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Fabrice Bouland

By Fabrice Bouland, CEO, Alphametry
Active asset management is under fire. MiFID II looms large on the horizon and although the deadline for this new piece of financial legislation is just a few months away, many firms are not fully prepared, or indeed clear on expectations from regulators on how new, complex rules will be put into practice.Their long established model is changing with the aim of making costs and charges more transparent to investors, including how wealth managers pay for investment research from brokers and banks.

Fabrice Bouland

Fabrice Bouland

MiFID II will come into practice and investment research will have to be paid for separately. This marks an end to the historic model whereby much of it has appeared to be provided free of charge. In preparation, buy-side firms have been undertaking the process of implementing more structure around their research; looking carefully at what they consume and what delivers the most value – no mean feat when you consider the size and scale of the many organisations which need to be MiFID II compliant.

Enter technology, into a sector which has been notable by its absence when it comes to riding the digital wave. Indeed, figures by Statista in 2017 show that finance lags behind when it comes to R&D expenditure, allocating a mere 1.5% to innovation and technology compared to other industries, some of which spend over 20%. It’s clear that finance has some catching up to do and that technology, driven by the need to be MiFID II compliant,is set to revolutionise the way firms buy and assess their research.

The regulatory landscape

In a few months, MiFID II will irrevocably separate research from execution. Despite murmurs of a second postponement to the deadline, Steven Maijoor, the chair of the European Securities Markets Authorithy (ESMA),confirmed in early June that they would be no further delay in the implementation of MiFID II.

Throughout 2017, a clearer landscape has emerged from the fog of European Directives, especially as local regulators have clarified their expectations, whereas interpretations will be revealed on July 3.Overall, a number of key points seem to have emerged including:

  • Buy-side firms should have a research evaluation process accessible in written policies
  • Research purchasing should be contractual and a budget should be set-up ex ante for each consumed service with each component (e.g. Written Research, Corporate Access) priced separately. Where investment strategies are similar, funds may be grouped together for the purposes of budgeting
  • Buy-side firms willing to finance research from dealing commission, or a separate charge to their asset owners, shall collect the money in a new separate Research Payment Account (RPA)
  • Macro Research is substantive in the FCA’s view, and therefore in-scope for MiFID II (Significantly, the AMF takes the opposite view, seeing macro as a minor, non-monetary benefit). Interestingly, the market has shown willingness to pay for Macro Research
  • The FCA expect that firms will make reasonable endeavours to implement MiFID II on time, though they probably do not expect for everything to be done by 3 January 2018

In contrast to the FCA, The German regulator, BAFIN, stated back at the end of last year that it would not consult on local interpretations but will rely on ESMA Q&As and other regulators’ input. Similarly, the incompatibility of unbundling with the rest of the world, in particular the US, continues to be a major concern. US providers face a dilemma in the fact that they cannot receive direct payment for research unless they become registered as Investment Advisors, which carries substantial legal obligations and risk.

A peculiar industry: investment research

The active asset management raison d’être, namely market-beating performance (“Alpha”), is essentially underpinned by the process of collection, analysis and circulation of information. This information is fundamental to its success.

And yet the research industry model is highly unusual. The discretionary costs of execution pay for free and unlimited access to the research of the world’s leading brokers. While financially advantageous, this model is subject to known limitations that are counterproductive. The obvious conflict of interest in providing endless investment advice to generate a maximum of execution turnover has been in the regulators’ sights for nearly 15 years. Indeed, in a recent study by Quinlan & Associates in March 2017, it estimated that over 40,000 research notes are sent weekly by the top 15 global investment banks. The same report goes on to say that less than 5% of these reports are actually opened, reinforcing the need for better insight into what firms actually use and what adds value for their clients. This excess also has a negative impact on quality as well as being an additional hindrance for asset management companies trying to identify the best sources of alpha.

Could it be that research, the key tool for active asset management, is in fact inefficient?

Research is knowledge

So what can be done to address this issue and ensure asset managers can easily access and extract the best possible research inputs intuitively?When we think of the role technology will play, it is helpful to think about the capacity of human knowledge to progress and to develop, and how this has always been bounded by two dimensions:

  • Space: the concentration of knowledge at a given location – the first libraries for example;
  • Time: the process of applying and interpreting knowledge, which yields advances in understanding – in other words, progress.

The digital revolution has caused a tremendous upheaval that is profoundly changing the world as we know it for two main reasons: Firstly, digitalisation provides a means of combining all forms of knowledge (text, images, video, sound, etc.) in a single space. Our world is in the process of evolving at breakneck speed from multiple physical locations where information is centralised, to a single global and unified digital space. Secondly, networked devices enable us to connect to all the forms of knowledge, and to enhance and process them almost instantaneously. In the 20th century, most of us were just consumers; in the 21st century, we can all consume, create and share.
Quantifying the investment know-how

Asset managers are professional readers, key players in content generation. They annotate, highlight, condense, create new notes, and share the outcome. All these actions give rise to ‘qualified links’ between the analyses, the notes and other collections of miscellaneous data.

In the digital space, these links cause information to appear in a new light. There is talk of a new topography of knowledge, which is no longer hierarchical, nor even organised in tree structure, but networked. The Internet reveals the natural organisation of information, which has always been linked, nested and interdependent.

Furthermore, the digital world, and in particular the rise of deep analytic tools, is generating consequences that go deeper than merely linking information. It provides a means of quantifying the processing of information, by logging and measuring the things that work. It also provides a means of modelling various scenarios, and running them repeatedly. This enables the prospect of an approach based on actual data rather than mere assumptions, and might eventually give rise to a genuine science of investment. Other industries are beginning to benefit from this new way of seeing things. Online education, for instance, correlates the actions of the students – their ‘clicks’ and ‘feedback’ – with their results, thereby improving the learning process continuously and dynamically.

Asset management – the challenges ahead

Active asset management sector has now entered a major battle brought on by innovation. It is under fire from multiple sources including product-led innovation in the form of the infamous ETFs that replicate many financial strategies, pushing asset management to the mass market; to technological innovation, with the onset of robot advisors and their algorithms that threaten to automate asset management.

Technology will play a major role in helping asset managers to face what lies ahead. And why wouldn’t it? New generation knowledge management solutions integrated with digital Online Research Marketplace (ORMs) will more easily bring extensive but targeted research directly into the heart of firms’ investment process.So while MiFID II may have lit the fire for necessary change, digitisation is fanning the flames, and never more so than in the area of research unbundling. Those who embrace it are likely to be the winners of tomorrow, not only terms of compliance, but more importantly in generating faster and more illustrative ROI on research costs than ever before.

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IMF lifts global growth forecast for 2021, still sees ‘exceptional uncertainty’



IMF lifts global growth forecast for 2021, still sees 'exceptional uncertainty' 1

By Andrea Shalal

WASHINGTON (Reuters) – The International Monetary Fund on Tuesday raised its forecast for global economic growth in 2021 and said the coronavirus-triggered downturn in 2020 would be nearly a full percentage point less severe than expected.

It said multiple vaccine approvals and the launch of vaccinations in some countries in December had boosted hopes of an eventual end to the pandemic that has now infected nearly 100 million people and claimed the lives of over 2.1 million globally.

But it warned that the world economy continued to face “exceptional uncertainty” and new waves of COVID-19 infections and variants posed risks, and global activity would remain well below pre-COVID projections made one year ago.

Close to 90 million people are likely to fall below the extreme poverty threshold during 2020-2021, with the pandemic wiping out progress made in reducing poverty over the past two decades. Large numbers of people remained unemployed and underemployed in many countries, including the United States.

In its latest World Economic Outlook, the IMF forecast a 2020 global contraction of 3.5%, an improvement of 0.9 percentage points from the 4.4% slump predicted in October, reflecting stronger-than-expected momentum in the second half of 2020.

It predicted global growth of 5.5% in 2021, an increase of 0.3 percentage points from the October forecast, citing expectations of a vaccine-powered uptick later in the year and added policy support in the United States, Japan and a few other large economies.

It said the U.S. economy – the largest in the world – was expected to grow by 5.1% in 2021, an upward revision of 2 percentage points attributed to carryover from strong momentum in the second half of 2020 and the benefit accruing from $900 billion in additional fiscal support approved in December.

The forecast would likely rise further if the U.S. Congress passes a $1.9 trillion relief package proposed by newly inaugurated President Joe Biden, economists say.

China’s economy is expected to expand by 8.1% in 2021 and 5.6% in 2022, compared with its October forecasts of 8.2% and 5.8%, respectively, while India’s economy is seen growing 11.5% in 2021, up 2.7 percentage points from the October forecast after a stronger-than-expected recovering in 2020.

The Fund said countries should continue to support their economies until activity normalized to limit persistent damage from the deep recession of the past year.

Low-income countries would need continued support through grants, low-interest loans and debt relief, and some countries may require debt restructuring, the IMF said.

(Reporting by Andrea Shalal; Editing by Shri Navaratnam)

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Leon Black step downs as Apollo CEO after review of Epstein ties



Leon Black step downs as Apollo CEO after review of Epstein ties 2

By Mike Spector and Chibuike Oguh

NEW YORK (Reuters) – Leon Black said on Monday he would step down as chief executive at Apollo Global Management Inc, following an independent review of his ties to the late financier and convicted sex offender Jeffrey Epstein.

While Black, whose net worth is pegged by Forbes at $8.2 billion, will remain Apollo’s chairman, his decision to step down illustrates how doing business with Epstein weighed on the reputation of one of Wall Street’s most prominent investment firms. Black co-founded Apollo 31 years ago.

Apollo said it plans to change its corporate governance structure, doing away with shares with special voting rights that currently give Black and other co-founders effective control of the firm.

The independent review, conducted by law firm Dechert LLP, found Black was not involved in any way with Epstein’s criminal activities. Black paid Epstein $158 million for advice on tax and estate planning and related services between 2012 and 2017, according to the review.

Black, 69, said that although the review confirmed he did not engage in any wrongdoing, he “deeply” regretted his involvement with Epstein.

“I hope that the results of the review, and related enhancements … will reaffirm to you that Apollo is dedicated to the highest levels of transparency and governance,” Black wrote in a note to Apollo fund investors. He will step down as CEO no later than July 31.

Apollo co-founder Marc Rowan, 58, will take over as CEO.

Rowan has often kept a low-key profile compared with Apollo’s other co-founder, Joshua Harris, 56, and spearheaded many initiatives that turned Apollo into a credit investment giant, including the permanent capital base the firm enjoys through its ties to reinsurer Athene Holding Ltd.

The revelations of Black’s ties to Epstein took a toll on Apollo, which Black turned into one of the world’s largest private equity groups. Apollo executives had warned in October that some investors had paused their commitments to the buyout firm’s funds as they awaited the review’s findings.

Apollo shares are down 1% since the New York Times reported on Oct. 12 that Black paid at least $50 million to Epstein for advice and services, when most of his clients had deserted him.

Over the same period, shares of peers Blackstone Group Inc, KKR & Co Inc and Carlyle Group Inc are up 19%, 10% and 23%, respectively.

“We think a large number of (Apollo fund investors) took a ‘pause’, and we believe the outcome (of the review) and changes today will cause most of them to return to allocating to future Apollo funds,” Credit Suisse analysts wrote in a research note.

Apollo shares jumped 4% to $47.65 in after-hours trading on Monday.

“We continue to follow these events closely and will evaluate how Apollo addresses its issues,” the California State Teachers’ Retirement System, one of the largest U.S. public pension funds and an Apollo investor, said in a statement.

Epstein was found dead at age 66 in August 2019 in a Manhattan jail, while awaiting trial on sex trafficking charges for allegedly abusing dozens of underage girls in Manhattan and Florida from 2002 to 2005. New York City’s chief medical examiner ruled that the cause of death was suicide by hanging.


Black previously said he had paid millions of dollars to Epstein, but the exact size of his payments was revealed for the first time on Monday. Beyond the $158 million in payments, Black made two loans to Epstein totaling $30.5 million in early 2017.

Dechert said in its report that Black’s social ties with Epstein, who built his fortune by endearing himself to powerful figures in high society, went back to the mid-1990s.

Epstein won Black’s trust by resolving an estate tax issue for him in 2012 potentially worth at least $500 million, the report said. He ended up advising Black on various aspects of his personal financial affairs, from his family office and airplane to his yacht and artwork.

Black believed that Epstein provided advice over the years that conferred between $1 billion and $2 billion in value to him, according to the Dechert report. Black said in his note to investors that he had paid Epstein a fee equivalent to 5% of the value he generated on an after-tax basis, and not tied to hourly rates.

Black and Epstein’s relationship deteriorated after Epstein failed to repay $20 million of the loans and Black refused to pay tens of millions of dollars in fees that Epstein demanded, according to the Dechert report.

They severed ties in October 2018, according to the report. Black knew Epstein had been convicted in Florida a decade earlier for soliciting prostitution from a minor, the Dechert report said, but there was no evidence suggesting Black had knowledge of the other alleged crimes before they were publicly reported in late 2018, culminating in Epstein’s July 2019 arrest.

On Monday, Black pledged $200 million toward “initiatives that seek to achieve gender equality and protect and empower women,” as well as helping survivors of domestic violence, sexual assault and human trafficking.

Apollo said it would pursue a “one share, one vote” corporate governance structure that would do away with shares with special voting rights. It said the move could qualify it for listing on the S&P Global indices.

Apollo also said it would seek to give its board more authority to oversee its business, eroding the power of its executive committee led by Black.

The board will be expanded to include four new independent directors, including Avid Partners founder Pamela Joyner and physician and scientist Siddhartha Mukherjee, Apollo said. Apollo co-Presidents Scott Kleinman and James Zelter will join the board and take on increased responsibility running day-to-day operations.

Apollo had about $433 billion in assets under management as of the end of September.

(Reporting by Mike Spector and Chibuike Oguh; Additional reporting by Lawrence Delevigne and Jessica DiNapoli in New York; Editing by Sonya Hepinstall, Leslie Adler and Kim Coghill)

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EU sees no cliff-edge ending for COVID fiscal stimulus



EU sees no cliff-edge ending for COVID fiscal stimulus 3

BRUSSELS (Reuters) – European governments will not need to abruptly end fiscal support for their economies after the pandemic, top officials said on Monday, noting that any withdrawal of stimulus would be carried out gradually and only once the economy has recovered.

Euro zone public debt rose sharply during 2020 and is likely to exceed 100% of GDP this year as governments borrow to help individuals and businesses survive lockdowns.

The higher debt raises concern about how to deal with it down the road and when to start cutting it again, since the EU last year suspended its rules limiting budget deficits and debt, known as the Stability and Growth Pact (SGP).

EU finance ministers are to discuss when to reintroduce any borrowing limits in the second quarter of this year.

“I believe it important that finance ministers debate and reach a common understanding on the appropriate fiscal stance by the summer. This can then serve as guidance for the preparation of their draft budgetary plans for 2022,” the chairman of the euro zone’s group of finance ministers, Paschal Donohoe, said on Monday.

“To avoid any misunderstanding, let me stress that this is not about an imminent withdrawal of fiscal stimulus,” he told the economic committee of the European Parliament.

“We all agree that our immediate priority is to shield our citizens, in particular younger cohorts and those most exposed to the crisis. There must be no cliff-edges,” he said.

Joao Leao, the finance minister of Portugal which holds the rotating presidency of the EU and therefore sets the agenda for EU finance ministers’ work until June, was equally cautious.

“We should not withdraw stimulus too early. We need to make sure the suspension clause for the SGP remains in force at least until we return to pre-crisis economic figures,” he told the committee. “We need to make sure jobs are maintained as well as the production capacity of companies.”

He said first cash from the EU’s 750 billion euro post-COVID economic recovery programme should reach the economy in the first half of the year.

“Real funding should be getting to the economy before the summer or in early part of the summer,” he said.

(Reporting by Jan Strupczewski; Editing by Giles Elgood)

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