Author: Ashton Wenborn

Saudi Arabia joins AAOIFI, bringing potential boost to finance sector

Posted on by Ashton Wenborn

The Saudi Arabian Monetary Agency (SAMA) has joined an industry body responsible for the development of international standards within the Islamic finance industry. On October 22, a statement given by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) confirmed that SAMA, Saudi Arabia’s central bank, had joined the institution.

The move could increase cross-border financial deals in the region, as universal guidelines will apply to all financial institutions within Saudi Arabia. Specifically, both conventional and Islamic banks will now be subject to the same standards, potentially encouraging deals with other Muslim countries.

The addition of the Saudi central bank to AAOIFI will help foster closer collaboration with Saudi Arabia.

Sheikh Ebrahim bin Khalifa Al Khalifa, Chairman of the board of trustees at the AAOIFI, stated that the addition of the Saudi central bank would help foster closer collaboration with Saudi Arabia.

“Having SAMA as a new member represents a quantum addition to AAOIFI’s membership base, thanks to the pivotal role of Saudi Arabia at all levels,” said Sheikh Ebrahim. “We, at AAOIFI, are particularly keen to extend the reach and application of AAOIFI’s standards: both Sharia standards and technical standards in areas of accounting, auditing, governance and ethics, towards higher levels of harmonisation and standardisation for Islamic finance contracts, products and practices at a global level.”

With Saudi Arabia intent on diversifying its economy, closer ties with the AAOIFI could help boost Islamic finance in the country. As part of its Vision 2030 programme aimed at lessening the nation’s reliance on oil revenues, Saudi Arabia has used Islamic bonds (sukuk) to raise billions of dollars this year.

With the assistance of the Bahrain-based AAOIFI, Saudi Arabia may even hold ambitions of becoming a global heavyweight in the Islamic finance sector. However, it will face intense competition from market leader Malaysia and non-Muslim countries such as South Africa and the UK, which have also begun issuing Sharia-compliant bonds.

Alphabet leads $1bn investment in Lyft

Posted on by Ashton Wenborn

US ride-hailing firm Lyft has raised $1bn in a new funding round, it announced on October 19. The fresh investment, led by Alphabet subsidiary Capital G, valued the firm at $11bn, making Uber’s principal rival an even bigger threat.

The news comes at a time when competition between tech companies in the ride-hailing sector is increasing around the world. Lyft – which currently controls a quarter of the US market – is moving fast to conquer a share of the international market at this crucial moment.

The new injection of funding, which was made public on October 19, is expected to boost Lyft’s growth and take advantage of Uber’s current complications. After a series of scandals, including the resignation of CEO Travis Kalanick, Uber lost its application to renew its license to operate in London in September 2017. Although the company is struggling to get back on its feet under new administration, it is still standing at the top of the market, valued at $69bn.

The latest round of funding not only provides an injection of capital, but also strengthens Lyft’s ties with Alphabet

Now, Lyft’s strategy could see it steam ahead. In recent months, it has achieved investors’ backing in several funding rounds, making it a serious threat to Uber. Just six months ago, Lyft raised $600m from a group of investors. This amount was added to a total $500m that was previously invested by General Motors.

The next step is to begin expanding overseas “very soon”, according to the company’s new CEO, Logan Green. London, Toronto and Mexico City could be Lyft’s first international destinations.

For the US unicorn, the latest round not only provides an injection of capital, but also strengthens its ties with Alphabet. As the Financial Times described it, this means that Google’s parent company, which is a major shareholder in Uber, is “switching sides” at a significant moment. Alphabet and Uber currently have a fraught relationship due to competition in the self-driving vehicle industry.

According to a statement published on Lyft’s blog, CapitalG Partner David Lawee will join the firm’s board.

With a fresh $1bn and the backing of a giant, Lyft is now better equipped become a major player in the disruptive ride-hailing market.

Commerzbank’s holistic approach to banking in the digital era

Posted on by Ashton Wenborn

The need to meet customers’ evolving demands is putting ever more pressure on banks to invest in digitalisation. But merely developing high-end products is not enough to stay ahead of the competition: those banks taking transformation seriously will implement change across their business.

Banks will also need to set, rather than merely catch up with, emerging digital trends. This means constantly refining existing tools and processes for customers, maximising the use of technology already on the market, and researching innovations that are yet to come.

As digitalisation grows in scope, some might warn that, with fintechs jostling for banks’ space, the financial status quo is being challenged. And yet, future-proof banks can weather such disruption by fostering productive collaboration with all players, from SMEs to innovative new start-ups.

Great expectations
Digital is not just for start-ups. Across industrial sectors, from carmakers to retailers, it is hard to imagine future business success without continued innovation. Digitalisation across the value chain is increasingly affecting revenues, profits and market opportunities.

According to McKinsey, the rate of digital penetration – the extent to which companies’ operations have been automated, connected and transformed – currently stands at about 37 percent across all industrial sectors. This means that, while companies have made some headway into transformation, digitalisation is yet to reach the mainstream. The race is on to reap the rewards of even greater digitalisation.

This puts the onus on banks to invest in digitalisation if they wish to meet their corporate customers’ demands. In the current environment, only the most modern, efficient financial services will do, as will only the most cutting-edge, secure and user-friendly products. A survey by Commerzbank recently found that as many as 52 percent of SMEs in Germany now expect to see an increase in intelligent systems that integrate banking services within their own IT infrastructure.

The ability to identify the technology that will bring about change is particularly important given that such changes will bring new – even as yet unidentified – disruptive challenges

At Commerzbank, corporate demand has spurred the development of new initiatives and products. The bank’s treasury management system – designed to boost companies’ liquidity, reduce overheads and optimise interest rates – is now integrated into the cloud. In addition, its new ‘photoTAN’ scanner app authenticates payment transactions straight from smartphones.

Holistic strategy
Products are not the whole story, however. Flashy smartphone apps alone will not drive the banking industry’s digitalisation. As impressive as new front-end developments and software interfaces may be, in the long term banks will struggle to meet their customers’ demands should their back-office infrastructure continue to rely on old, time-consuming manual processes.

Instead, banks need to adopt end-to-end innovation, transforming their very business models to embrace new trends. This means integrating digitalisation in a front-to-back manner by modernising both core processes in back-office systems and developing front-office platforms and client-facing systems. Only then can a bank truly enhance its customers’ digital experience.

This is why last year Commerzbank embarked on its new strategy, Commerzbank 4.0. By placing innovation at the heart of its business operations, the strategy aims to make the bank more efficient, digital and focused on the future needs of its clients. The bank is investing around €700m ($822m) a year in IT and is on track to digitalise 80 percent of its everyday business processes by 2020.

Under such a comprehensive strategy, no area of finance is immune to refinement. Transformation will not only reach mobile banking, digital authorisation and software interfaces, but also payments, trade finance, corporate credit, big data analytics, customer communication and cross-channel banking.

Driving innovation in all these areas is Commerzbank’s digital campus in Frankfurt, one of the pillars of Commerzbank 4.0. By 2018, some 1,000 business and IT experts will be working together on digitalisation projects, automating and optimising relevant everyday processes, and testing out new developments under the fail-fast principle.

Digitalisation in practice
The need for an overarching strategy for digital transformation is clear but a comprehensive plan is required for successful implementation. A three-tiered approach, based on improvement, adoption and innovation, is effective.

The first tier involves improving existing solutions and procedures to optimise internal banking processes. In this respect, corporate banking portals can be made more interactive, trading platforms more efficient and customer front-ends more user-friendly. Commerzbank, for example, is creating a digital credit lending platform that aims to cut the time needed to grant corporate loans from upwards of 72 hours to just 24.

On the second tier is the wider adoption of new technologies that, while already on the market, still have the potential to enhance customers’ experiences. The bank payment obligation (BPO) is a case in point. This trade settlement tool releases funds based on the automatic matching of data.

The BPO is able to balance the concerns of trading counterparties, such as exporters (who desire payment early) and importers (who prefer to pay late). While it has been in use for several years now, many companies are still getting to grips with the BPO, which is why Commerzbank has been a strong advocate for its uptake.

Commerzbank is also bringing cloud-based computing to customer relationship management, with a system for corporate clients set to be released this year. This can help preserve the human side of banking in the digital age.

The third tier includes researching new technologies that have the potential to transform the financial and corporate landscapes. To this end, Commerzbank participates in R3’s consortium of more than 70 banks that learn about distributed ledger technology through the Corda platform.

This allows banks to identify practicable use cases for blockchain and how it might add value to companies’ day-to-day operations.

On the lookout
Any bank aspiring to be at the forefront of digital developments needs to channel investment to all three tiers. However, the ability to identify at an early stage the technology that will bring about change in the financial sector is particularly important, given that such changes will bring new – even as yet unidentified – disruptive challenges to the table.

Already, headlines ask whether fintech start-ups pose a threat to the traditional dominance of banks. Agile young fintechs certainly react quickly to customer needs, taking advantage of their innovative strengths, familiarity with the digital space and command of new technologies.

Banks can find themselves hampered by the time and cost required to improve their IT infrastructure and navigate regulatory requirements and legal frameworks. Yet the banking sector has not been overwhelmed by disruptive fintechs.

On the contrary, established banks still enjoy crucial advantages over young upstarts, including experience in the markets, broad customer networks and security when dealing with finances.

Collaboration can help
Cooperation, rather than competition, might be the key to progress here. Across the financial industry, fintechs rely on cooperation with established market players for growth. Meanwhile, banks can learn a lot from the young upstarts about competing in the digital economy.

It is for this reason that, in 2013, Commerzbank established its ‘main incubator’. This is an early-stage investor in fintechs and a company-builder in banking. It helps to foster innovation within Commerzbank by extending the state-of-the-art services and products that can bring new value to its customers.

Commerzbank’s main incubator is the first to be set up by a major continental European bank, and already has several success stories to its name. One is the start-up Userlane, which directs users through all processes on web-based software or e-commerce websites.

The platform shows users where to click next in real time through interactive, step-by-step guides, just as a car’s GPS guides a driver turn-by-turn to their destination. This cuts out the need for specialist knowledge or extensive software training.

Another is the online payment platform OptioPay, which changes the way payees receive money by allowing the conversion of cash payments into higher value vouchers or gift cards.

The main incubator’s achievements do not end there: it also helped facilitate the development of Traxpay, a cloud-based B2B platform that offers integrated refinancing and investment products. The platform boasts fully flexible supply chain finance instruments for suppliers and capital optimisation instruments for buyers.

In addition, the incubator supported the platform Grover, which enables consumers and businesses to rent, upgrade and switch to the newest tech gadgets – clearly a platform well-suited to the switching economy brought about by the fast pace of digital change.

When it comes to digitalisation, all banks seek to charge ahead for the sake of their customers. With the right technology, a clear strategy and a collaborative mindset, they will be best placed to lead banking in the digital era.

The Mexican banking sector’s sustainable shift

Posted on by Ashton Wenborn

Nowadays, more of the public than ever before places environmental, social and corporate governance (ESG) matters at the top of its list of priorities when choosing a financial services provider. As much as this trend has been supported by the sharing of information in the internet age, the global financial crisis was also responsible for prompting a rethink of company-wide practices.

Consequently, financial markets from across the globe are placing greater importance on ESG, with individual institutions undergoing a drastic transformation of their internal structures, core values and long-term goals.

Even though Mexico has not progressed as quickly as other markets in terms of ESG, a significant shift is now impacting the country’s entire business community. This started in 2011, with the landmark introduction of the Mexican Stock Exchange’s sustainability benchmark IPC Sustentable, in order to formally recognise companies excelling in ESG terms.

Since IPC Sustentable came into play, several public companies in Mexico have stood out for their efforts to incorporate ESG practices in their day-to-day operations, as well as their long-term strategies. One such organisation is Grupo Financiero Banorte (GFNorte), Mexico’s third-largest bank in terms of deposits and loans.

World Finance spoke with Carlos Hank González, GFNorte’s Chairman, about the steps the institution has taken to embrace ESG matters and what they mean to the group.

What is required to get ahead of the pack in ESG terms?
For GFNorte, developing solid corporate governance has been a top concern, as we are one of the most public companies in Mexico, with a float of over 80 percent and a well-diversified investor base. In terms of governance standards, we excel among our peers in the Mexican Stock Exchange.

For instance, the roles of chairman and CEO are separated, while we also increased the percentage of independent board members to 73 percent a couple of years ago.

We also have strong engagement with our shareholders; assembly quorum has always been higher than 70 percent, and a consensus must be reached for new proposals. Moreover, in August 2016, we amended our corporate bylaws.

Now, any acquisition that involves related parties and has a value equal to or above five percent of GFNorte’s total assets is reviewed by the audit and corporate practices committee and our board of directors. Most importantly, it must also be approved by our shareholders. We have also increased the number of members in our nominations committee from four to seven, four of whom have to be independent.

What was the main driver behind modifying the group’s bylaws?
Since my appointment as chairman, I have been committed not only to complying with the relevant legal and regulatory frameworks, but also to maintaining our top-notch status in corporate governance. Under this rationale, we favour transparency and security in order to best protect shareholders’ interests.

For instance, Mexican law requires 20 percent shareholder approval for M&A transactions with related parties but, as previously mentioned, we lowered it to five percent in order to provide investors with extra assurance that significant decisions will be taken through corporate channels.

Mexico’s sovereign credit outlook has changed from negative to stable, as a result of debt reduction and improved fiscal consolidation

Moreover, we enhanced the nomination process for board members by increasing the percentage of independent members from 26 percent to 57 percent before the bylaws amendment was even made. It is important to highlight that only 13.5 percent of Mexican Stock Exchange companies hold this committee and, on average, only 19 percent of their members are independent.

How important are minority shareholder rights in terms of good governance?
Mexican regulations are quite strong in terms of the protection of minority shareholders, and in this respect we are fully compliant. We also maintain very strong communication with our international and local investors.

This applies to internationally recognised proxy advisors as well, in order to ensure that they are fully up to date with Mexican regulations and any major developments at GFNorte.

Our bylaws specifically detail the rules we have in place to protect the rights of shareholders. For example, shareholders representing five percent of capital stock may directly enforce civil liability action against administrators upon the terms of the applicable regulations.

Shareholders representing 10 percent of the capital stock are entitled to designate and dismiss board members at general shareholder meetings. They can also request to defer voting on any affair should they feel insufficiently informed. And shareholders with a share of at least 20 percent may judicially oppose the resolutions of general meetings through their right to vote.

How is ESG being strategically integrated into GFNorte’s operations?
GFNorte has a robust ESG programme that encompasses initiatives to help protect the environment, such as evaluations of the loans that the bank grants or through responsible investment in the asset management activities that we perform. We are also engaged in our communities through various initiatives with employees and clients, which include health, education and social support.

Our corporate social responsibility programme supports initiatives aimed at achieving sustainable development and fostering social responsibility, even in the pursuit of returns on investments. It also requires awareness about sustainable development and environmental protection in our day-to-day operations. Today, we have permanent ESG functions in our procurement, human resources, credit and investment divisions.

In terms of innovation, how has GFNorte changed in recent years?
Since 2013, we have been partnered with IBM to develop Sumando, a transformative program. Sumando has already delivered a central data repository, which is a starting point for a series of projects regarding business intelligence, client interaction, industrialisation, risk management and multichannel sale. We have already started seeing an enhanced experience for clients as a result.

The central data repository unifies loans, cards, checking accounts and treasury platforms in order to give a full picture of the products that customers have and their indebtedness capacity. By analysing this repository, we gain insightful knowledge into customers’ transactional behaviour, which in turn feeds into the ‘next best action-next best offer’ (NBA-NBO) system.

This delivers customers the most suitable products and services based upon their previous transactions. Every time the NBA-NBO system analyses client behaviour, it receives feedback from the previous actions, refining itself over time.

The NBA-NBO system has proved helpful not only in creating more efficient product campaigns, but also in improving collection activities. Thanks to this system, we have increased our ability to interact with customers through various channels and points of contact. For example, we can send clients a timely SMS notification on their payment due date or offer them a relevant service that they do not yet have.

What other new technology is GFNorte incorporating?
In 2016, we increased our sales capacity through a new multichannel architecture. This means that we no longer sell solely through branches, but also through ATMs, contact centres and internet and mobile platforms. Last year, mobile and online banking served more than 1.2 million clients, with 963 million transactions representing an eight percent increase in year-on-year growth.

We are also implementing technologies that facilitate identification through biometric systems, aiming to not only deliver a more pleasant and efficient experience to our users, but to also strengthen security. For instance, we were the first bank in Mexico to introduce mobile banking authentication via selfies, and we also use a voice recognition confirmation system to add further security.

Finally, we have been working on a pilot project with Watson, IBM’s artificial intelligence system, so users can carry out operations by giving instructions through their mobile phones.

Does GFNorte have a strategic plan in place for the future?
We aim to become the best financial group in Mexico through our Perfect Vision 20/20 strategy, which is based on three pillars: our investors, for whom we seek to generate added value and profitability; our customers, who we aim to serve more closely; and our employees, for whom we strive to offer the best conditions in the workplace and for their professional development.

On the financial side, our strategic plan aims to double our profits and increase return on equity to 20 percent by 2020. We hope to achieve this by increasing our cross-sale ratio from a multiple of 1.8 to a multiple of 2.2 products per customer.

In pursuit of this goal, we have made significant changes to the way we manage our retail bank. For example, we have enhanced information and business analytics to better understand customer segments, which in turn has made us more accurate and relevant in terms of our product offerings.

We have also modernised our technological platform in order to support our sales teams, improve business and simplify processes so as to reduce costs.

What is the outlook for Mexico’s banking industry for the rest of the year?
We are expecting steady double-digit growth for the credit portfolio. Over the summer, S&P and Fitch changed Mexico’s sovereign credit outlook from negative to stable, as a result of the reduction of debt and improved fiscal consolidation.

Alongside this news, NAFTA renegotiations seem less uncertain, with meetings already underway.

Xi Jinping warns of economic challenges at China Communist Party congress

Posted on by Ashton Wenborn

Chinese President Xi Jinping warned that China faces “severe challenges” as he set out his vision for the future of the country on October 18. During a three-hour-long speech, Xi told the Communist Party congress that the nation stood at the dawn of a “new era”, but that economic, political and environmental concerns could not be discounted.

Xi’s speech struck a largely upbeat tone, focusing on the progress China has made over the past decades. The president was keen to note that his country’s economic output has risen from $8.2trn to $12trn during his time in power, and that China’s cultural standing in the world has grown significantly. He also referred to China’s role in supporting global growth following the 2008 financial crisis.

The president was keen to note that his country’s economic output has risen from $8.2trn to $12trn during his time in power

Although Xi’s address was short on concrete reforms, particularly on the political front, he did outline several aims for China’s economy going forward. Xi hopes to have created a “moderately well-off society” by 2021, a century after the founding of the Communist Party.

Furthermore, he reaffirmed pledges to make the banking sector more market orientated. He did, however, reiterate that the party’s work was far from complete.

“The great rejuvenation of the Chinese nation is no walk in the park or mere drum-beating and gong-clanging,” Xi told the delegates, according to Time. “The whole party must be prepared to make ever more difficult and harder efforts. To achieve great dreams there must be a great struggle.”

Xi’s speech provided more questions than answers. Aside from a lack of economic clarity, the address failed to confirm whether Xi would remain as party leader for more than the usual ten-year period. There is also an expectation that he may try to elevate himself to the position of party chairman, putting himself alongside previous ruler, Mao Zedong.

UN launches $1bn sustainable farming fund

Posted on by Ashton Wenborn

The United Nations, in combination with Dutch financial institution Rabobank, is launching a new fund to encourage sustainable farming practices. The three-year programme was announced on October 16 and has been named Kickstart Food.

The centrepiece of the scheme will be a $1bn facility that aims to provide grants, loans and other forms of credit to agricultural producers that value sustainability. In particular, farms that engage in forest restoration and smallholder involvement will benefit from the fund.

Referencing the announcement, Head of UN Environment Erik Solheim commented on the important role that financial institutions play in supporting sustainable investment.

We want the entire finance industry to change their agricultural lending, away from deforestation and towards integrated landscapes

“Support from industry leaders like Rabobank is an extremely important first step,” Solheim said. “We want the entire finance industry to change their agricultural lending, away from deforestation and towards integrated landscapes, which provide good jobs, protect biodiversity, and are good for the climate.

“Sustainable land use and landscape restoration is also fundamentally about sound investments and good business. We want to speed up this trend so that it becomes the new normal for the finance industry.”

Kickstart Food will have four key focus areas: earth, waste, stability and nutrition. The $1bn facility is part of the ‘earth’ focus area, but future projects will concentrate on improving the food supply chain and creating a more balanced diet globally.

The collaborative programme, and others like it, will need to be successful if the agricultural sector is to meet both the needs of the environment and a growing global population. Although the threat of climate change poses a significant challenge, being able to feed a worldwide population of nine billion by 2050 is perhaps an even greater one.

Tackling unconscious gender biases in wealth management

Posted on by Ashton Wenborn

Every second, our brain receives 11 million pieces of information. However, its capacity for absorbing information taps out at less than 50 pieces per second, according to Encyclopaedia Britannica. Thus, to make quick, efficient decisions, our brains rely on unconscious assumptions. In fact, leading neuroscientist Michael Gazzaniga estimates that as much as 98 percent of all brain activity occurs in the realms of the unconscious.

Our unconscious assumptions, or mental models, are informed by life experiences, pop culture, history and other societal standards, and we start building them as young children.

Children as young as four or five have been shown to exhibit bias, picking up on verbal and nonverbal cues from the adults and media around them. In some cases, these assumptions can be helpful, but in others, they are not only incorrect, but harmful too. Indeed, these biases have far-reaching consequences in both the personal and professional aspects of our lives.

One oft-overlooked area that bias can affect is client service, and particularly the service of female clients. While everyone carries unconscious biases, the fields of financial advice and wealth management are particularly vulnerable to the implications of these assumptions.

Stagnating models
Historically, wealth in the US has not been diverse. Women only began controlling significant wealth in the US less than half a century ago, enfranchised by legislation that allowed their economic independence and access to credit. New regulations also removed some of the obstacles in the workplace. Consequently, the proportion of wealth held by women in society has expanded at a rapid rate over the past few decades, and the number holding the title of ‘primary household breadwinner’ has increased fourfold since 1960 – to 40 percent, according to a report by the Bank of Montreal.

This shift in economic power has been swift, but cultural and social references still frame men as the primary decision-makers and wealth creators. For this reason, our mental models have remained stagnant – outdated, out of touch and still referencing a time gone by.

While the face of wealth in the US has become increasingly diverse, the advisor community has not. According to research by asset management firm Cerulli, 86 percent of advisors are male, and 43 percent are over the age of 55. This is a critical area in which the industry is falling short.

Data published in Tim Smedley’s The Inclusive Workplace found that teams that are representative of their target client are up to 158 percent more likely to understand their client, and firms with diversity in leadership are 70 percent more likely to be able to open a new market.

In addition, a report by the Centre for Talent Innovation (CTI) entitled Harnessing the Power of the Purse found that advisors with ‘gender smarts’ with regards to women are 27 percent more likely to help their female clients align their investment and life goals, allowing them to deliver on women’s desire for tailored advice. And yet, only a small fraction of wealth managers view gender as a key client segmentation factor.

To serve current clients well and to adapt to the wants and needs of future clients, wealth management firms must change. Getting diversity right is key for wealth managers, but it won’t happen overnight.

Gender problem
With this information in mind, it comes as no surprise that women feel they are underserved and misunderstood by their financial advisors. They report being spoken down to and sometimes not even spoken to at all. An advisor may assume that the female client is not the primary decision-maker, or make assumptions about a client’s goals and priorities based on gender or family composition.

He or she might direct substantive questions to only the male participants in the meeting and limit interactions with the female client to small talk about family. These experiences are not merely anecdotal, but are shared by female clients across the industry.

Female clients complain their advisors do not look at them in meetings. This serves as a cue to the client that she is unimportant

The CTI report found that 67 percent of US women with a financial advisor feel their advisor either does not understand them or is not interested in them. It is no wonder, then, that 62 percent of women are willing to consider changing their wealth manager, compared with 44 percent of men, according to EY’s Women and Wealth report.

Such an endemic problem can be difficult to root out, but the solution lies in developing an awareness of the unconscious biases that undermine client relationships, and fostering trust with clients of all genders, cultures and backgrounds.

The next logical question would be: what do women want? In many industries, companies have attempted to tailor their products and services to women by ‘pinking and shrinking’ them. However, when it comes to financial guidance, women want the same thing as men: excellent service and customised advice focused on their needs and goals.

Actions related to this demand involve building trust and loyalty. Indeed, CTI’s report showed that advisors who help female clients align their investment and life goals are 41 percent more likely to build a satisfying relationship.

Conscious inclusion
For financial advisory firms to be able to attract and retain a diverse cohort of professionals and clients, creating a culture of conscious inclusion is imperative. Conscious inclusion involves constructing an environment of involvement, respect and connection, where a variety of ideas and perspectives are harnessed to create the best experience for each client through thoughtful, intentional, client-centric services.

Such environments necessitate that every client feels included in the conversation. Through involving every client and bringing all stakeholders to the table, financial advisors can help families make better decisions.

There are three key elements in the process of creating a culture of conscious inclusion: awareness, training and behavioural design. Awareness helps people identify the symptoms and diagnose the problem, training is the treatment, and behavioural design implements preventative measures to pre-emptively circumvent behaviours motivated by unconscious bias.

Part of this process involves advisors reflecting on how they create and sustain client relationships. Advisors must become conscious of their unconscious behaviours, including both verbal and nonverbal actions. For example, female clients frequently complain that their advisors do not look at them in meetings. This lack of eye contact, an unconscious action, serves as a subtle cue to the client that she is unimportant.

Everyone has preconceived notions of gender and how it may influence their clients. The implicit association test (IAT), developed by Harvard University, measures implicit bias by testing the strength of associations between concepts and evaluations or stereotypes. This method reveals underlying attitudes and beliefs that people may be unwilling or unable to report.

62%

of women are willing to consider changing their wealth manager

44%

of men are willing to consider changing their wealth manager

Data from Harvard’s Project Implicit reveal that 75 percent of test-takers correlated men with work and women with family. Taking the IAT can be the first step for many towards recognising automatic associations.

Unconscious bias training further develops an awareness of practices and behaviours that undermine inclusion. Firms must invest in training that brings a level of self-cognisance to relationship management and client communication.

This training should be intentional, informed by client feedback, and include best practices tailored for the end user. It must also be supplemented by an open, communicative workplace culture that encourages constructive feedback.

However, developing an awareness of unconscious bias and working to change existing behaviour only goes so far. The very nature of unconscious bias is that we are at least partially unaware of it and, in many cases, it is the result of our brain taking the ‘path of least resistance’ in the decision-making process.

The most effective way of eradicating unconscious bias is to create systems that disincentivise behaviour motivated by bias. Good behavioural design makes it easier for our biased minds to make unbiased choices, and ultimately leads to better outcomes.

For example, in 1952, when the Boston Symphony Orchestra was looking to diversify its mostly male orchestra, it conducted blind (and barefoot) auditions to disguise the gender of the musician. This led to women comprising almost 50 percent of the applicants that made it past the first round of auditions.

When it comes to financial advisory firms, behavioural design that combats bias could exist in the form of an onboarding checklist that explicitly asks about communication preferences, or even a simple reminder about best practices on a computer screen.

The industry’s capacity to serve its increasingly diverse clientele hinges on its consciousness of the impact of its underlying biases. When it comes to women, including them in the conversation, valuing their voices at the table and effectively engaging them in the decision-making process should underscore our interactions.

It is our responsibility as advisors to create spaces where women are actively involved and invited to participate and ask questions, which allows both confidence and trust to grow.

Central bankers cautious that low inflation could extend stimulus policies

Posted on by Ashton Wenborn

At the G30 banking seminar on October 15, US Fed Chair Janet Yellen, European Central Bank (ECB) Vice President Vítor Constâncio and Bank of Japan Governor Haruhiko Kuroda said institutions are closely monitoring growth in prices.

Low inflation despite a strong economic upturn worldwide continues to be a matter of concern among the world’s largest central banks. Their current pace means that stimulus policies implemented after the 2008 financial crisis cannot yet be suspended.

After a week of meetings between the World Bank and the IMF, central bankers’ speeches contrasted with the optimism expressed across the conference. While markets widely anticipate the end of emergency policies, authorities raised red flags about inflation, giving signals that they are in no rush to relax fiscal policies.

Although Yellen said the Fed will soon make another change to rates, she highlighted that inflation has been the “biggest surprise in the US economy this year”. Consequently, Fed officials “will be paying close attention to the inflation data in the months ahead”, suggesting that rate rises are subject to market performance.

While markets widely anticipate the end of emergency policies, authorities raised red flags about inflation, giving signals that they are in no rush to relax fiscal policies.

In August, inflation in the US had risen by 1.4 percent annually, far below the Fed’s two percent target, reports showed.

Yellen has forecast that prices will take a turn next year due to the “ongoing strengthening of labour markets”. However, on October 15 she said that low inflation may not end in the near future: “The fact that a number of other advanced economies are also experiencing persistently low inflation understandably adds to the sense among many analysts that something more structural may be going on.”

That said, President of the Federal Reserve Bank of Boston Eric Rosengren – whose views are usually consistent with Yellen’s – said in an interview on October 14 that the Fed must continue to raise interest rates in spite of inflation.

Europe is also keeping an eye on sluggish rates. Inflation in the Eurozone grew by 1.5 percent annually in September, but it is expected to drop due to decreasing food and oil prices.

Vítor Constâncio, Vice President of the ECB, highlighted that the relationship between rising inflation and decreasing unemployment has weakened in recent months, which could prolong ECB stimulus policies. The institution’s programme will continue “until further notice”, Constâncio said.

According to Bloomberg, some ECB policy makers projected purchases of around €200bn ($235bn) under the bond buying programme in 2018. This would represent a sharp reduction from the €720bn ($850bn) spent at present.

Bank of Japan Governor Haruhiko Kuroda said: “The Bank of Japan will consistently pursue aggressive monetary easing with a view to achieving the price stability target at the earliest possible time.” The two percent inflation target “is still a long way off”, he added.

With the world’s leading central banks moderating the upbeat tone of the conference, the end of easy money is not as near as expected.

Macau bridges the gap between Chinese and Portuguese markets

Posted on by Ashton Wenborn

Following decades of economic exchange, Macau is now perfectly positioned to promote cooperation between China and Portuguese-speaking countries (PSCs). Macau’s historically close relations with PSCs, which began when Portuguese traders first settled there in the 1550s, is key to this unique position, alongside the fact that Portuguese is one of the official languages in the territory. In this respect, companies from PSCs are able to take full advantage of Macau’s privileged geographic position in the Pearl River Delta and its proximity to China’s biggest trade hub, the coastal province of Guangdong.

The longstanding trust between the Chinese and the Portuguese makes Macau a melting pot that enables ever-closer trade relations between Beijing and PSCs. After centuries of alliance, mutual trust has been firmly consolidated, making Macau a unique place to exchange, understand and experience the difference in culture between China and PSCs. Naturally, it has also become the best stage for trade, investment and many other forms of cooperation too.

Mutual cooperation
Given Macau’s role as a bridge to China, numerous multinational companies are now holding their annual events in the area. The presence of representatives from PSC companies is always anticipated at such events. They are specifically designed to promote trade and business partnerships with Chinese companies, enabling foreign firms to take advantage of new opportunities in the country. One of the biggest events on the calendar, for example, is the Macao International Fair, at which there is a pavilion dedicated especially to companies from PSCs.

Macau’s role as a gateway to China is complemented by the partnerships with local companies that it offers to entities from Portuguese-speaking countries

Macau’s role is also enhanced by its participation in the Fund for Cooperation and Development between China and PSCs, as well as its recent launch of three strategic centres. The first is a business and trade service centre for SMEs in PSCs, the second is a distribution centre for goods, and the third is a new convention and exhibition centre that is focused on economic and trade cooperation between China, Macau and PSCs.

Macau’s role as a gateway into China is complemented further by the many partnerships, strategic alliances and privileged contacts with local companies that it offers to entities from PSCs. After years of working together, various financial institutions and enterprises in Macau now have extensive networks in PSCs, while companies from PSCs have also set up offices and contact points in the territory in order to market their products to the mainland.

In doing so, they can enjoy preferential treatment under the Macau and Mainland Closer Economic Partnership Arrangement (CEPA). This agreement lowers the threshold for locally incorporated companies to enter into certain industries in China, and allows them to receive the same treatment as a local national entity. This makes Macau particularly attractive for PSC companies wishing to enter
the Chinese market.

Boom zone
Macau’s business environment is itself a huge draw for many international companies, particularly given the territory’s impressive growth in recent years, together with its booming tourism industry. In addition, Macau has a simple taxation system in place, with corporate and individual tax rates never exceeding 12 percent – among the lowest rates in the region. And, like Hong Kong, Macau is a free port.

It is also worth noting that the local government has no financial debt; indeed, year after year it has increased its surplus. In line with this growing economic prowess, two key infrastructure projects have recently been undertaken in Macau: the Taipa ferry terminal was opened in June, while the Hong Kong-Zhuhai-Macau Bridge is now approaching completion. There are now other large infrastructure projects on the cards too, including a light railway system.

Another draw for foreign companies is Macau’s worldwide reputation. For example, Macau is recognised by the World Trade Organisation as having an “open economy that maintains few trade and investment restrictions”. What’s more, according to the 2017 Index of Economic Freedom, which was jointly released by the Heritage Foundation and The Wall Street Journal, Macau was ranked the 32nd-freest economy of 178 countries worldwide. The city also ranked ninth in the Asia-Pacific region.

Major player
Banco Nacional Ultramarino (BNU), a subsidiary of the Caixa Geral De Depositos Group (CGD), takes full advantage of Macau’s position as a platform into mainland China. Through CGD, Portugal’s largest banking group, BNU has access to an extensive global network that is present in 23 countries across Europe, Asia, Africa and the Americas. Given that the bank is the leading financial institution in five of the seven PSCs where it is represented (Portugal, Mozambique, Cape Verde, Sao Tomé and Príncipe, and East Timor), Macau’s role as a platform for economic relations between China and all PSCs
is enhanced even further.

Its presence in Macau and mainland China, with a representative office in Shanghai and a branch in Hengqin, places BNU in a unique position to support PSC companies that have goals to enter the Chinese market. The bank can also assist Chinese investors with interests in PSCs by providing integrated financial solutions.

In this regard, BNU has been extremely active in promoting trade and investment between China and PSCs. For example, the bank actively supports the initiatives of the Monetary Authority of Macao, the Macao Trade and Investment Promotion Institute, and AICEP Portugal Global, along with those of other official agencies. BNU also plays a crucial role in supporting new companies from PSCs in the territory, whether this is through facilitating communication or by providing financial services, particularly in terms of trade finance.

To help develop relations with its banking partners in PSCs even further, BNU has established an international desk, which focuses on international businesses. We believe that information is the key to success – consequently, the bank has set up a specialised research team that helps develop new business opportunities between PSCs and China. This has enabled BNU to refer business opportunities to its banking partners in those countries and in China, which is enabled by the bank’s local market knowledge and experience in identifying potential partners, suppliers or customers

Clearly, the bulk of trade and investment relations with PSCs occur through mainland China. Therefore, with the recent opening of a BNU branch in Hengqin to complement the office in Shanghai, BNU will play an even more active role in promoting business between China, Macau and these countries. In equal measure, our objective is to assist Macau investors and companies in expanding their businesses into mainland China, and to promote ever-closer cooperation between Macau and Guangdong Province.

As the first international financial group to enter the Hengqin Free Trade Zone, BNU is very confident about the future of Hengqin within the overall development of the Pearl River Delta Region, and its mission to bring together entrepreneurs from both east and west. This, in fact, is the core component of Macau’s ambitious five-year plan.

International scope
President Xi Jinping’s Belt and Road initiative will enable all countries that contribute to benefit from the rebuilding of ancient trade routes that connect China, Central Asia and Europe. This is a unique opportunity for the entire region, given that it comprises 4.4 billion people, constituting 63 percent of the global population, and has a combined GDP of $21trn. To achieve this ambitious goal, Beijing has already signed memorandums of understanding for the joint development of the initiative with several countries.

That said, the initiative is more than the construction of roads, railways and ports. China’s vision is to form an infrastructure network connecting all regions in Asia, and between Asia, Europe and Africa, including energy and communications infrastructure, as well as transportation.
Along this vein, CGD is also committed to Macau’s role as a renminbi clearing centre. The internationalisation of the renminbi brings forth numerous opportunities, not only by attracting the attention of the mainland business community, but also that of global financial markets. The rise of the renminbi reflects the growing economic importance of China and the increase in Chinese exports.

As the second-largest economy in the world, China is now pursuing a greater role for its currency in global trade. With the inclusion of the renminbi in the IMF’s basket of Special Drawing Rights, and being one of the currencies with the highest growth in global transactions, the renminbi is now one of the main currencies used in trade between PSCs and China.

As evidence of CGD’s commitment to the internationalisation of the renminbi, the group offers a full range of renminbi-denominated financial services to its international network. The results of Macau becoming a renminbi clearing platform between China and PSCs have also been encouraging, and will certainly have an even greater impact in the years to come.

With the recent move of the headquarters of the China-PSC Cooperation and Development Fund to Macau, a new impetus has been given to the projects currently in progress, which in turn is generating renewed interest from around the globe. With a wide presence in various markets that are at different stages of development, CGD is deeply supportive of all these important initiatives. As such, the group is now establishing itself as a strong partner that can leverage the opportunities derived from the Belt and Road initiative and renminbi growth in order to further boost cooperation between China and PSCs.

Why corporate tax cuts don’t work

Posted on by Ashton Wenborn

Although US plutocrats may disagree about how to rank the country’s major problems – inequality, slow growth, low productivity, opioid addiction, poor schools and deteriorating infrastructure – the solution is always the same: lower taxes and deregulation, to ‘incentivise’ investors and ‘free up’ the economy. President Donald Trump is counting on this package to make America great again.

It won’t, because it never has. When Ronald Reagan tried it in the 1980s, he claimed that tax revenues would rise. Instead, growth slowed, tax revenues fell and workers suffered. The big winners in relative terms were corporations and the rich, who benefited from dramatically reduced tax rates.

Trump has yet to advance a specific tax proposal. But, unlike his administration’s approach to healthcare legislation, lack of transparency will not help him. While many of the 32 million people projected to lose health insurance under the current proposal don’t yet know what’s coming, that is not true of the companies that will get the short end of the stick from Trump’s tax reform.

Unattractive options
Here’s Trump’s dilemma: his tax reform must be revenue neutral. That’s a political imperative. With corporations sitting on trillions of dollars in cash while ordinary Americans are suffering, lowering the average amount of corporate taxation would be unconscionable – and more so if taxes were lowered for the financial sector, which brought on the 2008 crisis and never paid for the economic damage. Moreover, Senate procedures dictate that to enact tax reform with a simple majority, rather than the three-fifths supermajority required to defeat an almost-certain filibuster by opposition Democrats, the reform must be budget-neutral for 10 years.

The only rhyme or reason to who gets tax breaks appears to be the effectiveness of supplicants’ lobbyists

This requirement means that average corporate tax revenue must remain the same, which implies that there will be winners and losers: some will pay less than they do now, and others will pay more. One might get away with this in the case of personal income tax, because even if the losers notice, they are not sufficiently organised. By contrast, even small businesses in the US lobby Congress.

Most economists would agree that the US’ current tax structure is inefficient and unfair. Some firms pay a far higher rate than others. Perhaps innovative firms that create jobs should be rewarded, in part, by a tax break. But the only rhyme or reason to who gets tax breaks appears to be the effectiveness
of supplicants’ lobbyists.

One of the most significant problems concerns taxation of US corporations’ foreign-earned income. Democrats believe that, because US corporations, wherever they operate, benefit from America’s rule of law and power to ensure that they are not mistreated (often guaranteed by treaty), they ought to pay for these and other advantages. But a sense of fairness and reciprocity, much less national loyalty, is not deeply ingrained in many US companies, which respond by threatening to move their headquarters abroad.

Something from nothing
Republicans, partly out of sensitivity to this threat, advocate a territorial tax system, like that used in most countries. This holds that taxes should be imposed on economic activity only in the country where it occurs. The concern is that, after imposing a one-off levy on the untaxed profits that US firms hold abroad, introducing a territorial system would generate a tax loss.

To offset this, Paul Ryan, the Speaker of the US House of Representatives, has proposed adding a tax on net imports (imports minus exports). Because net imports lead to job destruction, they should be discouraged. At the same time, so long as US net imports are as high as they are now, the tax would raise enormous revenues.

But here’s the rub: the money must come from someone’s pocket. Import prices will go up. Consumers of cheap clothing from China will be worse off. To Trump’s team, this is collateral damage, the inevitable price that must be paid to give America’s plutocrats more money. But retailers such as Walmart, not just its customers, are part of the collateral damage too. Walmart knows this, and won’t let it happen.

Other corporate tax reforms might make sense, but they, too, imply winners and losers. And so long as the losers are numerous and organised, they’re likely to have the power to stop the reform.

A politically astute president who understood deeply the economics and politics of corporate tax reform could conceivably muscle Congress towards a reform package that made sense. Trump is not that leader. If corporate tax reform happens at all, it will be a hodgepodge brokered behind closed doors. More likely is a token across-the-board tax cut: the losers will be future generations, out-lobbied by today’s avaricious moguls, the greediest of whom include those who owe their fortunes to scummy activities like gambling.

The old lie
The sordidness of all of this will be sugarcoated by the hoary claim that lower tax rates will spur growth. There is simply no theoretical or empirical basis for this, especially in countries like the US, where most investment (at the margin) is financed by debt and interest is tax-deductible. The marginal return and marginal cost are reduced proportionately, leaving investment largely unchanged.

In fact, a closer look, taking into account accelerated depreciation and the effects on risk sharing, shows that lowering the tax rate likely reduces investment.

Small countries are the sole exception, because they can pursue beggar-thy-neighbour policies aimed at poaching corporations from their neighbours. But global growth is largely unchanged – the distributive effects actually impede it slightly – as one gains at the expense of the other. And even this outcome assumes that the other does not respond, and fuels a race to the bottom.

In a country with so many problems – especially inequality – tax cuts for rich corporations will not solve any of them. This is a lesson for all countries contemplating corporate tax breaks, even those without the misfortune of being led by a callow, craven plutocrat.

© Project Syndicate 2017

Bayer to sell seeds and pesticides unit to BASF

Posted on by Ashton Wenborn

On October 13, chemical and pharmaceutical group Bayer announced it had signed an agreement to sell its crop science business to its competitor BASF for €5.9bn ($6.8bn). However, the deal will only go ahead if the European Commission approves Bayer’s acquisition of Monsanto, an American agricultural conglomerate.

“We are pleased that, in BASF, we have found a strong buyer for our businesses that will continue to serve the needs of growers and offer our employees long-term prospects,” Bayer’s Chairman, Werner Baumann, said in a statement.

The business unit being sold generated around €1.3bn ($1.53bn) in sales last year, Bayer said.

The deal is a strategic move to obtain approval from European regulators to take control of Monsanto. “We are taking an active approach to address potential regulatory concerns, with the goal of facilitating a successful close of the Monsanto transaction,” Baumann added.

The deal is a strategic move to obtain approval from European regulators to take control of Monsanto

The deal, which was made public in September last year, is worth $57bn.

More recently, on August 22, the European Commission opened an “in-depth” investigation into whether the merger would negatively affect competition, as it would create the world’s largest integrated pesticides and seeds company.

Commissioner Margrethe Vestager, who is in charge of competition policy, said in a statement: “We need to ensure effective competition so that farmers can have access to innovative products, better quality and also purchase products at competitive prices. And at the same time maintain an environment where companies can innovate and invest in improved products.”

Bayer said it aims to close the acquisition of Monsanto by early 2018, at which point it would put the deal with BASF into motion.

The terms of the deal between Bayer and BASF include the transfer of “relevant” intellectual property and facilities. In addition, more than 1,800 employees, located in the US, Germany, Brazil, Canada and Belgium, will be transferred from Bayer to BASF.

With food demand forecast to increase around the world, the agricultural business has been growing, with new industry giants appearing in recent years.

Previous transactions saw Dow Chemical acquire DuPont and China National Chemical take over Syngenta. The European Commission approved both mergers after the companies made “considerable divestitures”, according to The Wall Street Journal.

 

Renegade logic

Posted on by Ashton Wenborn

Once again, the Chinese economy has defied the hand wringing of the nattering nabobs of negativism. After decelerating for six consecutive years, real GDP growth appears to be inching up in 2017.

The 6.9 percent annualised increase recently reported for the second quarter exceeds the 6.7 percent rise in 2016, and is well above the consensus of international forecasters who, just a few months ago, expected growth to be closer to 6.5 percent this year, and to slow further, to six percent, in 2018.

I have long argued that the fixation on headline GDP overlooks deeper issues shaping the China growth debate. That is because the Chinese economy is in the midst of an extraordinary structural transformation, with a manufacturing-led producer model giving way to an increasingly powerful services-led consumer model.

To the extent that this implies a shift in the mix of GDP away from exceptionally rapid gains in investment and exports, towards relatively slower-growing internal private consumption, a slowdown in overall GDP growth is both inevitable and desirable. Perceptions of China’s vulnerability need to be
considered in this context.

Defying expectations
This debate has a long history. I first caught a whiff of it back in the late 1990s, during the Asian financial crisis. From Thailand and Indonesia to South Korea and Taiwan, China was widely thought to be next. An October 1998 cover story in The Economist, vividly illustrated by a Chinese junk getting sucked into a powerful whirlpool, said it all.

Yet nothing could have been further from the truth: when the dust settled on the virulent pan-regional contagion, the Chinese economy had barely skipped a beat. Real GDP growth slowed temporarily, to 7.7 percent in 1998-99, before reaccelerating to 10.3 percent in the subsequent decade.

Pessimists view the Chinese economy as they view their own economies, repeating a classic mistake historian Jonathan Spence warned of many years ago

China’s resilience during the global financial crisis was equally telling. In the midst of the worst global contraction since the 1930s, the Chinese economy still expanded at a 9.4 percent average annual rate in 2008-09. While down from the blistering, unsustainable 12.7 percent pace recorded during the three years prior to the crisis, this represented only a modest shortfall from the 30-year post-1980 trend of 10 percent.

Indeed, were it not for China’s resilience in the depths of the recent crisis, world GDP would not have contracted by 0.1 percent in 2009, but would have plunged by 1.3 percent the sharpest decline in global activity since the Second World War.

The latest bout of pessimism over the Chinese economy has focused on the twin headwinds of deleveraging and a related tightening of the property market in essence, a Japan-like stagnation. Once more, the western lens is out of focus. Like Japan, China is a high-saving economy that owes its mounting debt largely to itself. Yet, if anything, China has more of a cushion than Japan to avoid sustainability problems.

Similarly different
According to the International Monetary Fund, China’s national savings are likely to hit 45 percent of GDP in 2017, well above Japan’s 28 percent savings rate. Just as Japan, with its gross government debt at 239 percent of GDP, has been able to sidestep a sovereign debt crisis, China, with its far larger savings cushion and much smaller sovereign debt burden (49 percent of GDP), is in much better shape to avoid such an implosion.

To be sure, there can be no mistaking China’s mounting corporate debt problem, with non-financial debt-to-GDP ratios hitting an estimated 157 percent of GDP in late 2016 (versus 102 percent in late 2008). This makes the imperatives of state-owned enterprise reform, where the bulk of rising indebtedness has been concentrated, all the more essential in the years ahead.

Moreover, there is always good reason to worry about the Chinese property market. After all, a rising middle class needs affordable housing. With the urban share of China’s population rising from less than 20 percent in 1980 to more than 56 percent in 2016 and most likely headed to 70 percent by 2030 this is no trivial consideration.

But this means that Chinese property markets unlike those of other fully urbanised major economies enjoy ample support from the demand side, with the urban population likely to remain on a one or two percent annualised growth trajectory over the next 10 to 15 years. With Chinese home prices up nearly 50 percent since 2005 nearly five times the global norm (according to the Bank for International Settlements and IMF Global Housing Watch) affordability is obviously a legitimate concern. The challenge for China is to manage prudently the growth in housing supply needed to satisfy the demand requirements of urbanisation, without fostering excessive speculation and dangerous asset bubbles.

Growing power
Meanwhile, the Chinese economy is also drawing support from strong sources of cyclical resilience in early 2017. The 11.3 percent year-on-year gain in exports recorded in June stands in sharp contrast with earlier years, which were adversely affected by a weaker post-crisis global recovery. Similarly, 10 percent annualised gains in inflation-adjusted retail sales through mid-2017 about 45 percent faster than the 6.9 percent pace of overall GDP growth reflect impressive growth in household incomes and the increasingly powerful (and possibly under-reported) impetus of e-commerce.

Pessimists have long viewed the Chinese economy as they view their own economies, repeating a classic mistake that Yale historian Jonathan Spence’s seminal assessment warned of many years ago. The asset bubbles that broke Japan and the US are widely presumed to pose the same threat in China. Likewise, China’s recent binge of debt-intensive economic growth is expected to have the same consequences as such episodes elsewhere.

Forecasters find it difficult to resist superimposing the outcomes in major crisis-battered developed economies on China. That has been the wrong approach in the past; it is wrong again today.

© Project Syndicate 2017

BlackRock consolidates its place at the top of wealth management sector

Posted on by Ashton Wenborn

On October 11, US asset manager BlackRock reported that it has added almost $1trn to its assets under management in the first nine months of 2017. This outstanding result takes the total investor cash administrated by the firm to $5.98trn.

BlackRock has experienced a marked growth since the financial crisis in 2008, due to banks losing ground in the field. Over time, investors have lost faith in traditional stock picking, showing a preference for other options, according to The Wall Street Journal.

Consequently, exchange-traded funds (ETFs), a low-cost alternative to mutual funds, haven’t stopped breaking records in the last few years.

ETFs are investment vehicles similar to mutual funds, but they differ in that they trade in stock exchanges, not diversified holdings. ETFs allow investors to gain exposure to a basket of assets without having to purchase individual shares.

BlackRock has experienced a marked growth since the financial crisis in 2008, due to banks losing ground in the field

Additionally, ETFs have benefits compared to other investment alternatives, as shareholders don’t have to pay capital gains on shares until the final sale. In line with the growing popularity of ETFs, BlackRock has experienced a constant upward trend, becoming the world’s largest wealth manager.

Following the announcement, BlackRock’s Chief Executive, Laurence Fink, said in an interview: “It’s humbling.” His forecast for the coming three to five years is upbeat as he expects ETFs to become even more popular if new regulations are implemented in Europe and the US. “That’s the backdrop we’re living in,” he added.

In its latest report for the third quarter, BlackRock posted $96.1bn in total net inflows, which “reflects [the] continued strength of [its] diversified business model”. More than half of this amount flowed into ETFs.

This said, BlackRock’s main rival, Vanguard Group, has enjoyed the same positive environment, also experiencing growth. Its ETF business “more than doubled in less than four years”, the Financial Times reported.

Now, the world’s two largest wealth managers deal with around $10.7trn. According to the industry’s leaders, there’s even more to come.