I am a risk manager first, and a profit maker second. I tend not to trust solutions that are "magic bullets" unless there is some barrier to entry — why can you do it, and few others can? Knowledge travels.
So, regarding the "endowment model" of investing, I have been partly a believer, and partly a skeptic. A believer, because endowments do have the ability to invest for the long-term, and not everyone else does. A skeptic, because many endowments were taking on too much illiquidity.
Liquidity is an underrated factor for investors who have charge over portfolios that have a long-term stable funding base. I had that advantage once, as the main investment manager for an insurer the had a large portfolio of structured settlements. In insurance liabilities, nothing is longer than a portfolio of structured settlements.
Buy long-dated debt? Illiquid debt? If the pricing is right, sure; you should have to pay to rent the strength of a strong balance sheet, where the funding is intact. WHen managing that company's portfolio I didn't have to worry about a run on the portfolio, because I kept more than enough liquid assets to satisfy the demands of policyholders should they decide to surrender.
Source
Wednesday, October 28, 2009
Thursday, October 15, 2009
Gold ETF backed Gold Participating Bond scheme for resource finance
In the opening presentation on Mining Journal's Gold Day, sponsor Steve Sharpe of investment banker Canaccord Adams' London office unveiled an innovative financing scheme which can be used to help raise finance for a gold related resource project . The idea behind what it calls a Gold Participating Bond, is a proprietary mechanism developed by Canaccord Adams that affords the investor full gold price exposure, whilst achieving a running yield, by circumventing conventional financial markets and pre-purchasing gold direct from the mining company, with settlement by way of a gold ETF (currently the Zurich Kantonal Bank's gold ETF).
The idea is that in effect the mining company issues the bond which is based on a maximum of 20% of the mine's annual gold production giving a strong degree of commercial safety. The bond is set on a fixed term and carries a set coupon - in the case of the example put forward by Sharpe at 8% per annum - and is repayable by the issuer (the mining company) in equal quarterly payments in the form of the gold ETF. Thus, in effect, the bond becomes a securitised gold loan repayable out of future production.
Sharpe told Mineweb that this is the kind of deal he used to structure when he worked for Rothschilds in London, although in those days the ETF element was not available.
He reckons the Gold Participating Bond will be of particular interest to funds looking for pure gold exposure, those already holding gold ETFs or those wishing to undertake a phased purchase of gold ETFs at a predetermined price, while carrying a good interest rate and with very limited risk.
Source
The idea is that in effect the mining company issues the bond which is based on a maximum of 20% of the mine's annual gold production giving a strong degree of commercial safety. The bond is set on a fixed term and carries a set coupon - in the case of the example put forward by Sharpe at 8% per annum - and is repayable by the issuer (the mining company) in equal quarterly payments in the form of the gold ETF. Thus, in effect, the bond becomes a securitised gold loan repayable out of future production.
Sharpe told Mineweb that this is the kind of deal he used to structure when he worked for Rothschilds in London, although in those days the ETF element was not available.
He reckons the Gold Participating Bond will be of particular interest to funds looking for pure gold exposure, those already holding gold ETFs or those wishing to undertake a phased purchase of gold ETFs at a predetermined price, while carrying a good interest rate and with very limited risk.
Source
Monday, September 28, 2009
Corporate Powers Should be Limited to Services, Short Term Investments, Task Force Urged
CUNA and NAFCU's Corporate Credit Union Restructure Policy Task Force recommended that corporate credit unions should restrict the products and services they offer to short term investment products and payment processing and settlement services.
The task force said it found “considerable value” in the corporate credit union's payment and settlement services and urged that they keep offering them, even as it acknowledged the same services are available though the Federal Reserve banks.
“Although there are alternatives to some of these services from the Federal Reserve, Federal Home Loan Banks, and commercial banks, the task force believes there is significant value to credit unions in having these services provided by not-for-profit organizations controlled by credit unions,” the task force said.
Since short term credit and deposit accounts are tied to payments and settlement services, the task force recommended that corporate credit unions continue to offer these. But the task force urged that corporate credit unions not be allowed to offer longer term investment products going forward.
“This is the area that has historically and recently created the greatest risk in corporate credit unions. Purely for settlement purposes, a maximum maturity of three months would be sufficient,” the task force said. “However, the task force believes that on-balance sheet deposit taking and investing in instruments of up to one year could be consistent with an acceptable level of risk. Even within this short maturity limit, care should be taken that interest rate risk is appropriately managed.”
In order to help meet, in a limited way, the needs of natural person credit unions for investment products, the task force urged that corporate credit unions be allowed to own investment CUSOs that would “provide investment advisory and broker/dealer services” to natural person credit unions, but would act in a more advisory role rather than holding long term investments themselves the task force recommended.
Source
The task force said it found “considerable value” in the corporate credit union's payment and settlement services and urged that they keep offering them, even as it acknowledged the same services are available though the Federal Reserve banks.
“Although there are alternatives to some of these services from the Federal Reserve, Federal Home Loan Banks, and commercial banks, the task force believes there is significant value to credit unions in having these services provided by not-for-profit organizations controlled by credit unions,” the task force said.
Since short term credit and deposit accounts are tied to payments and settlement services, the task force recommended that corporate credit unions continue to offer these. But the task force urged that corporate credit unions not be allowed to offer longer term investment products going forward.
“This is the area that has historically and recently created the greatest risk in corporate credit unions. Purely for settlement purposes, a maximum maturity of three months would be sufficient,” the task force said. “However, the task force believes that on-balance sheet deposit taking and investing in instruments of up to one year could be consistent with an acceptable level of risk. Even within this short maturity limit, care should be taken that interest rate risk is appropriately managed.”
In order to help meet, in a limited way, the needs of natural person credit unions for investment products, the task force urged that corporate credit unions be allowed to own investment CUSOs that would “provide investment advisory and broker/dealer services” to natural person credit unions, but would act in a more advisory role rather than holding long term investments themselves the task force recommended.
Source
Monday, August 24, 2009
Scoring investment risk
The Bank for International Settlements is thinking the right way in calling for a global standard of ranking financial instruments based on their risk and suitability for different kinds of investors.
For instance, the warning on a structured note could read something like this: “Even though this security is marketed as principal protected, you could still lose everything if the bank that issued it goes bust. Additionally, structured notes generate fat fees for the both the issuing bank and the bank that sells them. In many cases, an investor could achive the same asset exposure by buying a basket of stocks, commodities etc. on his or her own.”
Let’s hope this idea from BIS is adopted by the SEC and the new consumer financial protection agency the Obama administration wants to create.
Source
The BIS Annual Report argues that financial instruments, markets and institutions all require reform if a truly robust system is to emerge. For instruments, it means a mechanism that rates their safety, limits their availability and provides warnings about their suitability and risks.One way to do that would be to require investment houses to slap a Surgeon General cigarette-style warning on every exotic security that gets peddled to retail investors. This warning would be attached to every piece of marketing material for a financial product, disclosed by brokers everytime they pitched the security and prominently displayed on every investor account statement.
For instance, the warning on a structured note could read something like this: “Even though this security is marketed as principal protected, you could still lose everything if the bank that issued it goes bust. Additionally, structured notes generate fat fees for the both the issuing bank and the bank that sells them. In many cases, an investor could achive the same asset exposure by buying a basket of stocks, commodities etc. on his or her own.”
Let’s hope this idea from BIS is adopted by the SEC and the new consumer financial protection agency the Obama administration wants to create.
Source
Monday, August 10, 2009
Structured notes investors hope MAS report will boost claims
INVESTORS caught out by the structured notes fiasco hope the official report slamming the sale processes used by financial institutions might bolster their legal claims for compensation.
But lawyers maintained yesterday that an investor's chances of success will improve if individual sales staff are found to have mis-sold the Lehman-linked structured notes.They also expressed hope that the findings on this point from the Monetary Authority of Singapore (MAS) will be released soon.
The MAS said on Monday that it is still investigating complaints of mis-selling against individuals - sales representatives, relationship managers or financial advisers - and may take action.
Its comments came as it released its report documenting how the 10 financial institutions that sold complex structured notes had failed to ensure a robust sales and advisory process.
About 9,900 retail investors lost around $520 million invested in structured notes such as Lehman Minibonds and DBS High Notes 5.
The institutions have since been banned from selling similar products. The bans range from six months to two years.
Investors hope that the bans have strengthened their case that the sellers were at fault.
However, the MAS had made it clear that the institutions' failings and the penalties handed out do not automatically mean they will be liable to investors.
Some investors say the report will not help them, but one lawyer said the report offers 'one more piece of evidence in the investor's favour but that alone may not win the case, though it does help bring the investor closer to the finishing line, or help him cross it'.
Another lawyer in corporate litigation said: 'The report generally helps the investors prove that there was really a systemic problem, especially in how the relationship managers were trained.
'If the relationship managers were untrained, then it is unlikely they can fulfil their duties under the Financial Advisers Act.'
The role which sales staff played remains crucial for investors in trying to prove that they were mis-sold, said lawyers.
Investors will typically need to relate what exactly they were told and what information they relied on from the staff before they decided to invest in the notes.
The challenge investors face with such cases of mis-selling or misrepresentation is one of proof, but most information related by sales staff is done verbally so there would not be any records.
'This is where the credibility of the staff is crucial and if it is known that he has already been singled out by the authorities for inappropriate behaviour during the sale process, then that may tip the scales in favour of the investor,' said another lawyer.
That is why if details of the investigation into individuals are released, they may help the legal proceedings.
Meanwhile debate continues on whether investors have received fair compensation as the settlement amounts released by the MAS appear surprisingly low.
For example, brokerages DMG & Partners and UOB Kay Hian were out of pocket by only $20,000 and $90,000 respectively, a small fraction of the total sums their clients invested in the notes.
DBS Bank paid out $7.6 million, about a tenth of the $70 milion to $80 million it had set aside to compensate investors in Singapore and Hong Kong.
The MAS said the different compensation sums were determined by each institution's customer profile and business model. Brokerages, for example, mostly perform transactions instructed by clients without necessarily giving advice, so the cases of mis-selling may have been fewer.
DBS said that most of its customers were relatively sophisticated - two out of three DBS High Notes 5 clients were priority banking customers, while 80 per cent of the customers were below the age of 60.
MAS had noted earlier that most of the 'vulnerable' investors - the elderly or those with little income, low levels of formal education or little investment experience - had been offered 'full or partial settlement'. For the 'few cases' among this group who did not receive any settlement offer, the financial institutions had provided 'good grounds' for their decisions.
Source
But lawyers maintained yesterday that an investor's chances of success will improve if individual sales staff are found to have mis-sold the Lehman-linked structured notes.They also expressed hope that the findings on this point from the Monetary Authority of Singapore (MAS) will be released soon.
The MAS said on Monday that it is still investigating complaints of mis-selling against individuals - sales representatives, relationship managers or financial advisers - and may take action.
Its comments came as it released its report documenting how the 10 financial institutions that sold complex structured notes had failed to ensure a robust sales and advisory process.
About 9,900 retail investors lost around $520 million invested in structured notes such as Lehman Minibonds and DBS High Notes 5.
The institutions have since been banned from selling similar products. The bans range from six months to two years.
Investors hope that the bans have strengthened their case that the sellers were at fault.
However, the MAS had made it clear that the institutions' failings and the penalties handed out do not automatically mean they will be liable to investors.
Some investors say the report will not help them, but one lawyer said the report offers 'one more piece of evidence in the investor's favour but that alone may not win the case, though it does help bring the investor closer to the finishing line, or help him cross it'.
Another lawyer in corporate litigation said: 'The report generally helps the investors prove that there was really a systemic problem, especially in how the relationship managers were trained.
'If the relationship managers were untrained, then it is unlikely they can fulfil their duties under the Financial Advisers Act.'
The role which sales staff played remains crucial for investors in trying to prove that they were mis-sold, said lawyers.
Investors will typically need to relate what exactly they were told and what information they relied on from the staff before they decided to invest in the notes.
The challenge investors face with such cases of mis-selling or misrepresentation is one of proof, but most information related by sales staff is done verbally so there would not be any records.
'This is where the credibility of the staff is crucial and if it is known that he has already been singled out by the authorities for inappropriate behaviour during the sale process, then that may tip the scales in favour of the investor,' said another lawyer.
That is why if details of the investigation into individuals are released, they may help the legal proceedings.
Meanwhile debate continues on whether investors have received fair compensation as the settlement amounts released by the MAS appear surprisingly low.
For example, brokerages DMG & Partners and UOB Kay Hian were out of pocket by only $20,000 and $90,000 respectively, a small fraction of the total sums their clients invested in the notes.
DBS Bank paid out $7.6 million, about a tenth of the $70 milion to $80 million it had set aside to compensate investors in Singapore and Hong Kong.
The MAS said the different compensation sums were determined by each institution's customer profile and business model. Brokerages, for example, mostly perform transactions instructed by clients without necessarily giving advice, so the cases of mis-selling may have been fewer.
DBS said that most of its customers were relatively sophisticated - two out of three DBS High Notes 5 clients were priority banking customers, while 80 per cent of the customers were below the age of 60.
MAS had noted earlier that most of the 'vulnerable' investors - the elderly or those with little income, low levels of formal education or little investment experience - had been offered 'full or partial settlement'. For the 'few cases' among this group who did not receive any settlement offer, the financial institutions had provided 'good grounds' for their decisions.
Source
Monday, July 20, 2009
Alternative Investments Under Scrutiny
Scrutiny of the due diligence performed by independent financial advisors and broker-dealers on alternative investments has increased dramatically, according to experts.
Regulators and arbitration panels expect member firms and their registered representatives to conduct significant due diligence and to communicate their findings to investors, said Derek C. Anderson, Esq., an attorney with the law firm Michaels, Ward & Rabinovitz LLP, a securities litigation and regulation law firm with offices in Boston, Boulder, Colo., and West Palm Beach, Fla.
“More alternative investments are being sold and FINRA is focusing its examination efforts on the sales practices surrounding alternative investments” because of the scandals that have hit Wall Street, said Anderson, who spoke on the topic during a recent webinar sponsored by the Financial Services Institute, an advocacy organization for independent financial advisors and broker-dealers.
Regulators are looking closely at how advisors are handling investments in hedge funds, asset-backed securities, derivative products, structured products, bonds and bond funds and life settlements, he noted.
“Due diligence now means more than just accepting the disclosures in the offering documents. It means advisors and firms need to investigate the sponsors and the documents and see if the quoted projections add up,” Anderson says. “Advisors will be required to dig deeper for information than they may have in the past.”
One of the reasons for the heightened scrutiny is the large number of baby boomers who are seeking higher yields on their investments because of the losses they have sustained in the bear market, according to Anderson.
Source
Regulators and arbitration panels expect member firms and their registered representatives to conduct significant due diligence and to communicate their findings to investors, said Derek C. Anderson, Esq., an attorney with the law firm Michaels, Ward & Rabinovitz LLP, a securities litigation and regulation law firm with offices in Boston, Boulder, Colo., and West Palm Beach, Fla.
“More alternative investments are being sold and FINRA is focusing its examination efforts on the sales practices surrounding alternative investments” because of the scandals that have hit Wall Street, said Anderson, who spoke on the topic during a recent webinar sponsored by the Financial Services Institute, an advocacy organization for independent financial advisors and broker-dealers.
Regulators are looking closely at how advisors are handling investments in hedge funds, asset-backed securities, derivative products, structured products, bonds and bond funds and life settlements, he noted.
“Due diligence now means more than just accepting the disclosures in the offering documents. It means advisors and firms need to investigate the sponsors and the documents and see if the quoted projections add up,” Anderson says. “Advisors will be required to dig deeper for information than they may have in the past.”
One of the reasons for the heightened scrutiny is the large number of baby boomers who are seeking higher yields on their investments because of the losses they have sustained in the bear market, according to Anderson.
Source
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