Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

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Economy

Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Financial

Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Financial

Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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Banks

RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Archive | November, 2016

Film funds offer a route for investors

Posted on 26 October 2015 by

HOLLYWOOD, CA - FEBRUARY 22: Director Alejandro Gonzalez Inarritu (C) with cast and crew accept the Best Picture award for 'Birdman' onstage during the 87th Annual Academy Awards at Dolby Theatre on February 22, 2015 in Hollywood, California. (Photo by Kevin Winter/Getty Images)©Getty

Opulent award ceremonies might suggest that film backers always hit the jackpot

The glamour and glitz of the film industry with its blockbusters, opulent award ceremonies and legions of celebrities might suggest that film backers always hit the jackpot.

But while this might be the case for some investors, the reality for many is far removed from this dream scenario. It can be high risk — many British films, for example, do not even make it to the US box office, and miss out on the world’s largest movie market as a result.

    “Film has a reputation of being highly risky and only a very small number become blockbusters, so the stats are against the investor,” says Martin Sherwood, a partner at Enterprise Investment Partners. “A lot of UK movies do not make much, if any, money. Only occasionally one or two do.”

    But there are a number of British films that have achieved accolades and financial success, most crucially in the US, including The King’s Speech, which was directed by Tom Hooper and starred Colin Firth, and Slumdog Millionaire, directed by Danny Boyle.

    Film industry analysts say both of these films were in part reliant on funding from individuals, showing that it is possible for private investors to win big. They also say that there are a number of ways in which backers can mitigate risks if they wish to try to safeguard capital when investing in a film.

    “Only invest with experienced producers and financiers,” says Martin Smith, founder of West Bridge Consulting, an advisory firm specialising in arts, media and entertainment.

    But how can an investor gain access to such experience? One answer could be to invest in films through film funds, a number of which have emerged over the past few years.

    Shelley Media, for example, which requires a minimum investment of £10,000, has delivered an average annual return of 11.5 per cent since launch five years ago. The Enterprise Investment Scheme (EIS) fund has raised a total of £200m and has been involved in successful British films including Mr Turner and Testament of Youth, for example.

    Look for films that mitigate production risk through pre-sales

    – Nik BowerRiverstone Pictures

    However, there have been well-publicised flops. In June, it was reported that an Octopus Investments EIS fund in the UK had almost halved in value since it first started making allocations in 2011. It had invested in 10 companies, nine of which were film rights companies that all made losses.

    About 170 people had put at least £50,000 each into the Octopus EIS 2 fund, which raised £18m. By June they had lost nearly £8m.

    Meanwhile, new funds are preparing to come to market. Ingenious Investments, which provides access to alternative asset classes from media to clean energy, is set to launch a fund called Greenlight Media, pending regulatory approval. It will target higher returns for investors with a greater risk appetite than other products in its range.

    Octopus EIS investors face large losses


    U.K. pound coins sit on a twenty pound note, arranged for a photograph in London, U.K., on Monday, Aug. 17, 2009. The pound’s biggest five-month rally in 24 years is ending as the Bank of England floods the shrinking U.K. economy with newly printed cash and slowing inflation precludes higher interest rates to lure investors. Photographer: Chris Ratcliffe/Bloomberg

    Investors in a tax-efficient fund that targeted capital preservation are facing losses of 40 per cent after investments in unlisted media companies performed poorly. The Octopus EIS 2 fund, which raised £18m through the government’s enterprise investment scheme, invested in a number of film rights companies that have lost money since 2011 when money was allocated.

    Read more

    One way for funds and their investors to be more confident about the risks involved in chasing returns from investing in film is to ensure that some of the movie’s revenues are locked in before it is even made. Nik Bower, co-founder of Riverstone Pictures, a film production and financing company, says professional investors often “look for films that mitigate production risk through pre-sales”.

    Pre-sales involve agreeing contracts with distributors, often based on the script and the cast, while a film is in development. The buying and selling of rights often takes place at important film festivals. Such agreements allow a loan to be taken out against the pre-sales deal to help fund the film.

    Mr Bower says investors should also look out for “strong genre and cast”.

    Professional investors would also be wise to spread their risks by backing a slate of several films rather than betting everything on a single title that may flop.

    Individual investors must also be aware of their position in the capital structure of film financing, in order to help determine the level of risk they are taking on. Taking a stake in a film through equity entails a higher level of risk than taking on a debt position where lending is secured against income from pre-sales, for example.

    “Single picture financing does exist, and will always, but should only ever be contemplated by investors who really know the business and who are willing to take on a very high level of risk, because most independent pictures lose money on a box office or equity return basis,” says Mr Smith.

    In terms of recouping investment, tax plays a huge role. One of the main ways for UK-based individuals who are outside the industry but wish to gain access to film is through enterprise investment schemes. These are structured to provide 30 per cent upfront income tax relief, if the investment is held for three years.

    “For every pound put in, you get 30p back through income tax relief,” says Mr Sherwood. “EIS is the main route.”

    Investors can also indirectly benefit from the film production tax credit. In the UK, for example, this system provides filmmakers with 20 per cent of costs back as a rebate from the government.

    “Rebates vary around the world,” says Mr Bower. “Always look for where you can make your film that creatively works but also maximises those subsidies.”

    He adds: “If we’re making a film or funding a film, we look to tax credit as a source of recoupment.”

    In spite of the inherent risks, there are steps investors can take to avoid the worst. However, even if they do place their money with professional managers running film funds, it would still pay for them to undertake their own due diligence. In spite of their potential artistic merits, many films might never even see the light of day — let alone achieve Hollywood-style rewards and recognition.

    Top female manager shuns gender debate

    Posted on 26 October 2015 by

    Julie Dean, the renowned fund manager whose abrupt departure from Schroders last year triggered billions of pounds of outflows from the UK fund house, is arguably London’s most high-profile female investor.

    This is a label she despises. Ahead of Ms Dean’s meeting with FTfm, her spokespeople warned: “Julie is not too keen [on] talking about the whole women in the City debate. She is first and foremost a fund manager.”

    The 45-year-old’s aversion to this topic is surprising, given the influential position she holds as one of the few women to have forged a successful career as a lead fund manager.

    Julie Dean

    Research published earlier this year showed women run just 2 per cent of fund management assets in the US, and are much more likely to become doctors, lawyers or accountants than portfolio managers.

    In the UK, just 7 per cent of retail funds are managed or co-managed by women.

    But Ms Dean would rather be known for her record as an equity investor.

    From 2002-14 her UK Opportunities fund — which she initially managed for Cazenove, the wealth and asset manager, until the company’s 2013 takeover by Schroders — returned 314 per cent, compared with a 190 per cent rise in the FTSE All-Share index.

    She is continuing to build that record in her latest role at asset management start-up Sanditon
    . Ms Dean joined the boutique, where she has been reunited with former Cazenove colleagues Chris Rice and Tim Russell, six months after her unexpected departure from Schroders.

    Ms Dean’s reluctance to discuss the position of women in the market is also at odds with her relaxed, chatty nature throughout most of the interview. She talks openly about her interests outside of work — playing cards and building Lego with her two children, as well as reading detective novels and knitting.

      The fund manager is a serious yoga enthusiast and spent some of the six months between the Schroders and Sanditon jobs training as a yogi in Mexico. “Standing on your head sometimes is quite nice,” she says of her regular office yoga sessions.

      When asked why she does not want to discuss the issues facing women in fund industry, where complaints about sexism and obstacles to career progression are rife, Ms Dean’s friendly demeanour becomes frosty.

      “You are going to make me talk about it. I do not particularly want to be quoted on it,” she says.

      She grudgingly sums up her point of view by saying: “If you want to be successful at anything you have to work hard and deliver competitive, industry-beating returns. I am one of the few women in the City who has done that, [but] I do not think it is any reflection on my gender.”

      The only other topic that causes Ms Dean to become prickly is her 18-month spell at Schroders. When her departure from Europe’s largest listed fund house by assets became public, Schroders executives openly discussed their surprise and disappointment.

      Was she unhappy at the company? “I don’t want to talk too much about this because it is history, really,” she says. “My decision to leave Schroders was not a reflection on Schroders. It is not like I am the only person [to have] ever left Schroders, or the only fund manager ever to have left a big company.”

      On further questioning, however, she adds: “As a fund manager, the most important thing is always your clients. In the Schroders environment, there is an institutional mentality [that gets you] dragged into doing meetings that are not really about stock picking all the time. [That] eats into what you should be doing for your clients, which is trying to pick stocks and make money.

      “At Sanditon, [stock picking] is all I do. We do not have teams of analysts. We do not see five companies a day. We observe prices. We think about the cycle. We look at what companies are reporting. We look at what asset prices can tell us about the future and we think about the shape of the portfolio we want for the next 12-18 months. It is much more liberating. There is much more freedom.”

      Ms Dean, the daughter of a dairy farmer in the north-west of England near Bolton, is clearly passionate about investing. Early in her career she decided not to manage institutional money in order to avoid having to meet pension and insurance clients on a regular basis. “I don’t like meetings very much,” she says.

      She first developed an interest in stock picking aged 12, after discovering some share certificates at the bottom of her father’s wardrobe.

      “I was being a nosy child one afternoon and I asked my father what [the certificates] were. He explained they were for a [few] breweries and took me to see his stockbroker, who was the only stockbroker in Bolton,” she says.

      “He was a large gentleman sat behind a TV, and it struck me that [stock broking] seemed more comfortable than getting up at 4am to milk cows.”

      Ms Dean went on to read history at Oxford university, which she believes provided good training for a future career in asset management.

      The fund manager, who got a C in O-level maths, one of five mandatory exams British students take at the age of 16, says: “To be a successful fund manager, you have to take an interest in all things. In modern parlance, you need bandwidth, and that is what I look for in people who ask me about coming into the industry.

      “Fund management is about selectivity, judgment and flair, not necessarily about being able to do quadratic equations in your head.”

      Her final career tip for aspiring portfolio managers is: “In life, you regret what you don’t do.

      “For me, Sanditon was the right opportunity at the right time and if we can build this business into a successful company over the next 10 to 15 years, and have a lot of fun along the way, then that is great. Whatever you do in life, you should have fun doing it.”

      CV

      Born 1970

      Total pay Not disclosed (the highest-paid director at Sanditon received £80,000 last year)

      Education 1992 BA (Hons) in modern history, Oxford university

      Career

      1992-98 UK equity fund manager, GT Asset Management
      1998-2002 Fund manager, HSBC UK Growth and HSBC British funds
      2002-13 Fund manager, Cazenove UK Opportunities and Cazenove UK Equity (Offshore) funds
      2013-14 Head of the businesscycle team and fund manager, Schroders UK Opportunity fund and Schroders UK Equity (offshore fund)

      Sanditon Asset Management

      Founded 2013

      Assets under management £600m

      Employees 11

      Headquarters London

      Apathy over business banking — who cares?

      Posted on 26 October 2015 by

      Bank signs on the high street in Staines. Barclays, HSBC, Lloyds, Natwest.©Charlie Bibby

      “The trouble with this world is apathy!” Lucy shouts at Snoopy. “But then, who cares?” she adds, as she slopes off. That Peanuts cartoon was 30 years ago. By now, Lucy, the fictional soeur
      terrible, would be grown up with a bank account. And, if statistics from the UK broadly match those in the US, she has probably banked with the same organisation since she was 20. She is more likely to have changed her husband than switched accounts.

      If Lucy has also set up a business, she would probably have opened a business account with the same bank she uses for her personal account. In the UK, more than four-fifths of loans to small and medium-sized enterprises (SMEs) still come from the big four high street lenders: HSBC, Barclays, Lloyds or Royal Bank of Scotland.

        It is as if the banking crisis seven years ago never happened. In fact, the market share of the big four has increased, rather than fallen, despite the arrival of more than a dozen so-called “challenger banks”.

        Inertia weighs down the market in banking both for individuals and small businesses, the Competition & Markets Authority said last week. It found that banks do not work hard enough for customers’ business because they do not have to. This is bad enough for consumers but “there is a particular problem in SME banking”, the CMA added.

        Depressing — but hardly news. Consumer champions and politicians have long railed against what they see as the banks’ abuse of customers through opaque products, hidden charges, and the chimera of so-called “free in credit” accounts. Yet consumers themselves are largely silent. They don’t vote with their feet either — according to the CMA, just 3 per cent of customers moved their accounts last year.

        So, now, the CMA is stepping in with proposed remedies, aimed at helping small companies as well as individuals.

        It has shied away from demanding that the big banks are broken up, as this would not help, it says. True, breaking up one of the high-street behemoths would be long-winded, disruptive and might do nothing but create two smaller banks with a higher cost-to-customer base — and still an awful lot of inert clients. The weakness of customer engagement would still mean that they have little incentive to change the way they work.

        Regulators could help by cutting the cost of capital for the challenger banks. The CBI, which purports to speak for UK business, cites figures showing that to lend £100, challengers have to put aside £2.80 in capital to meet requirements while the large banks can get away with £1. But that is for politicians and regulators to change.

        Instead, the CMA is focused on prodding customers such as Lucy out of her apathy. Rightly. If customers were less supine, lenders would be forced to compete for business.

        Requiring lenders, credit agencies and advisers to share lending data and credit ratings would shake up the big four and reduce one of the advantages they have over their challengers

        A first step would be to make it easier for small businesses to see clearly what they are getting from their banks and make it easier to switch accounts. This may not be so easy, given that many SME services and products are tailored. But the proposed price comparison website for retail bank customers could — and should — be extended to SMEs. Similarly, the account switching service to help individual borrowers switch banks could also be extended to small business owners.

        Requiring lenders, credit agencies and advisers to share lending data and credit ratings would also shake up the big four and reduce one of the advantages they have over their challengers.

        However, consumers still have to be persuaded that searching for better banking products is worth the effort. To do this, the CMA suggests forcing banks to ask clients to review their service at set “trigger” points. But, here, the CMA is in danger of missing its target.

        Consumers have been bludgeoned into apathy over the years by cold callers, junk mail, and electronically-generated texts promising redress for mis-sold products. So the chances are that clients will just hang up if they receive yet another call from their bank asking them to fill in a customer satisfaction survey. If Lucy didn’t care 30 years ago, she would care even less now.

        kate.burgess@ft.com 

        ‘Time to re-examine the ETF ecosystem’

        Posted on 26 October 2015 by

        NEW YORK, NY - OCTOBER 15: A trader works on the floor of the New York Stock Exchange (NYSE) on October 15, 2014 in New York City. As fears from Ebola and a global slowdown spread, stocks plunged on Wednesday with the Dow falling over 400 points during the afternoon before receovering slightly. (Photo by Spencer Platt/Getty Images)©Getty

        Debate is growing over the credibility and suitability of exchange traded funds after one of the wildest days in US stock market history in August.

        More than a fifth of all US-listed exchange traded funds and products were forced to stop trading on August 24 after the Dow Jones Industrial Average dropped nearly 1,100 points in the first few minutes of the day and then rebounded by almost 600 points just minutes later.

          Retail investors were badly affected. The New York Stock Exchange reported a fourfold increase in stop-loss orders that automatically trigger the sale of a security if it drops below a certain price. Many retail ETF investors were caught out because these sell orders became activated as the market tumbled, leaving some nursing unexpected losses.

          The breakdown has left fund managers facing yet more questions about the reliability and safety of ETFs at a time when the industry is attracting record asset flows.

          The disruption prompted Luis Aguilar, a commissioner at the Securities and Exchange Commission, to table dozens of questions about ETFs to his fellow regulators in a speech this month.

          “Why ETFs proved so fragile that [August] morning raises many questions and suggests it may be time to re-examine the entire ETF ecosystem,” said Mr Aguilar.

          He further asked if the trading in ETFs should be halted whenever a significant number of the underlying assets held by an ETF stopped trading.

          However, BlackRock, the world’s largest fund manager and the biggest ETF provider, is fighting hard to counter the suggestions.

          “Preventing ETFs from trading when a significant number of securities are halted is not a desirable response and could have unintended negative consequences for market liquidity,” the investment house says.

          ETFs regularly account for a third of all US equity trading volumes and even more during periods of high volatility.

          BlackRock argues that ETFs can provide a valuable “price discovery” function during periods of market disruption.

          It notes that ETFs started trading before most underlying stocks opened on September 17 2001 following the 9/11 attack on New York and proved to be accurate predictors of major benchmarks as trading volumes recovered.

          But even seasoned ETF traders question how efficiently the product’s price discovery can function during phases of extreme stress.

          “ETFs can provide the market’s best estimate of fair value in times of high volatility, but this might not necessarily reflect the true value of the underlying asset,” says a senior market maker based in London.

          BlackRock argues there is no one “silver bullet” to solve the problems of August 24 and has suggested a number of reforms that include harmonised trading rules for individual stocks, derivatives and ETFs.

          It also wants regulators to re-examine how market-wide circuit breakers can be used to counter periods of stress.

          Vanguard, the world’s second-largest fund manager, adds that many of the problems of August 24 were due to the fragmented nature of US equity trading, which is spread across 13 exchanges.

          Inconsistencies in how different exchanges restarted trading once stock suspensions were lifted also contributed to further problems for ETFs on August 24, says Joel Dickson, a principal at Vanguard.

          He says the fact that US equity ETFs listed in Europe and Australia did not experience any trading issues on August 24 support the view that the problems were due to the different trading rules that apply to ETFs, stocks and derivatives in the US.

          “We need to see trading rules harmonised across all types of products and also for those rules to be consistently applied by all US exchanges,” he says.

          Problems with ETF trading have occurred elsewhere.

          ETFs tracking both Chinese and Greek equity indices have also been subject to severe liquidity tests in 2015. More than half of the equities listed in China were suspended from trading during a sharp market correction this year while ETFs tracking Chinese stocks were able to continue trading.

          Many China-tracker ETFs experienced wild price swings but providers argued this showed that ETFs could continue to provide liquidity in a period of market stress.

          In late June, trading was halted on the Athens stock exchange as Greece teetered on the verge of expulsion from the eurozone.

          Global X, a US manager, decided to allow investors to continue to trade its $322m Greek ETF in spite of the suspension of activity on the Athens exchange.

          But Lyxor, the Paris-based asset manager, opted to suspend trading of its €231m Greek ETF, arguing this was necessary to protect investors from the risk that the price of the ETF could be manipulated in the absence of activity in the underlying market.

          The SEC said in June it would ask for public comments about ETF pricing and about investors’ understanding of the nature and use of ETFs.

          It has yet to publish its response to the information received.

          Mr Aguilar’s speech, however, suggests it will have concerns about the expansion of the ETF industry, which continues to grow at a breakneck pace.

          Investors ploughed $251bn into ETFs (funds and products) during the first nine months of 2015, up a quarter on the same period last year and comfortably on track to surpass the record for net inflows of $339.7bn set in 2014.

          “The explosive growth of ETFs poses a challenge that is not going away and [it] may well become more acute as new ETFs enter the market,” said Mr Aguilar.

          ‘Blowing up the industry’: Doubts about the safety of ETFs continue

          Doubts about the safety and suitability of exchange traded funds continue to surface.

          Those concerns first appeared after the “flash crash” in May 2010 when US financial markets experienced a brief but severe drop in prices. ETFs were initially blamed for causing that crash but investigations by US regulators eventually blamed a poorly executed $4.1bn derivatives trade.

          More recent dissent has come from Carl Icahn, the billionaire activist investor, who became involved in an extraordinary argument with Larry Fink, the head of BlackRock, the world’s largest ETF provider.

          Mr Icahn claimed high-yield bond ETFs could create severe liquidity problems and described BlackRock as “an extremely dangerous company” while sitting next to Mr Fink at a conference in July.

          Mr Fink dismissed the criticisms as “flat-out wrong”.

          In 2014, Mr Fink himself warned that another section of the ETF market, leveraged ETFs, contain “structural problems that could blow up the whole industry”.

          That explosion has yet to take place, but in the meantime the US regulator has added its voice to those doubters of ETFs.

          It has repeatedly warned that leveraged ETFs, which provide double or three times the daily return of an underlying index, are wholly unsuitable for retail investors.

          Ex-Rabobank trader arrested in Australia

          Posted on 25 October 2015 by

          A cyclists passes the headquarters of Rabobank Groep illuminated at night in Utrehct, Netherlands, on Thursday, Oct. 24, 2013. Rabobank, the Netherlands' biggest mortgage lender, will pay about $1 billion to resolve regulators' claims that it tried to manipulate benchmark interest rates, two people with knowledge of the matter said. Photographer: Jasper Juinen/Bloomberg©Bloomberg

          Rabobank’s headquarters in Utrecht

          A former Rabobank trader charged by US authorities with allegedly manipulating Libor, the benchmark interest rate, has been arrested, according to Australian authorities.

          Paul Thompson, an Australian who was the Dutch bank’s head of money market and derivatives trading for north-east Asia, was detained on October 22 in Perth following an extradition request from the US, according to a statement released by the Australian Attorney-General’s Department over the weekend.

            “Mr Thompson is wanted to face prosecution in the United States for wire and bank fraud offences,” the statement said.

            The identity of Mr Thompson’s lawyer was not immediately known. Mr Thompson’s wife, Robyn, was quoted in the Wall Street Journal as saying: “There is no reason for Paul to be charged by the US. For this reason we were hoping that Paul could defend himself against any allegations in either Australia or the UK, so he could have access to the necessary evidence, financial and emotional support to do this properly.”

            Mr Thompson is one of seven former Rabobank traders charged with allegedly conspiring to rig rates to help their own positions. Two other former Rabobank traders, Anthony Allen and Anthony Conti, are currently facing trial in a Manhattan court. Both men have pleaded not guilty.

            The first US trial over allegations of manipulating Libor, which began earlier this month, came two months after the former UBS trader Tom Hayes was sentenced to 14 years in prison in the UK for conspiring to rig Libor — the first conviction in the global scandal over manipulation of the interest rate.

            The Rabobank case is being heard by Judge Jed Rakoff, of the US district court, who has accused regulators of being too soft on Wall Street and chastised them for not holding enough individuals accountable.

            In 2013, Rabobank agreed to pay $1bn to US, UK, Dutch and Japanese authorities, and admitted that dozens of employees had manipulated Libor and other key benchmark interest rate over a six-year period. Banks including Barclays, Deutsche Bank and UBS have paid nearly $9bn in fines over the Libor scandal.

            In early 2014, the US Department of Justice announced criminal conspiracy and fraud charges against Mr Thompson, Paul Robson, a former senior rate trader and submitter in the UK who left the Rabobank in 2008, and Tetsuya Motomura, a senior trader and supervisor in Japan.

            At the time, the DoJ said Mr Robson, Mr Thompson and Mr Motomura allegedly entered “ridiculously” high and “silly” low Libor submissions to benefit their own positions.

            In May 2006, according to DoJ, Mr Thompson emailed Mr Robson asking him to “sneak your 3m libor down a cheeky 1 or 2bp” because “it will make a bit of diff for me” on a large position he held.

            “No prob mate I mark it low,” Mr Robson replied

            Draghi must be more unconventional

            Posted on 25 October 2015 by

            Steady ahead: Mario Draghi said the market had to get used to 'such periods of high volatility'©AP

            Mario Draghi

            Mario Draghi last week opened the door for some lateral thinking on eurozone monetary policy. At the meeting of the governing council of the European Central Bank, the bank’s president hinted they would have to take a deep look at all the monetary policy instruments available at their next meeting in December

            This is both welcome and unfortunate — welcome in terms of what it says about his determination to get inflation back to target; unfortunate because it should not have been necessary. The eurozone is once again in a position where economic recovery is weakening before it really started, where the global risks are rising, and where inflation remains way off target.

              So what should this lateral thinking consist of? An extension of the ECB’s programme of quantitative easing beyond its scheduled cut-off date of September 2016? Another cut in interest rates?

              This is what the consensus opinion expects, but that would be vertical thinking, not lateral. It would also be ineffectual. Lateral thinking should take us outside conventional approaches.

              We should start reminding ourselves of the reason why we are in this miserable position only nine months after the start of QE. The ECB and other forecasters were simply too optimistic about the impact of this relatively small programme on inflation. Headline inflation in September was exactly where it was in March. Core inflation went up from an annual rate of 0.63 per cent in March to 0.88 per cent in September, an increase of a quarter of a percentage point.

              The latter constitutes a fair metric of the programme’s success. Most of that was probably due to a one-off effect — the end of the credit crunch in the Italian banking sector. QE has really helped Italy. It was worth doing it for that reason alone. But this also means that the effect of QE from now on is not going to be all that large.

              The governors of the ECB may want to reflect on how an extension of QE could get inflation back to its target, and what other conditions will need to be put in place for that to happen. Would QE work better if eurozone governments were to incur higher fiscal deficits?

              The governors should ask themselves if their inflation target is one reason they are in the current mess

              Matteo Renzi, the Italian prime minister, is currently using every trick in the book to circumvent European budget rules. His previously planned spending cuts are lower; the tax cuts are bigger — and of the wrong kind; and against the advice of the European Commission, he is now cutting unpopular property tariffs instead of labour taxes.

              But can the ECB find a politically feasible way to support Mr Renzi’s fiscal expansion when Germany and others are consolidating? Are there other ways for the ECB to create aggregate demand in the economy?

              The governors might also want to reflect on the inflation target itself, and ask themselves whether one of the reasons they are in this current mess is because of how the inflation target is formulated in the first place: a rate of inflation of below, but close to 2 per cent.

              Done to please the Germans in the early years of the euro, this formulation leaves too much wiggle room for interpretation. I know economists in Germany who consider any inflation rate above 1 per cent as consistent with the target. And for them, the current core inflation rate of 0.9 per cent hardly constitutes sufficient reason to roll out the next monetary bazooka.

              I am wondering whether the governors would do themselves a favour by simply clarifying their target — not to raise it, but simply restate it as 2 per cent, no more, no less.

              That would get rid of any doubt about the trajectory from where we are now to where we have to go. The previous intellectually lazy generation of central bankers thought ambiguity was useful to them. The current generation has learnt that ambiguity works against them.

              We are not yet at the point where the governors will consider truly radical proposals — such as an increase in the inflation target or a nominal gross domestic product target, let alone the nuclear option of a monetary helicopter drop. They will first try to exhaust the existing instruments to their limits.

              Central bankers are conservative types. But they should have a rational interest in preventing a loss of their credibility.

              My advice to them is first extend the current programme to its outlier limits — another year of QE — agree another cut in the deposit rate and look at the addition of other instruments to the mix, like corporate bonds.

              But much more importantly: have a genuine radical plan B ready to unroll in 2016, ahead of the next shock you did not see coming. You will need it.

              munchau@eurointelligence.com

              Four Seasons says it can make £26m payment

              Posted on 25 October 2015 by

              ARG6MW Senior Man Receiving Assistance Getting out of Chair

              Four Seasons, Britain’s largest provider of care homes, has insisted that it can meet an upcoming £26m interest payment, following speculation over a potential deal with lenders to reduce its debt pile.

              Last week, the financial difficulties at Four Seasons — which operates 470 homes with a total of 22,500 beds — became clear when it appointed advisers to carry out an emergency review of its finances. It said “all options” were being considered.

                At present, the lossmaking business has debts of more than £500m and has to find annual interest payments of £50m.

                However, a spokesman said there had been no talks with creditors over a possible financial restructuring, and insisted the company had “sufficient medium-term financial flexibility” to make the interest payment due in December.

                “We envisage no scenario that would affect the care for the residents and patients in our homes,” the spokesman added.

                His comments followed a report in the Sunday Times that HCP, a US property investment trust that is a lender to Four Seasons, had hired Rothschild and City law firm Freshfields as advisers for debt restructuring negotiations.

                Industry sources quoted in the report said a debt-for-equity swap could wipe out the shareholding of Four Seasons’ owner Terra Firma, the private equity group run by Guy Hands. They also claimed that a number of US hedge funds had started buying up chunks of Four Season’s senior secured debt in anticipation of a deal.

                This speculation comes at a time of widening losses in the sector. Care home operators have warned that the government’s unexpected increase in the living wage to £7.20 an hour from next April risks a “catastrophic collapse” in the industry.

                Bupa is currently preparing to put 200 care homes up for auction.

                Four Seasons has attributed its troubles to sharp cuts in fee payments from local authorities, as well as higher staff costs because nursing shortages have forced it to use expensive agency staff.

                It reported a pre-tax loss of £25m for the second quarter, compared with a £17m loss for the same period last year. Moody’s subsequently downgraded Four Season’s credit rating, pushing its bonds into junk status.

                Analysts have suggested the further investment from Terra Firma, which bought Four Seasons for £825m through a debt-fuelled deal in 2012, is unlikely given that the Guernsey-based investor has already written off millions of pounds on the care homes.

                HPC, Freshfields and Rothschilds could not be contacted for comment.

                US widens Deutsche’s Russia trades probe

                Posted on 25 October 2015 by

                ©Bloomberg

                Deutsche Bank is facing a major escalation of a US probe into its activities in Russia, as a money laundering investigation of its Moscow unit widens to examine possible sanctions violations, said people familiar with the case.

                The US Department of Justice and New York’s Department of Financial Services are expanding the scope of their probe into the bank because some of the scrutinised transactions allegedly involved US dollars and a former banker who is a US citizen.

                  The probe is one of the first known US investigations of a Wall Street company tied to potential breaches of western sanctions against Russia since the measures were first imposed in the wake of Russia’s 2014 annexation of Crimea.

                  At issue is a series of so-called “mirror trades”, in which Russian clients bought securities in roubles through Deutsche Bank’s Moscow office and then sold identical ones for foreign currency, including US dollars, through the bank’s London office. Some of the transactions also involved US dollar clearing.

                  The DoJ and DFS are investigating $6bn-worth of such trades, people familiar with the case said.

                  A central focus of the US inquiry is Tim Wiswell, a US citizen who was head of Deutsche’s Russian equities desk and was placed on leave in connection with the internal inquiry, the people said.

                  US authorities are also examining whether Deutsche had adequate compliance programmes in place in relation to Russian sanctions and provided accurate information to regulators.

                  Some of the bank’s Russian clients subject to US sanctions included the brothers Arkady and Boris Rotenberg, who are close associates of Russian president Vladimir Putin. Arkady, the younger of the two, is Mr Putin’s long-time judo partner.

                  US sanctions imposed on Russian entities and individuals make it difficult for US citizens and companies to do business with them, particularly if the transactions involve US dollars.

                  US authorities are also exploring whether trades allowed Deutsche Bank’s Russian clients to illegally move funds out of the country.

                  Deutsche Bank is investigating the circumstances around equity trades entered into by certain clients with Deutsche Bank in Moscow and London that offset one another

                  – Deutsche Bank statement

                  Given Mr Wiswell’s senior position at Deutsche, US authorities are also investigating whether his alleged involvement indicates that a broader scheme was approved by executives at the bank, people familiar with the case said. Mr Wiswell has sued the bank for wrongful dismissal.

                  Mr Wiswell and his attorney in Moscow did not respond to requests for comment.

                  “Deutsche Bank is investigating the circumstances around equity trades entered into by certain clients with Deutsche Bank in Moscow and London that offset one another,” the bank said in a statement. “Deutsche Bank has taken disciplinary measures with regards to certain individuals in this matter and will continue to do so with respect to others as warranted.”

                  The Rotenberg brothers control Stroygazmontazh, an energy service company, and SMP Bank. Since the sanctions were imposed, the duo have sold assets to their sons in a process that some observers have viewed as an attempt to protect those businesses from the impact of sanctions.

                  But in recent months the US has added some of those companies, such as Långvik Capital, which owns a hotel in Finland, to an expanded sanctions list. A spokesman for the Rotenbergs declined to comment.

                  In June, Deutsche disclosed it had launched an internal investigation into the Russian securities trades and had placed several individuals from its Moscow unit on leave. This inquiry is looking at trades carried out over a period of four years ending in early 2015.

                  Deutsche has already notified regulators and law enforcement agencies in the US, the UK, Germany and Russia of its internal probe. The Financial Conduct Authority in the UK is also investigating the Russian mirror trades for possible money laundering breaches.

                  Week ahead: Economic outlook

                  Posted on 25 October 2015 by

                  Japan's national flag is seen behind a traffic signal of a red man at the Bank of Japan headquarters in Tokyo November 19, 2014. The Bank of Japan kept monetary settings and its upbeat economic view unchanged on Wednesday in the wake of data showing the economy has slipped into recession, preferring to spend more time to gauge the effect of its surprise easing last month. REUTERS/Yuya Shino (JAPAN - Tags: BUSINESS)©Reuters

                  Market participants might expect further clarity regarding the economic outlook in the advanced countries after this week, which sees important central bank meetings in the US and Japan, first estimates of gross domestic product in the US and UK, and inflation numbers for Japan and the eurozone.

                  The US Federal Reserve’s Open Markets Committee meets on Wednesday and Thursday, one of the scheduled meetings that does not come with an update of economic forecasts. While the Fed could raise interest rates for the first time in nine years at this meeting few commentators expect a move. However, the meeting should give clues as to whether a rise is still possible this year, at the meeting in December.

                    Following a disappointing labour market report released earlier this month Thursday’s publication of US GDP in the third quarter could also guide the Fed away from a move in rates. Analysts expect annualised quarterly growth of 1.7 per cent, down from 3.9 per cent in the second quarter.

                    In the UK attention will also focus on third-quarter GDP, published tomorrow.

                    Consensus forecasts point to a value lower than the 0.7 per cent growth seen in the second quarter.

                    The Bank of Japan meets on Friday under pressure to ease policy further given a run of weak data. Growth and inflation forecasts are likely to revised downward but policy action is thought unlikely by analysts.

                    Japanese national inflation data for September is published on Thursday. The headline measure is likely to remain close to the minus 0.2 per cent annual rate seen in August, but measures excluding energy have been approaching a rate of 1 per cent.

                    Low inflation is also a pressing issue in the eurozone and Friday sees the initial flash estimate of average consumer prices in October. The headline annual rate is expected to just escape negative territory, while the core measure excluding food, energy alcohol and tobacco is expected to remain at 0.9 per cent.

                    September unemployment data for the eurozone is also released on Friday. The rate is expected to be unchanged at 11 per cent, but this hides a wide variety in the experiences of individual countries.

                    Today’s report from the Ifo institute will provide the first glimpse of business confidence in Germany since the Volkswagen revelations. Confidence has been holding up in spite of the deterioration in many large emerging economies but the business climate index is expected to fall back this time.

                    Two other central bank meetings on Wednesday may be of interest. In Sweden the Riksbank is contending with deflation and a strong currency. Further reduction of the repo rate — already negative — is unlikely at this meeting but the bank’s bond purchase programme may be extended.

                    The Reserve Bank of New Zealand may also cut interest rates — partly to stem currency appreciation — at its meeting on Wednesday.

                    Aberdeen Asset Management on the block

                    Posted on 25 October 2015 by

                    Aberdeen Asset Management Cowes Week.©Alan Crowhurst/Getty Images

                    Aberdeen Asset Management has begun to sound out potential buyers for the group as Europe’s second-largest fund house struggles to put an end to a slump in its profitability, share price and assets under management.

                    People familiar with the process said Martin Gilbert, Aberdeen’s 60-year-old
                    founder and chief executive, had made informal approaches to a number of rivals in recent months.

                      Mr Gilbert declined to comment, but one person familiar with his thinking said he was “very happy being independent”, without denying that approaches had been made.

                      Aberdeen has been hit by recent turmoil in emerging markets, where the group built its reputation and much of its investments are based. Its share price has fallen by 25 per cent over the past six months, and the fund house suffered net outflows of almost £10bn in the three months to the end of June, worse than analysts had expected. Total assets stand at £307bn.

                      “[Martin Gilbert] is in deep trouble,” said one asset management M&A expert, who requested anonymity. He said the group was struggling to hold on to key staff as the fall in assets was having a negative effect on employee bonuses.

                      A hedge fund chief executive, and acquaintance of Mr Gilbert’s, added: “I have heard the [sale] rumours. Martin is of the age where he needs to find a successor, and there is no one [appropriate] within the business today.

                      “Aberdeen has a huge Asian equity market problem, [and has experienced] a huge amount of outflows. They don’t want to wait that out for three years as there is probably only one direction it will go, and that is down.”

                      An Aberdeen spokesperson said: “In his 32 years years running Aberdeen Asset Management, Martin Gilbert has never made a formal or informal approach to anyone to buy the business.”

                      A number of UK, US and Asian fund groups may be interested, asset managers said. Private equity groups KKR, Blackstone and Warburg Pincus would also be keen on a deal, said analysts.

                      Credit Suisse and Deutsche Bank have signalled a renewed interest in asset management although short-term acquisitions are unlikely, according to bank insiders.

                      It’s blindingly obvious that Credit Suisse should buy Aberdeen

                      – One person close to the situation

                      Aberdeen bought the UK and US institutional fund businesses of Deutsche in 2005 and acquired a large chunk of Credit Suisse’s global fund management operation seven years ago, leaving the Swiss bank with a 25 per cent stake in Aberdeen, which it later sold.

                      Mr Gilbert, who was travelling last week in Malaysia and Japan, is known to be close to Credit Suisse and its new chief executive Tidjane Thiam. “It’s blindingly obvious that Credit Suisse should buy Aberdeen,” said one person close to the situation.

                      Mr Thiam has told colleagues he will not make any significant acquisitions in the short term, focusing instead on the bank restructuring announced last week. Credit Suisse declined to comment.

                      A senior Aberdeen employee said: “I have no knowledge of [a potential sale]. We’ve been independent forever.” But he added: “I did hear a rumour that we could be a target [for acquisition] as we have a big cash holding, and I heard a rumour about Credit Suisse.”

                      Mr Gilbert has held the top job at Aberdeen since he co-founded the company in 1983.