the executive team, and they should be answered in an appropriate and understandable way – not necessarily requiring a background in economics or the skills of an actuary.

Furthermore, is it not about transferring a huge pile of papers upwards in the system, obscuring the full picture with highly technical detail. It is about achieving a clear communication using a common language on risks, and ensuring that there exists an informed basis for proper decisions at board level.

The going concern discussion
The importance of understanding the basis for going concern can be illustrated from what happened for some insurers in the Nordic European region in 2010. Before entering 2010 the top performing general insurers were running their businesses with a combined ratio (CR) in the range of 88 to 92. That is, for every €100 of premium, claims costs and expenses were amounting to between €88 and €92. With a fully fledged business this would allow them to fund their risk based capital through the remaining €8-12 per €100 premium.

There was then a tough winter with an excess of snow claims, followed by a very wet spring with flooding. Suddenly these prior top performers were now running at CR close to 100 or above, and hence were not able to fund their capital. Some of them were even realising bottom lines in the red.

Bearing in mind that it usually takes 18-24 months to recover from such a hit by premium increases, swift action needed to be taken. Strangely, during that spring, only a few of the boards initiated the discussion of how to fund capital – they were simply not aware of the impact of results on going concern.

Reality today or trend tomorrow
It is almost unnecessary to say that the objective of the ORSA process in Solvency II is not only related to the insurance business but spans the majority of the financial sector. There are initial indications that similar regulations could be the broader political response to the financial crisis and government support in the banking area, and the analysis steps could soon be considered good practice in financial institutions.

In monitoring this upcoming political debate it should be remembered that compared to banking, where there is a natural inherent imbalance in the business model in borrowing short and lending long, the business model for insurance is a far more stable one.

Case study: Denmark
As a response to the preparatory work of Solvency II, the Danish Financial Supervisory Authority forced in the autumn of 2009 a change of regulation introducing an ORSA-esque process as a mandatory requirement, in addition to the existing risk based capital regime. Key triggers for the regulatory change was the missing link between risk identification and decision making at board level on what capital to hold, and the lack of articulation of risks.

Having had the regime in place now for 18 months, the experience to share is: boards are often not aware of their capital responsibility, and do not find the simple questions on risks and how to navigate them as natural. Moreover, they are struggling with the appropriate division of responsibility between themselves and the executive team, and finding the balance between lack of technical expertise and at the same time being responsible for the company’s capital.

They are moving from the passenger’s seat to become the navigator of the company – which indeed is what the owners expect them to be. The Danish Financial Supervisory Authority assesses the change in regulation to have improved the quality of the board work with more joint discussions of risks taking place and a better understanding of what to manage. But it does not change overnight. It is like a cultural change – it takes time to settle.

Jan Parner is Deputy Director General at the Danish FSA

Establishing a company in Cyprus

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Michael Kyprianou & Co LLC is a broad based legal practice based in Cyprus and Greece. One of its areas of specialisation is the company formation, management and administration of Cyprus and offshore companies, and formation and administration of Trusts.

Cyprus business law
A Cyprus company needs to have at least one director, one shareholder, one secretary and a registered office in Cyprus.  The minimum share capital of the company is €0.01 (denominated in any currency). The first step in the process is choosing the name of the company, to be approved by the Registrar of Companies. The name must include the word “Limited” (or Ltd) to signify limited liability status. Approval takes six or seven business days, but for urgent cases Michael Kyprianou & Co LLC can offer a list of names already approved by the registrar.

After this, the memorandum and articles of association of the company are prepared and submitted for registration to the registrar, together with details of the officers and shareholders of the company. It will take approximately five working days to obtain a company registration number and another five working days to obtain the company’s corporate documents. Again, urgent cases can be serviced with a list of shelf dormant companies that are already registered.

Cypriot jurisdiction
Cyprus has a very advanced tax planning culture based on an extensive network of double taxation treaties. In recent years – following the accession of Cyprus into the European Union – a large number of international structures involve a Cypriot company. Cyprus at present features the lowest fixed corporate tax rate (10 percent) in the European Union and a very competitive VAT rate (15 percent).

As of the end of 2010 there were 237,372 companies registered in Cyprus, and 19,278 new incorporations in 2010. The Cyprus government recognises the importance of company formations and protects such services by maintaining low tax rates as well as other measures to attract foreign investors to the country.

Professional services
Michael Kyprianou & Co LLC provides a full complement of services under one roof, with the highest level of confidentiality.  The firm’s staff of corporate administrators, lawyers, tax advisors, accountants and auditors all work together to provide a complete package of services necessary for prudent administration and management of companies and trusts.

For more information Tonia Antoniou,+357 253 636 85, tonia@kyprianou.com.cy; www.kyprianou.com.cy

Surfing the wave of wealth management

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Up until now, Wealth and Investment Management (WIM) has been a fairly stable business in all the key areas such as market evolution, client behaviour, investment performance, competition, regulation and technological innovation.

However, a series of different factors are reshaping this industry. Firstly, demography and wealth distribution are changing. As the over-64 world population holds around 34 percent of wealth, mortality and inheritance will globally shift an estimated $18 trillion market to a new generation of people. Another 30 percent of wealth will be owned by the baby boomer generation, currently aged approximately 55 to 64. They will gradually shift from accumulation mode to retirement mode, and will be quite equally distributed in Europe. In the USA, Asia and Pacific regions, they will also bring new needs into the market place.

A second factor stems from the global financial crisis of 2008. Poor investment performance, increasing onshore and offshore competition and new regulations – such as MIFID in the European Union – have dramatically changed the scenario for the WIM sector. Clients have become much more careful and selective about financial service providers. These changes have had a strong impact on investment protection and risk management strategy and decisions.

Additionally, the fast pace of technology evolution is radically changing the way relationship managers, advisors, private bankers and clients interact. For example, computing platforms are quickly shifting from the web client oriented to mobile operations. The use of smart phones and tablet devices is increasing rapidly. It is estimated that the end of 2011, there will be 400 million users, with this figure likely to double over the subsequent three years.

As a result, clients will challenge the financial advisors with radically new expectations in terms of product needs, service demands, customer relationship and experience. A high performance WIM strategy will therefore require two main imperatives: a shift to an advisory approach to clients using targeted business models, and the adoption of a new information technology platforms.

An advisory approach to clients
Financial sector operators need to focus on a new set of actions. These include:
– developing a broad and deep knowledge of client’s values, risk attitude and priorities;
– creating new tailored product and service bundles;
– shifting the paradigm of WIM professionals from relationship managers to trusted advisors;
– investing in traditional and innovative distribution channels; and
– improving each client’s relationship and experience by enhancing integration and personalisation across different channels.

In order to keep up with the changes and implement a high performance WIM strategy, tailored business models become essential for specific customer segments. The first level of differentiation is between the Private Wealth Management and the Retail Advisory Sales business model.

The Private Wealth Management business model targets three sectors with tailored operating models. The first, Affluents, requires an assessment and a financial planning process using an underlying open product catalogue architecture approach. Financial advisors should quickly understand the client’s balance sheet, their needs, the risk profile and potential investment approach.

High Net-Worth (HNW) is the main target area of all private banking operators, and demands a sophisticated and tailored global advisory service. Their trusted advisor should be able to deliver holistic, integrated investment advice, spanning across asset allocation and drawing upon outside expertise in areas such as legal, trust, tax optimisation.
 
Finally, the Ultra High Net-Worth (UHNW) sector represents the top level private banking operators. This requires a trusted advisor delivering an integrated exclusive investment advisory service, spanning across asset allocation, real estate, corporate management, arts and philanthropy and draws upon outside expertise in all these areas.

Retail Advisory Sales business model addresses retail customers who ask for basic products focused on their needs, such as loans, mortgages, saving products and ‘simple’ investment solutions. The challenge is to set up a ‘light’ advisory service with a low cost-to-serve approach, which enables the relationship manager to exploit the combination of bank subsidiary face-to-face channel and internet client portal channel to easily and quickly map customer needs and serve them with the right blend of banking products.

High performance needs innovative software
WIM information technology platforms must change from the current conventional application ‘silos’ to a single integrated platform. ObjectWay has therefore designed and delivered ObjectWay Financial Software Platform (OFS) in order to support this.

From a business perspective, OFS platform is a suite of specific business applications, which work together to support each process area of the WIM lifecycle. From a technology perspective, business applications and components share a common data model, integration and infrastructure layers. OFS therefore enables the financial institution to implement the key success factors of an effective service and operational model.

OFS also offers comprehensive support of the whole WIM process, from the client and contact management through to order fulfilment. The software offers real-time access by both the financial institution staff and clients to an all-embracing and unique spread portfolios and products.

For advisors, the analytical tools within OFS help develop a deeper, more predictive insight into customer needs allowing advisors to gain a unique view of the customer and a context-based understanding of their needs, not easily replicated by competitors. Advisors also have a powerful integration between decision-making systems, execution systems and channels.

This system generates several business benefits, making it easier to acquire and retain customers, improve customers experience, increase efficiency and reduce costs. These factors are vital for serving all customers, from the largest retail and Affluents segments to the smallest HNW and UHNW clients, even if the work is complex and sophisticated.

 These business applications are available to the financial institution staff and the clients across different sales channels, whether advisors, branches, service centres, internet, and through various interfaces, such as the web, tablets and smartphones. In the last year ObjectWay has extended the OFS with a set of mobile business applications, OWealth Portfolio and OWealth Studio, to support both advisors and clients.
Three business solutions are currently available through OFS:

– OFS Private Wealth Management: designed for high and ultra high net worth customers and focused on a global advice approach. It supports global portfolio accounting, analysis and performance attribution, personalised asset allocation strategies and tax optimisation
– OFS Premiere Wealth Management: tailored for affluent customers and focused on the client’s accounting and advice in terms of financial planning, portfolio allocation, retirement management and health management.
– OFS Advisory Retail: for retail customers and focused on customer data aggregation, household budget and needs analysis. The software features specific simulators and estimators for loans saving products, life insurance, pension gap analysis, retirement fulfilment and simple investment products. The whole sales process is included in the solution, from the proposal to the contract signature.

These platforms are customised by ObjectWay for each financial institution with a collaborative approach, to obtain a tailored application platform that implement the institution specific operational model according to its positioning, its product and service offering and its organisation.

The choice for success
ObjectWay has supported several private and retail banks in Europe, including Barclays and Unicredit–Fineco, reshaping and tailoring their wealth management services.

The implementation of the OFS platform allowed Barclays PLC to promptly enter the affluent wealth management market segment in Europe in just a few years. According to Euromoney’s 2011 Private Banking and Wealth Money survey, Barclays was able to reach a position in the first top 10 global banks for the first time and has won the super-affluent category in Western Europe.

Barclays PLC adopted the OFS Premiere Wealth Management business solution to support the financial advisory services in the Western Europe Division. This focused on Italy, France, Spain and Portugal and met with the requirements of the MIFID directive. Using a unique platform, Barclays set up the service in these four different countries, according to the business needs of each county native languages and idioms and fully integrating the solution with the bank’s core legacy systems.

Fineco, part of the Unicredit Group and an Italian leader in advisory services, has implemented OFS Premiere Wealth Management Business Solution in Italy. Fineco delivers independent and strong qualified advisory services on a fee-only base. Fineco Advice is based on a multi-brand open architecture product catalogue and on a direct processing of analysis, recommendation and order execution process, with each customer receiving a tailor-made solution according to the individual objectives and risk profile.

The winning approach to WIM therefore as demonstrated by these successful examples, is to select and adopt cutting edge technology that is able to support the new customer relationship and experience model.

LiteForex assists growth

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LiteForex Group specialises in providing online trading services and placing financial instruments on the commodity, stock, future and currency markets. It has developed an impeccable reputation thanks to its consistent management and highly qualified specialists, and an ongoing commitment to develop new ideas and projects provides clients with continually improving services and facilities.

The group was founded in 2005 with a mission to provide the highest standards in service and facilities, with an emphasis on providing each client with a balanced and optimal service package for trading on the financial markets.

Today the brand is steadily expanding into new regions and key hub countries, helping a strong increase in its client base – some 300 new trading accounts are opened every day, and the total number of traders who have registered with LiteForex since its inception is steadily approaching 300,000. The broker is enjoying particularly strong growth in Asia, and as a result of its popularity in the region won the prestigious award for Most Reliable Broker in Asia at the 2010 ShowFX World exhibition, as well as the award for Best Forex Broker in Nigeria – 2010 by the Online Forex Traders Association of Nigeria.

Account types
The group has created a set of trading conditions that are comfortable both for new traders who are just taking their first steps into the market and for professional traders who are in charge of managing significant capital. To accommodate this spectrum, LifeForex offers three types of account: LITEForex, REALForex and FLOATForex.
LITEForex is a cent type of account that provides beginners with the opportunity to feel confident while dealing with real money. By opening an account with the minimum deposit required, a client who is new to forex can easily gain valuable experience in financial market trading.

REALForex is an account that is usually chosen by traders with practised market experience, who want to operate with large amounts.

The FLOATForex account type allows clients to carry out transactions with unfixed spreads starting from zero pips. When executing trades on a FLOATForex account it is possible to use any of the trading instruments provided by LiteForex Group. There is no commission for executing transactions with a FLOATForex
account.

Equal conditions for using leverage, no hidden commissions and a fixed spread starting from three points are provided for trading on all account types.

To let its clients profit from every opportunity the financial market gives, LiteForex provides 83 trading instruments, including a wide range of currency pairs, precious metals, currency indices and CFDs.

Trading is powered by the popular and accessible MetaTrader4 platform and MetaQuotes Soft – an update version of MetaTrader5. The 5 terminal enables clients to work simultaneously at the major financial floors in the framework of the single account, as well as carry out transactions with currency pairs, commodities, world indices and CFDs.

One of the many advantages of the new MetaTrader5 terminal is automatic trading support with the use of scripts, advisors, its own indicators, and the ability to create bespoke trackers with MetaEditor5, MetaTrader5 Strategy Tester and MetaQuotes Language 5.

Partnership opportunities
The LiteForex trademark is widely represented in a number of countries, where it offers partnership programmes to people who are ready to dedicate their time to developing a client base within their region. LiteForex affiliates are rewarded with spread-based commission, fostering a successful and solid cooperative instrument. In bestowing upon LiteForex the award for Best Affiliate Programme – 2011, World Finance recognises the positive conditions offered by the programme and the new opportunities LiteForex can offer for its affiliates. In the past LiteForex Group was also awarded the prize for Affiliate Programme Innovator at ShowFX Asia 2010.

LiteForex Group makes every effort to develop successful partnerships through its four programmes – Bring a Friend, Internet Partner, White Label and Regional Representative – which were developed for the clients who wish to start their own business in the online trading area.

Partners of the Bring a Friend programme receive substantial bonuses to their trading accounts for recommending LiteForex brand to their friends and acquaintances working in the forex market.

The Internet Partner programme invites partners to attract new clients to LiteForex. For cooperation in this programme a bonus is transferred to a special partnership account based on the new client’s trading.

Regional Representative status is an offer for experienced partners who are able to promote the LiteForex brand in their region and manage a local office. Special partnership conditions and individual assistance for each representative help to incentivise and optimise their work.

Finally, the White Label programme involves further cooperation between LiteForex and regional representatives. Partners working in this programme are not involved in the basic scope of administrative work and so don’t bear any responsibility for the clients’ deposits. The details of the White Label cooperation, including remuneration, are decided individually.

By engaging with these affiliate programmes, LiteForex clients can receive an additional income. The innovative MultiRebate service is extremely popular, as it opens prospects of additional income to each of LiteForex’s clients. Traders using MultiRebate are paid back 1.5 pips from each transaction what is the maximum spread rebate amount. Partners registered in this programme receive 0.4 pips of commission from each referral’s transaction and 10 percent from each attracted partner’s income.