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The Investment Management Review (IMR) is a specialist quarterly magazine written by Dr Arjuna Sittampalam, Chartered MCSI, Managing Director, Sage and Hermes.

This invaluable publication provides an overview of key issues currently affecting the financial services industry. It surveys the best research and most significant developments from around the world, and contains analytical articles based on themes and issues of global significance.

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Below is a selection of interesting articles from this quarter’s Investment Management Review. These articles show some of the insights that our higher level members have access to through the full magazine. You must be an MCSI to access the full magazine. To find out how to become an MCSI visit cisi.org/mgrade



AN EXCITING NEW ONLINE FUND COMPANY

Financial Times - ‘Schroders invests in web asset manager’, Emma Dunkley, 25.6.14 and ‘Schroders beats Aberdeen to Nutmeg’, Chris Newlands and Madison Marriage, FTfm, 30.6.14

Schroders, along with some well-known entrepreneurs, has participated in a capital raising of $32m by Nutmeg, a relatively new online wealth management company, describing it as offering huge growth in discretionary fund management. The company was founded in 2012 by Nick Hungerford, a Stanford MBA with an impeccable history in wealth management, and by William Todd, a software expert. The company is regulated by the Financial Conduct Authority (FCA) and endorsed by the UK Government.

What is so special about this online company? Nutmeg’s website provides the answer. The following benefits are claimed:
  • no charge levied for an illusory personal relationship
  • no opaque benchmarks
  • no fees for sales forces
  • full transparency at all times as to where the funds are invested and how they are performing
  • a portfolio regularly balanced from a diverse range of global assets.
Nutmeg’s low-cost model allows an initial investment of as little as £1,000 per fund, albeit with a minimum monthly contribution of £50 for portfolios below £5,000. Individuals are allowed to set up as many funds as they like, with different time horizons and risk appetites. The website boasts of being just ten minutes away from a professional portfolio, with investors providing information on their financial situation, amount of money to invest, time frame and risk appetite. They are allowed to top up or withdraw at any time. Fees start at 1% and fall to 0.6% for £100,000 and as low as 0.3% for £500,000. The website claims that the underlying costs associated with putting money in average just 0.3%.

Nutmeg’s low-cost model allows an initial investment of as little as £1,000 per fund, albeit with a minimum monthly contribution of £50 for portfolios below £5,000. Individuals are allowed to set up as many funds as they like, with different time horizons and risk appetites.
The company’s investment philosophy is that asset allocation produces the bulk of performance while stock selection absorbs most of the costs.

Reflecting this, Nutmeg focuses on indexed and exchange-traded funds. It manages just ten funds, varying in risk levels from money markets funds at one end to the highest risk ‘global equities and commodities’ at the other. All ten funds are rebalanced every two weeks. This streamlined process enables huge economies of scale that allow costs to be kept low.

Nutmeg closed its $32m fundraising in June this year and intends using the money for customer acquisition and product development. But the capital raising is not just about money. Its Chief Executive, Nick Hungerford, points to the new shareholders having experience in both investment management and developing innovative digital companies like Nutmeg as well as their shared passion. Along with Schroders, others who have joined include Charles Dunston, founder of Carphone Warehouse, and Michael Spencer, Chief Executive of ICAP, the world’s largest inter-dealer and broker. Venture capital firm Balderton, with a previous record of investing in online operations LoveFilm, Betfair and Zopa, has also participated in the fundraising.

Massimo Tosato, Executive Vice-Chairman of Schroders, said that it was an interesting investment in an innovative and fast-growing online wealth management business. Tosato and Tim Bunting, a General Partner at Balderton, are joining Nutmeg’s board. Other high-profile investors had already been involved previously, and perhaps the best known is John Kay, the Financial Times columnist, who strongly welcomes the company as providing investors with a simple choice.

The Chief Executive, Nick Hungerford, points to the new shareholders having experience in both investment management and developing innovative digital companies like Nutmeg as well as their shared passion.

A cautionary note has been struck by David McCann of Numis Securities, who pointed out that this online model is untested and provides a challenge in attracting customers, asking the question whether a low-cost model is what is wanted by customers.
Nutmeg has more than 35,000 registered users, with customer acquisitions in the first quarter of this year up 350% on the corresponding quarter of the previous year. Though it was Schroders which was selected for its regulatory experience, distribution expertise and family orientation, seven other asset management companies, including Aberdeen, have been interested in buying a stake. Martin Gilbert, Chief Executive of Aberdeen, said that it was a smart move by Schroders, which had beaten it to it. Gilbert feels that Schroders have established a cheap route to learning about the online wealth market that also facilitates a possible eventual takeover of Nutmeg. According to him, the younger generation will not use stockbrokers, but will instead go for Nutmeg-type companies.

Editor’s comment

Nutmeg’s approach addresses several serious deficiencies in asset management, not just in the UK but also globally. The most important is that the lowest end of the market is not adequately catered for. A minimum investment of £1,000 allows Nutmeg to remedy this situation. The huge slice of savers’ portfolio returns appropriated by the bloated intermediary sector, hitting even the affluent, is widely recognised as another serious cause for concern. Nutmeg’s low charges would be much welcome on this account.

For the company’s low-cost model to work, scale is needed. The danger is if too many imitators fragment the market before Nutmeg establishes itself. It is not at all surprising why it has has so many distinguished backers. Its success can only enhance the savings industry and the financial system.




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NEW TYPE OF ROBOT EXTENDING INTO SOCIETY

Financial Times - ‘China transforms from ‘workshop of the world’ to biggest robot buyer’, Tanya Powley, 2.6.14; ‘Industry thrives on rise of the machines’, Tanya Powley and Chris Bryant, 2.6.14 and ‘New robot generation comes out of safety cage for 24-hr shifts’, 15.6.14, ft.com

Robots’ interaction with human beings is undergoing a sea change, with considerable implications for asset management paradigms relating to global economic structures. Previously, industrial robots were often considered too dangerous to work in close proximity to human beings. There was always a risk of a worker being injured by a heavy robot. A new generation of robots is changing matters.

These lightweight robots are much safer and no longer need be consigned to safety cages. Robot companies are now rushing to fulfil the increased demand for these new robots, which are referred to as ‘collaborative’ robots, or co-bots. They include a six- axis robot arm made by Universal Robots of Denmark, which is able to pack large numbers of eggs without damaging them. ABB of Switzerland has created software that uses sensors to shut down a robot if a human being gets too close. BMW is now making more use of these co-bots, working side-by-side with workers on the assembly line. Human-machine collaboration represents a massive change, according to Rich Walker of Shadow Robots, a robotics research company based in the UK, enabling strong and precise robots to help their weak but more dextrous human co-workers.

Hitherto, the automotive and semi-conductor manufacturing industries were the biggest users of robotics. But the new-style robot is creating fresh demand in a wide swathe of society. Advances in sensors and other innovatory fields are making robots more sensitive, precise, flexible and autonomous, allowing their wider use not just in manufacturing but also in areas such as healthcare, logistics, agriculture and films. Robotics is expected to grow on the back of these. The International Federation of Robotics (IFR) in Germany forecasts that about 95,000 service robots will have been sold between 2013 and 2016.

Hitherto, the automotive and semi- conductor manufacturing industries were the biggest users of robotics. But the new-style robot is creating fresh demand in a wide swathe of society.... According to industry experts, a very high proportion of manufacturing, currently based on manual labour, could be automated.

The costs of robots are falling. It is believed that their use can be extended to small and medium-sized enterprises. The flexible lightweight robot arm from Universal Robots is one of the leaders, costing from €20,000 to €30,000, a fraction of what is needed for an industrial robot.
According to industry experts, a very high proportion of manufacturing, currently based on manual labour, could be automated. The UK is particularly backward in this area. In 2013, just under 2,500 robots were bought in the UK, compared with about 24,000 in the US and 18,000 in Germany, according to the IFR. Nearly two thirds of UK robots are accounted for by the automotive sector.

It is suggested that the growth of the humanoid robot is inhibited by the continuance of a strong market for conventional robots. Most robot sales are still of large industrial caged machines. Co-bots represent only a small proportion of the 179,000 industrial robots sold every year. However, Enrico Krog Iversen, Chief Executive of Universal Robots, argues that collaborative robots do not compete with the older, traditional industrial machines. He points out that that 80% of Universal’s co-bots are used in tasks not possible for the caged machines and are hence applicable to a much wider range of fields.

The economics of the new robots makes compelling reading. According to a Stanford University research paper ‘Rethink Robotics: Finding a market’, the cost of a US factory worker is $23.32 per hour, and the corresponding figures for workers in Germany and China are $25.80 and $1.36 per hour respectively. A robot priced at, for instance, $27,000, with a three-year warranty, represents a cost of just $3.20 per hour.

The potential for the new robots is so vast that both the public and the private sector are laying out huge sums on expanding robotics into new areas. The European Commission, for instance, has committed nearly €1bn in funding for robotics. Even Google is getting into the act and has embarked on a robotics buying spree, having bought eight start-up companies in this arena in 2013. But it has a long way to go to catch up on the leaders, Yaskawa and Fanuc in Japan, ABB in Switzerland and Kula in Germany, which together control a majority of the market.

The cost economics will change the structure of global manufacturing. Many western manufacturers are taking advantage of the productivity increases enabled by the robots, to bring back (reshore) manufacturing that was previously outsourced to Asia. But countries in the latter region are not standing still either. China is no longer the low-labour-cost factory of the world. Rising wages at home there and competition from other emerging economies have seen to this. In response, China’s manufacturers have climbed aboard the robots bandwagon. In 2013, 20% of robot sales globally were in China. Some 36,500 industrial robots were bought in China last year, 60% higher than in 2012, according to IFR.
The potential for the new robots is so vast that both the public and the private sector are laying out huge sums on expanding robotics into new areas.... The cost economics will change the structure of global manufacturing.

Robot sales in China increased by 36% per annum from 2008 to 2013. However, these figures are for robots as a whole, and not for the new collaborative type only. The next two biggest purchasers were Japan, with about 20,000 robots, and the US with 24,000. Japan still has the largest number of industrial robots, possessing 310,000 in 2012, with the US having 168,000 and China 96,000. The figures for other Asian countries, such as Taiwan, India and Indonesia, are also growing strongly.

Editor’s comment

Advanced countries have the most to gain from the productivity introduced by the new type of robots, because of their high labour costs. Though China is also getting into the act, the relative savings there will be much less, as is the case in the other Asian countries. Japan is already strong here. So the western countries have much to play for in expanding their use of robots, perhaps recovering some economic advantage from the emerging economies for a time.

Within societies structural changes are in prospect in terms of the relative impact of the robots on different sectors. It’s not just to do with saving labour costs as the demand for the new robots in low wage Asian countries demonstrates. It’s perhaps too soon to tell definitely but this breakthrough in robotics has the hallmarks of a possible major revolution to come if increased familiarity, and falling costs, propel demand past a tipping point. Investment paradigms, such as the West being in relative economic decline and that manufacturing goes to the lowest wage areas, may need to be revised.




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GREEN BOND ISSUANCE ACCELERATING

Financial Times - ‘Corporate green bond sales to double this year, says S&P’, Andrew Bolger, 21.5.14; ‘Green bonds grow as transparency efforts flicker’, Andrew Bolger, 29.5.14 and ‘Green bonds bloom as growth of $40bn forecast for this year’, Andrew Bolger, 18.7.14

‘Green shoots – Client bonding’, Katie Gilbert, Institutional Investor, May 2014

‘Green bonds - Green grow the markets, O’, The Economist, 5.7.14

‘Bond market sees a green light’, Richard Barley, The Wall Street Journal, 15.7.14

forbes.com climatebonds.net ‘2012 Global Sustainable Investment Review’, Global Sustainable Investment Alliance, 2013


Green bonds came of age and appeared on the corporate issuer radar screens in 2013 (see box) and the sector has gathered speed this year. By July, expectations were that the overall issuance in 2014 will be $40bn, with another big jump to $100bn next year, according to the Climate Board Initiative (CBI), an international non-profit organisation set up to promote climate-change investment.

The concept is catching on worldwide in new markets, including Germany and China. The latter’s government has encouraged the growth of a corporate green bonds market. The CBI points out that much more needs to be achieved to meet International Energy Agency estimates of the capital needed for dealing with climate change, amounting to $1trn per year.

The bond market, with its $100trn outstanding total of bonds issued, is essential for a climate-resilient economy.

According to the CBI, mobilising the bond market, with its $100trn outstanding total of bonds issued, is essential for a climate-resilient economy. The total raised through green bonds of about $50-60bn is as yet miniscule. The CBI’s opinion is that corporate bond issuance is likely to accelerate because of investors’ increasing desire to implement environmental, social and government targets under the UN Principles for Responsible Investment. By April this year, nearly 1,200 investors representing over $34trn of assets under management, had signed up to the principles, compared with just half this amount five years previously.

Green bonds are issued by organisations to pursue specific green projects. But how exactly is ‘green’ defined? There are no hard-and-fast rules yet. The CBI prefers a single standard, but recognises the difficulties of making it stick. A consortium of leading banks, including Bank of America Merrill Lynch, Citi, Credit Agricole and J.P. Morgan, have published a set of voluntary guidelines for issuers, referred to as the Green Bond Principles. The goal of the principles is to encourage transparency in the projects financedby the bonds, rather than defining rigidly what exactly green is. This will allow investors to judge for themselves whether the bond issuer has delivered on its promise to implement a green project.
GDF Suez, the French power group, announced in May this year the largest corporate green bond issued by a company, amounting to $3.4bn. This bond was three times oversubscribed. It was bought mainly by French, German and UK institutional investors with nearly two thirds purchased to meet environmental and socially responsible investment aims. GDF stated that the funds would be used to back renewable energy, including hydro-electric plants, and energy-efficiency projects, such as smart metering.

GDF developed investment criteria in conjunction with Vigeo, an ethical rating agency in Paris, which also helped EDF in the same way. The criteria covered five areas: environmental protection; contribution to local development and the well-being of local communities; fair and ethical relationships with suppliers and subcontractors; human resources management; and good corporate finance.

The creditworthiness of green bonds is that of the issuing organisation, and not dependent on the specific project in which the money would be invested. In this aspect, they differ from many of the climate bonds referred to below. The credit risk of the green bond would be on a par with other bonds issued by the same organisation, allowing for differences in factors such as maturity and liquidity. There is no reason, therefore, to expect that green bonds will underperform relative to other bonds. This is a strong attraction to fund managers, as they can do good without sacrificing any return.

The above Green Bond Principles recommend processes for designating, disclosing, managing and reporting the proceeds of the green bonds. The International Capital Market Association, representing institutions in over 50 countries, will be the secretariat. Setting up an enforcement system has been ruled out, allowing investors to do their own thing.

In practice, green bonds are policed via reporting commitments, including third-party reviews, but there is concern as to whether the reporting is up to scratch. It is argued that reputational risk and investor pressure will keep companies honest, but this has not worked with other types of bonds. The real test will come if a dubious bond is issued or a company fails to fulfil its green commitment. That might be the moment of truth.

Independent bodies are emerging to provide second opinions. These include the Centre for International Climate and Environmental Research in Oslo (CICERO) run by Norwegian academics. CICERO announced a partnership in July this year with four other academic institutions, including Tsinghua University. This move was timed with the first yuan-denominated green bond. But not all companies allow for independent opinions in issuing green bonds. Toyota, for instance, launched a $1.7bn bond to finance zero-emission car sales without any third-party input.

The CBI report pointed out that green bonds are fast- growing, accompanied by a lot of publicity. Actually, they are a part of a much bigger universe with over $500bn outstanding, ten times that in green bonds at the time of the report. This wider universe of climate- themed bonds referred to as ‘climate bonds’ is also growing with a record issuance of $95bn in 2013, about an eighth higher than in the previous year.
It is argued that reputational risk and investor pressure will keep companies honest, but this has not worked with other types of bonds.

Many of the climate bonds are railway bonds, which ordinarily would not be thought of as green bonds. However, according to Sean Kidney, Chief Executive of the CBI, transport accounts for 23% of global emissions and any activity that serves to reduce this is important. Climate bonds are screened by the CBI to cover seven themes: transport, energy, climate finance, buildings and industry, agriculture and forestry, waste and pollution control, and water. These climate bonds originated from the multilateral development banks, including the World Bank, the European Investment Bank and the IMF. These institutions have so far issued most of the climate bonds as investors had needed the triple-A rating to be comfortable in the new area.

These climate bonds are an extension of the green bond concept. The latter are issued to raise finance for an environmental project while climate bonds are directed at investments in emission-reduction or climate-change adaptation. Some 85% of the market is comprised of railway bonds and low-carbon energy bonds. Two-thirds - 67% - originated in Europe, including 23% in the UK alone. The US comes next at 17%, while Russia, China and Canada account for 3% each.

The climate bonds include three particular types:
  • Project bonds – the money is in a separate company or special-purpose vehicle (SPV ) for a particular project.
  • Asset-backed securities – a portfolio of cash flows from loans to renewable energy projects.
  • Covered bonds – the investor has dual recourse to the balance sheet of the issuer and a pool of assets such as mortgages.
Editor’s comment

At the above rate of growth, in about ten years, green bonds could easily surpass hedge funds and private equity and give exchange-traded funds a run for their money, fast-growing as the latter sector is.

However, it remains to be seen whether this rate of growth can be sustained. Remember it is from a very low base so far, and many among fund managers remain agnostic or sceptical about the green concept. It is more than possible that the sector is benefiting from the low-hanging fruit among fund managers. Neither is it easy to predict whether the growth rate of the number of corporations wanting to issue green bonds can be sustained.




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