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STRATEGY


DANGERS, UNFAIRNESS AND EXAGGERATED BENEFITS OF PASSIVE

The accelerating shift to passive investment is sparking off an intense debate on the possible dangers it might cause to society. Increasing numbers in the industry are voicing fears of the consequences, should the shift to passive go too far. Furthermore, for investors, technicalities of passive portfolios point to their benefits being overstated.

SURPRISING PARTNERSHIP BETWEEN FUND MANAGER AND HIGH-FREQUENCY FIRM

A surprise trading link between a top fund manager and a high-frequency trader (HFT), unthinkable just a few years ago, has brought into the spotlight the trading relationships between the buy-side and sell-side. The link is signalling undergoing a radical transformation in the investment dealing landscape.

It was revealed that the leading German asset manager Union Investment was discussing the appointment of Virtu, an electronic market maker, as an agency broker in Europe.

SPEED BUMPS CURBING HIGH-FREQUENCY TRADERS

The furious controversy surrounding the fairness of high-frequency trading (HFT) might be at least partly mitigated by a new exchange. The Investors Exchange (IEX), which was given the go-ahead by the Securities and Exchange Commission (SEC) in June, has a very distinctive feature. It is introducing ‘speed bumps’ that aim to deliberately slow down transactions. IEX, while being the first major new stock exchange in the US since 2010, is also the first platform that actually slows down trading.

INVESTMENT POTENTIAL IN SPACE COMMERCIALISATION

Commercial exploitation of space sounds exciting but on the face of it, probably too speculative for serious investors. Fidelity, the hard-headed fund manager, thinks otherwise. Impressive progress by SpaceX in 2016 is helping to confirm Fidelity’s judgment that the group is a good long-term bet on the commercialisation of space (see box 1). In January 2015, Fidelity and Google had together taken a 10% stake for an outlay of $1bn with Google putting in about $900m and Fidelity $100m. The two giants joined existing investors Founders Fund, Draper Fisher Jurvetson, Valor Equity Partners and Capricorn.

PIONEERING HEDGE FUND OUTSHINES THE WEATHER

A pioneering hedge fund has achieved outstanding performance in its weather-based portfolio over the ten years since its launch. The Cumulus Energy Fund (with assets under management (AUM) of $2.3bn) was established in 2006, by Peter Brewer, an expert in weather derivatives, and has returned about 970% since inception.

HOLLYWOOD, DATA ANALYTICS AND SPORTS IN POWERFUL CHINESE COCKTAIL

The production of Hollywood films and world of professional sports seem far apart. However, the power of data analytics and Chinese entrepreneurial insights is bringing the two fields together to constitute a strong global investment theme of the future. Top international investors are already attracted.

EUROPEAN FOOTBALL ATTRACTING GLOBAL SPORTS INVESTORS

Top flight European football has the characteristics of a tiny but fast-growing and lucrative asset class. Not only is it interesting in its own right, but it has the potential as a holding in a global sports portfolio, a sector that could grow in importance.

Serious professional investors worldwide are attracted by the rising profitability of European soccer clubs. The Chinese, in particular, are laying out large sums of money on various facets of the European game including clubs and related activities, though their motives are mixed, not entirely commercial.

PRIVATE EQUITY BUZZING AROUND FOOTBALL HONEYPOT

Until recently, only the foolhardy or the super-rich would have considered backing UK football clubs, given their habitual tendency to make huge losses and even go bankrupt. Matters are now different with a turnaround in their fortunes.

MISUSE OF DISCOUNT RATES

The valuation of future cash flows, implicitly or explicitly using discount rates, is a central aspect of much investor activity. Yet serious flaws are prevalent in practice in the way discount rates are applied in financial markets, business projects and other areas.

A seminar at Gresham College in London explored many weaknesses in the usage of discount rates. The starting point was the paper Uses and abuses of discount rates: a primer for the wary by Nick Goddard, a leading member of the think-tank Z/Yen. The paper covered basic concepts of discounting theory. The speakers at the seminar expanded on the subject, dealing with issues where discount rates are used either wrongly or in a controversial manner.

ROBO-ADVISER DANGER TO WEALTH MANAGERS DRAWS CLOSER

Robo-advisers, which have been seen as an incipient long-term threat to wealth managers for more than a year now, are becoming a more imminent menace. The big change is that many top financial players are now joining the game and are poised to accelerate the growth of this sector. According to Ian Woodhouse, Partner at PwC, 2016 promises to be pivotal in this regard and Bill McNabb, CEO of Vanguard, the giant index fund group, describes robo-advisers as ubiquitous.

MISTAKEN IDEAS OF SHAREHOLDER OWNERSHIP AND SHAREHOLDER VALUE

Many believe that shareholders own the companies in which they hold shares. This is wrong, as pointed out by Professor John Kay, Financial Times columnist and the author of the UK Government-mandated landmark study, The Kay review of UK equity markets and long-term decision making.

Kay cites eminent authorities in the UK and the US in asserting that the belief does not correspond to the law. This mistaken notion of ownership has serious implications for corporate governance, the demand for more shareholder engagement and the focus on shareholder value.

Shareholders have more rights with respect to companies in the UK than they do in the US, but these rights still do not amount to ownership. A 1948 declaration by the UK’s Court of Appeal clearly stated that “shareholders are not, in the eyes of the law, part owners of the company”, a ruling reiterated unambiguously by the House of Lords in 2003.

OPPORTUNITIES AND DANGERS IN FORESTRY

Backing forestry is appealing from a variety of different perspectives. Aesthetically, everybody likes greenery. Forestry is a hedge against inflation and has a low correlation with other asset classes. But what is most enticing and distinguishes it from most other investments is the inbuilt biological growth, reassuringly visible year by year. Maurice Ryan, Timber Marketing Manager at the Irish forestry management company Green Belt, pointed out that the long-term organic growth of the trees allows investors to ride out the low points and to wait for the highs. These investments are also less volatile than other asset classes as a result.


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IMR Magazine Summer 2017


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Copyright ©2017 IMR Magazine
Powered by Sage and Hermes

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