FINspeak

In my last blog's closing comments I spoke about "Thinking out of box" and the growing importance of Alternative investments in the ever dynamic world of Portfolio management. Gathering my thoughts from where I left last time around, "Alternative investments" are indeed the buzz word in the world of wealth and asset management today. Talking about "Alternative investments" my thoughts first drift towards "Art" and off course the fact that it has been so much in news in the recent past is merely a coincidence here!! With news, I am referring to the recent sale of a Tagore painting collection for a whopping 1.6 million pounds, which created ripples in the world of Art and Investments alike.

Art was once considered the indulgence of the "privileged few", but today it has emerged as a niche investment vehicle which provides the portfolio with just the right amount of stability and diversification. The fact that it's correlation with the equity market is as low as 0.5, only makes it all the more desirable in the present market context, wherein equity markets are highly volatile.

Art investment works with a network of art dealers, artists, galleries, auction houses and investors. Decoding the correct valuation of a piece of art is no cakewalk! It requires extensive knowledge of the various forms of art be it ancient, modern or contemporary to distinguish a masterpiece from a fake imitation. This is all the more challenging in today's digital age where even signatures can be easily manipulated.  Also the art market comes with a certain amount of risk which cannot be predicted easily, what may be the "flavor of the market" today may not have much value few years down the lane and vice versa. So much so that I would say prices here are a function of Trends and Tastes and not any performance fundamentals!

Physical possession of Art comes at a cost which can sometimes be very steep, considering the recent theft of rare precious paintings from a Paris Museum.  Professional maintenance services provided by art galleries are required to maintain and attract buyers, and these do not come cheap by any standards! Holding power of the investor is another concern here since unlike property and stocks, there is no underlying income stream such as rentals, dividends or interest received.   Also investors taking the plunge into Art for investments purposes should typically stay clear of any "emotional attachments" with the works of art and should consider it a purely financial transaction to reap its benefits fully.  

All these factors coupled with the lack of transparency and regulations in the past, ensured that the Art markets were dominated by the larger players i.e. UNHI's and Institutional investors. The last few years have seen increased activity on part of Art Auction houses and Dealers, which has led to the growth of a secondary market for Art and, in turn, promoted liquidity. But it has a long way to go in terms of its penetration to the retail investors, which remains to be low till date.

What's your opinion, will the Art bubble burst or it'll emerge as a practical and stable alternative investment? Let me know ...

Posted by Navdeep Gill at 3:15 AM | Permalink | Comments (4) | TrackBacks (0)

It's been a while since my last post - I was travelling to Europe, which in recent times could turn out to be quite nightmarish. Infact, apart from leaving the airlines drooling in losses running into billions of dollars, the volcanic ash did pose a big operational risk for the project I was travelling for! - Quite a loss continuum, as I was remarking in my previous blog, but this time, just not within one entity, but across several industries like tourism, air freight and...of course, insurance (I'll get to that in a bit). Businesses which rely on airways for distribution of products, would have met with, in financial terms, an "un-modelled scenario". Interestingly, it bears quite a semblance to the credit crisis, where the CDOs and CDS' resulted in an un-factored systemic risk, owing to their risk cascading nature, which I spoke of in my initial post.

Being a supervening impossibility, the insurance companies weren't obliged to pay the claims to the airlines, but they did, in an attempt to reduce their reputational risk exposure. Now, the pertinent question is, where would these costs be booked? Clearly, the airlines couldn't sue the insurance companies, which rules out the Oprisk loss head, leaving it to something strategic, aimed at preserving reputation, client relationship and future revenue streams. Back in the Banking and Basel world, the problem at hand draws sharp parallels to the recent spark of discussions that the economic crisis was accentuated by operational risk sources. Keeping aside the Basel approach, the simple question is, "Where do we draw the line between various risks?" How to separate a poor lending choice (Operational) from a genuine default (Credit)? How to distinguish the voracity to make profits or poor investment choices (Operational) from sudden market fluctuations (Market)? Before this can be answered, we need to understand, who makes these decisions - More often than not, the person recording it is the one responsible for the loss itself - So much so for decentralisation!

The whole purpose is to embrace the "once bitten twice shy" phenomenon, particularly given the same capital charge irrespective of classification into credit, operational or market risk buckets. Furthermore, it also provides the business case for an operational improvement, which would else be sunk, much like the loss.

It would only be fair to say that risk culture, structure and process of the organisation could either make the deal (or) break it - no greys - just black or white! I would be delving into key areas under each of these in the coming days. In the meanwhile, let me know what you think...

Posted by Vikram Srinivasan at 7:56 AM | Permalink | Comments (7) | TrackBacks (0)

Recently, I was studying and evaluating the wealth management trends worldwide. In the course of my research I was surprised that barring few regional differences the challenges faced by WM firms are more or less similar globally.  Customers are demanding products which are not just "off the shelf types" and at the same time are cautious of investing in anything new! Which only adds to the dilemma of the WM firms.

Of course, one fact which no one can deny is that, the last 18 months have been truly transformational for the industry as whole in terms of its operations and assets under management (AUM). Coming back to trends, the following are my "Top 5":

1.     Regaining Client Trust

Failure of a number of banks/ financial institutions coupled with mounting losses, in the recent past, has had an adverse impact on the client trust. Winning back client trust is the top priority of firms today. I recommend bringing in transparency in operations and make full disclosure of facts to the customer, in order to achieve this.  There can be no hard and fast rules here but I believe that advisors with their conduct and expertise can win back customer trust over a period of time.

2.     Operational Efficiency and Technology

It's a fact well known today, that margins of advisory firms (or WM firms) are at an all time low. There is a huge need to cut costs and yet sustain and grow business operations. While dealing with the client in a "rendezvous" sort of mode comes at a cost; alternatives are provided by technology today in the form of "Smart devices" like the iphone or blackberry which facilitate seamless connectivity. Also initiatives like setting up comprehensive and user friendly online services provide an extra edge to the firms in the ever competitive market place.

3.     Looking East

Advisors are today increasingly looking at "New money" in the Asian markets of China, Singapore and India.  These markets have shown growth even in the last year or so and have been largely untapped. The trick here is not just to dump the western products in these markets but for me the key to success here  would be to bring in the "regional flavor" and come up with customized products and services with which  local investor can associate.

4.     Regulatory Compliance

Post the economic downturn, a whole new set of regulations has been put in place to ensure that Financial Services firms remain healthy and robust. Starting from the account opening (KYC process) to trading regulations (MiFID, NMS, SOX etc), the regulatory scanner is higher today than ever before.  This has a direct implication on operational costs and efficiency, as firms need to quickly ramp up there systems to comply with these regulations.  What would help here is technology enabled flexible and agile process setup, which can be modified with relative ease.

5.      Thinking Out of the Box

With the widening client base, the advisors need to come up with innovative solutions which cater to the needs of its "Diverse clientele". Having burnt their fingers in equities most clients today are looking out for products/solutions which offer them diversification and growth. The growing traction in fields like Wine banking, Art banking and even Islamic banking seconds my claim here!

Posted by Navdeep Gill at 8:16 AM | Permalink | Comments (0) | TrackBacks (0)

Probably some of you might have watched the zombie comedy "Zombieland". It is a hilarious movie about a motley crew of 4 people who are trying to survive the world overrun by zombies.  Columbus (the lead, of course) follows a set of "rules" designed to ensure maximum possibility of survival. Just one bite from these zombie-like-predicaments and you are pretty much looking down the barrel.

I was going through an article which listed down rules and was amused when I tried to fit the same over the prevailing business conditions affecting the "Living" in the Banking & Capital markets world. So why not check out some of these rules and who knows we might yet live to tell the tale.

1. "Know your way out"

Always have a way out when you are getting into a building which, you suspect, might be full of zombies.  Leverage is that building for us.  A two edged sword which, if not handled appropriately, can lead to unprecedented disasters as was evident from the financial crisis of 2007-08.  Western banks which usually held up to 20% of their total assets as core capital did not hesitate from over leveraging to a situation where this core capital came down to less than 3 % of their assets.  Moreover, liquid assets among these accounted for less than 10%!! This simply meant that these big guns did not have enough buffers to find a way out of this "zombie" infested financial crisis. 

Are you prepared to handle this two-edged sword and most importantly-do you know your way out?

2. "Double tap"

Just one tap may not be enough to vanquish a zombie. You probably might need to give another tap to ensure your survival.  Lehman brothers had a Risk committee (supposedly one of the strongest of its time), which met twice a year!! You might have all the state-of-the-art risk management and compliance systems, but if your risk team is having limited interaction with the day to day activities of the entire firm, you might find yourself way behind the 8-ball. 

Does your organisation have a double tap to ensure that the Governance, Risk & Compliance systems are in order?  Has your organisation revamped its risk and compliance departments to meet these new challenges?  Certainly, something to chew on.

3. "Cardio"

A bit of cardio exercise goes a long way in helping you flee from a group of zombies.  Have you ever thought about it? How much "Cardio" does your bank do?  Stringent Stress tests & scenario analysis are crucial in averting liquidity problems in this credit crunch hit environment.  Does your organisation have the strength to run - and run hard?

These rules are only too well known to us.  But the crucial aspect is that small oversights related to these areas might snowball into situations which are uncontrollable.   As the old adage goes, "A stitch in time saves nine".  Well, the current situation is that even nine stitches may not be enough to survive and so these rules might come handy in trickier times like these. 

Do let me know your thoughts on this!

Posted by Godwin George at 6:39 AM | Permalink | Comments (1) | TrackBacks (0)