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Global Investor Confidence in US Soars for Third Straight Year, According to 2014 Global Venture Capital Confidence Survey

August 14, 2014 Comments off

Global Investor Confidence in US Soars for Third Straight Year, According to 2014 Global Venture Capital Confidence Survey
Source: Deloitte

Global investor confidence in the United States significantly increased for the third year in a row, driven by a combination of favorable capital markets, abundant investment opportunities in innovative companies and a strong investor climate, according to the 2014 Global Venture Capital Confidence Survey from Deloitte and the National Venture Capital Association. Moreover, global investor confidence also increased in the United Kingdom, Israel and Canada, but continued to decline in Brazil, China and India, according to the survey.

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Survey: lawyers ready to join in major push to spot and report financial fraud targeting older Americans

August 12, 2014 Comments off

Survey: lawyers ready to join in major push to spot and report financial fraud targeting older Americans (PDF)
Source: Investor Protection Trust (IPT), the Investor Protection Institute (IPI), and the American Bar Association (ABA)

Nine out of 10 practicing attorneys surveyed by the Investor Protection Trust (IPT), the Investor Protection Institute (IPI), and the American Bar Association (ABA) are willing to take part in a new campaign to address the estimated 20 percent of older America ns who have been the victims of investment fraud and financial exploitation.

In releasing the survey findings, the three groups announced that they are launching the Elder Investment Fraud and Financial Exploitation (EIFFE) Prevention Program Legal. The EIFFE Prevention Program Legal will develop, test, and implement a model national continuing legal education (CLE) program to teach lawyers to: (1) recognize clients’ possible vulnerability to EIFFE due to mild cognitive impairment (MCI); (2) identify EIFFE in their clients; and (3) report suspected instances of EIFFE to appropriate authorities. In June 2010, the Investor Protection Trust released a national survey showing that one out five older Americans are victims of financial swindles.

+ Survey Results (PDF)

A Real Fix for Credit Ratings

August 8, 2014 Comments off

A Real Fix for Credit Ratings
Source: Brookings Institution

The failure of credit ratings agencies to do their job – warn investors of the true risks entailed by the subprime mortgage securities they rated – was at the heart of the financial crisis. Policy makers since have wrestled with how to “fix” the ratings process going forward. Although the Securities and Exchange Commission has required the agencies to disclose more of their methodology, the ratings process is still less than transparent. The issuer-pay rating agency business model has been criticized as a central cause and new agencies designated by the SEC after 2008 moved away from this model, though they have since moved back. Various additional ideas to fix the system have been put forward but none has been adopted: randomizing the choice of ratings agency, or replacing private ratings with those of a public agency, such as the Securities and Exchange Commission.

Faulting the issuer-pay model for the Crisis, which has been in continuous use for more than 40 years cannot explain the sudden explosion and subsequent collapse of the securitization market, which occurred over a much shorter period. We offer a different approach here: by showing how the absence of a single, numerical, public structured credit scale to serve as a yardstick of structured credit quality in the U.S. debt capital markets provides a more plausible explanation for the problems in structured finance in particular. Transparent, numerical benchmarks of credit risk relating to structured credits should not only fix structured finance going forward, and ideally help resuscitate the market but in a more sensible fashion. In addition, we will argue that such benchmarks also are a necessary component to a prudent system of capital regulation and for accurately informing investors of true credit risk, just as speed limits are a necessary component of vehicular traffic regulation.

Practical Considerations for Factor-Based Asset Allocation

August 5, 2014 Comments off

Practical Considerations for Factor-Based Asset Allocation (PDF)
Source: McGraw-Hill Financial

Much has been written about the shortcomings of the traditional approach to asset allocation. Traditional asset allocation policies can typically be characterized by relatively static asset allocation and by diversification across asset class building blocks. As asset class returns are largely driven by common risk factors such as growth and inflation, traditional balanced portfolios can be poorly diversified, with a pro-cyclical growth bias that may lead to significant drawdowns and losses in the event of market turmoil. Against this backdrop, there has been an emerging shift, especially among institutional investors, toward more dynamic asset allocation, hinged on diversification across risk factors.

This being said, most investment portfolios are still constructed on the basis of direct asset class exposure and, as yet, it may not be feasible for investors to apply a factor-based asset allocation framework to implement their policy-level decisions. For this reason, more practical solutions are needed in order to allow investors to potentially incorporate risk factors in the portfolio construction process while accommodating their constraints and existing investment processes.

Exactly how risk factors should be included in the portfolio construction process is still a nascent area of research and is fiercely debated among practitioners. While there are numerous research papers that explore this topic, they tend to be theoretical, and it is for this reason that this paper has a stronger focus on the practical aspects of implementation. Rather than provide definitive answers here, we aim to share our reflections on this topic, following feedback from practitioners and discussions that took place in client roundtable events S&P Dow Jones Indices organized to promote dialogue with industry experts.

In this paper, we review three approaches of risk-factor-based portfolio construction and, using stylized case studies, discuss the investment rationale of the approach and remark on the issues that should be given consideration. First, this paper analyzes the use of risk parity on the asset class level as an approach to potentially reduce the concentration of equity risks in a traditional, balanced portfolio. Next, we examine how returns may potentially be enhanced or how risk may potentially be reduced by adopting alternate beta strategies—that is, strategies designed to capture both beta exposure from individual asset classes and systematic factors (such as value). Following that, we assess the feasibility of using risk premia portfolios, which involves taking long-short positions, to target systematic factors—a strategy used by some investors as a low-cost alternative to other absolute return strategies. Finally, we summarize our reflections on the trends in this area.

PwC and IRRC Institute Release New Cybersecurity Report; Offers Investors Strategies to Evaluate Risk Amid Opaque Corporate Disclosures

August 4, 2014 Comments off

PwC and IRRC Institute Release New Cybersecurity Report; Offers Investors Strategies to Evaluate Risk Amid Opaque Corporate Disclosures
Source: PricewaterhouseCoopers

A new report from PwC US and the Investor Responsibility Research Center Institute (IRRCi) indicates that while companies must disclose significant cyber risks, those disclosures rarely provide differentiated or actionable information. The report examines key cybersecurity threats to corporations and provides information to investors struggling to evaluate investment risk, business mitigation strategies and the quality of corporate board oversight.

The report suggests that investors focus on corporate preparedness for cyber attacks, engage with highly-likely targets to better understand corporate preparedness, and demand better and more actionable disclosures (though not at a level that would provide a cyber-attacker a roadmap to make those attacks).

The study suggests investors ask the following key questions:

  • Does the company have a Security & Privacy executive who reports to a senior level position within the company?
  • Does the company have a documented cybersecurity strategy that is regularly reviewed and updated?
  • Does the company perform periodic risk assessments and technical audits of its security posture?
  • Can senior business executives explain the challenges of cybersecurity and how their company is responding?
  • What is the organization doing to address security at its business partners?
  • Has the company addressed its sector-based vulnerability to cyber attack?
  • Does the organization have a response plan for a cyber incident?

The study also outlines common motivations for cyber-attacks, by industry sector, based on PwC experience…

How America Saves 2014

July 31, 2014 Comments off

How America Saves 2014
Source: Vanguard

How America Saves 2014 is here! This comprehensive report analyzes the saving, investing, and account activity trends in defined contribution (DC) plans at Vanguard. The report offers useful insights into current issues affecting DC plans, including employer contribution trends, automatic plan features, use of target-date funds, and use of advice services.

OECD releases full version of global standard for automatic exchange of information

July 24, 2014 Comments off

OECD releases full version of global standard for automatic exchange of information
Source: OECD

Taking an important step towards greater transparency and putting an end to banking secrecy in tax matters, the OECD today released the full version of a new global standard for the exchange of information between jurisdictions.

The Standard for Automatic Exchange of Financial Account Information in Tax Matters calls on governments to obtain detailed account information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. The Standard, developed at the OECD under a mandate from the G20, endorsed by G20 Finance Ministers in February 2014, and approved by the OECD Council.

The Standard provides for annual automatic exchange between governments of financial account information, including balances, interest, dividends, and sales proceeds from financial assets, reported to governments by financial institutions and covering accounts held by individuals and entities, including trusts and foundations. The new consolidated version includes commentary and guidance for implementation by governments and financial institutions, detailed model agreements, as well as standards for harmonised technical and information technology solutions, notably a standard format and requirements for secure transmission of data.

Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits (hearing and report)

July 24, 2014 Comments off

Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits
Source: Senate Permanent Subcommittee on Investigations

The Permanent Subcommittee on Investigations has scheduled a hearing, “Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits,” on Tuesday, July 22, 2014, at 9:30 a.m., in Room 216 of the Hart Senate Office Building.

The Subcommittee hearing will examine a set of transactions that utilize financial engineering and structured financial products to attempt to avoid paying U.S. taxes on short-term capital gains. Witnesses will include representatives of major financial institutions, as well as tax experts from a nonprofit institution and the U.S. Government Accountability Office.

Impact of Fed Tapering Announcements on Emerging Markets

July 21, 2014 Comments off

Impact of Fed Tapering Announcements on Emerging Markets
Source: International Monetary Fund

This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.

Incubators, Accelerators, Venturing, and More: How Leading Companies Search for Their Next Big Thing

July 11, 2014 Comments off

Incubators, Accelerators, Venturing, and More: How Leading Companies Search for Their Next Big Thing
Source: Boston Consulting Group

Most corporate-executive suites are packed with all manner of state-of-the-art technology. But one low-tech instrument is in demand in nearly all of them: a periscope. Not a literal one, perhaps, but CEOs would no doubt welcome the ability to see around corners and spot the approaching forces that could disrupt their businesses or give them an innovation advantage over their peers. In this report, The Boston Consulting Group takes a close look at tools already in use at some of the corporate world’s innovation leaders to identify and explore new pathways to growth, including business incubators and accelerators, corporate venture investing, and strategic partnerships. Drawing on our extensive experience in the field, we offer insights into their most effective applications and describe how they can best be used in concert for maximum strategic advantage.

Understanding Social Impact Bonds and Pay for Success

July 11, 2014 Comments off

Understanding Social Impact Bonds and Pay for Success
Source: Urban Institute

Pay for success (PFS) financing and social impact bonds (SIBs) have generated immense enthusiasm in the public and private sectors as a means to shift risk and generate new capital for social programming. In PFS and SIB transactions, private investors provide capital for an evidence-based social program. The investors’ principal is returned with a profit if rigorous evaluation concludes predetermined performance goals are met.

There are more than a dozen operating SIBs in the United Kingdom, and several PFS projects in US cities and states. However, transitioning from an experiment to a stable social funding structure requires a rigorous selection and evaluation process, and an appropriate pricing scheme for governments and investors. Urban Institute researchers have developed roadmaps for the next step for PFS development in the United States by drawing on evaluation research, policy development, and cost-benefit analysis.

Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance

July 9, 2014 Comments off

Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance
Source: Social Science Research Network

We find evidence that CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.

Market Risk Premium Used in 88 Countries in 2014: A Survey with 8,228 Answers

July 8, 2014 Comments off

Market Risk Premium Used in 88 Countries in 2014: A Survey with 8,228 Answers
Source: Social Science Research Network

This paper contains the statistics of the Equity Premium or Market Risk Premium (MRP) used in 2014 for 88 countries. We got answers for more countries, but we only report the results for 88 countries with more than 6 answers.

37% of the MRP used in 2014 decreased (vs. 2013) and 9% increased.

Most previous surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references used to justify the MRP, comments from 30 persons that do not use MRP, and comments from 53 persons that do use MRP.

CRS — Foreign Holdings of Federal Debt

July 7, 2014 Comments off

Foreign Holdings of Federal Debt (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Federal debt represents, in large measure, the accumulated balance of federal borrowing of the U.S. government. The portion of gross federal debt held by the public consists primarily of investment in marketable U.S. Treasury securities. Investors in the United States and abroad include official institutions, such as the U.S. Federal Reserve; financial institutions, such as public banks; and private individual investors.

CRS — High-Frequency Trading: Background, Concerns, and Regulatory Developments

July 7, 2014 Comments off

High-Frequency Trading: Background, Concerns, and Regulatory Developments (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

High-frequency trading (HFT) is a broad term without a precise legal or regulatory definition. It is used to describe what many characterize as a subset of algorithmic trading that involves very rapid placement of orders, in the realm of tiny fractions of a second. Regulators have been scrutinizing HFT practices for years, but public concern about this form of trading intensified following the April 2014 publication of a book by author Michael Lewis. The Federal Bureau of Investigation (FBI), Department of Justice (DOJ), Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), the Office of the New York Attorney General, and the Massachusetts Secretary of Commerce have begun HFT-related probes.

Sustainability goes mainstream: Insights into investor views

July 4, 2014 Comments off

Sustainability goes mainstream: Insights into investor views
Source: PricewaterhouseCoopers

What do investors think about sustainability issues? Do these issues factor into investment strategies and practices? Will they in the future?

Four in five investors responding to our survey said they considered these concepts in one or more investment contexts in the past year. And about 85% expect to consider them three years from now. But investors are not happy with corporate reporting about sustainability—they’re still not getting the information they’re looking for. Investors want to be a part of the sustainability dialogue. And they want direct engagement with the companies in which they invest.

The Effect of Patent Litigation and Patent Assertion Entities on Entrepreneurial Activity

June 27, 2014 Comments off

The Effect of Patent Litigation and Patent Assertion Entities on Entrepreneurial Activity
Source: Social Science Research Network

This paper empirically investigates the statistical relation between levels of patent litigation and venture capital (“VC”) investment in the U.S. We find that VC investment, a major funding source for entrepreneurial activity, initially increases with the number of litigated patents, but that there is a “tipping point” where further increases in the number of patents litigated are associated with decreased VC investment, which suggests an inverted U-shaped relation between patent litigation and VC investment. This appears strongest for technology patents, and negligible for products such as pharmaceuticals. There is some evidence of a similar inverted U-shaped relation between patent litigation and the creation of new small firms. Strikingly, we find evidence that litigation by frequent patent litigators, a proxy for PAE litigation, is directly associated with decreased VC investment with no positive effects initially.

Hat tip: ResearchBuzz.

New From the GAO

June 23, 2014 Comments off

New From the GAO
Source: Government Accountability Office

Reports

1. DOD Financial Management: The Defense Finance and Accounting Service Needs to Fully Implement Financial Improvements for Contract Pay. GAO-14-10, June 23.
http://www.gao.gov/products/GAO-14-10
Highlights – http://www.gao.gov/assets/670/664319.pdf

2. Telecommunications: USDA Should Evaluate the Performance of the Rural Broadband Loan Program. GAO-14-471,May 22.
http://www.gao.gov/products/GAO-14-471
Highlights – http://www.gao.gov/assets/670/663577.pdf

3. Medicaid: Financial Characteristics of Approved Applicants and Methods Used to Reduce Assets to Qualify for Nursing Home Coverage. GAO-14-473, May 22.
http://www.gao.gov/products/GAO-14-473
Highlights – http://www.gao.gov/assets/670/663416.pdf

4. Advanced Reactor Research: DOE Supports Multiple Technologies, but Actions Needed to Ensure a Prototype Is Built. GAO-14-545, June 23.
http://www.gao.gov/products/GAO-14-545
Highlights – http://www.gao.gov/assets/670/664297.pdf

5. VA Spina Bifida Program: Outreach to Key Stakeholders and Written Guidance for Claims Audit Follow-up Activities Needed. GAO-14-564, June 23.
http://www.gao.gov/products/GAO-14-564
Highlights – http://www.gao.gov/assets/670/664304.pdf

6. Debt Management: Floating Rate Notes Can Help Treasury Meet Borrowing Goals, but Additional Actions Are Needed to Help Manage Risk. GAO-14-535, June 16.
http://www.gao.gov/products/GAO-14-535
Highlights – http://www.gao.gov/assets/670/664107.pdf

Related Product

Debt Management: Survey of Investors in Treasury Securities (GAO-14-562SP, June 16, 2014), an E-supplement to GAO-14-535. GAO-14-562SP, June 16.
http://www.gao.gov/products/GAO-14-562SP

Global Wealth 2014: Riding a Wave of Growth

June 20, 2014 Comments off

Global Wealth 2014: Riding a Wave of Growth
Source: Boston Consulting Group

The global wealth-management industry delivered a few surprises in 2013. Excellent growth did not always translate into higher profits. The mature economies of the “old world” and the rapidly developing economies (RDEs) of the “new world” continued to move at different speeds in general, but some developed economies performed extremely well, shifting the playing field. And sophisticated digital offerings are increasingly becoming a source of competitive advantage.

Overall, the key challenge in the old world remains how to make the most of a large existing asset base amid volatile growth patterns, while the principal task in the new world is how to attract a sizable share of the new wealth that is being created more rapidly than ever. Players in every region will be required to forge creative strategies in order to deepen client relationships and lift both revenues and profits. But the road will not be easy. Indeed, most wealth managers continue to face common challenges in terms of gathering new assets, generating new revenues, managing costs, maximizing IT capabilities, complying with regulators, and finding winning investment solutions that foster client loyalty. The battle for assets and market share will become increasingly intense in the run-up to 2020.

In Riding a Wave of Growth: Global Wealth 2014, which is The Boston Consulting Group’s fourteenth annual report on the global wealth-management industry, we explore the current size of the market, the present state of offshore banking, and the performance of leading institutions in a wide range of categories. We also examine the growing digital aspects of wealth management, along with the most profitable business models—all with an eye toward the steps that wealth managers must take to position themselves advantageously.

Our goal, as always, is to present a clear and complete portrait of today’s wealth-management industry, as well as to offer thought-provoking analysis of issues that will affect all types of wealth managers as they pursue their growth and profitability ambitions in the years to come.

Free registration required to access report.

The big questions about Scottish independence; Towers Watson summarises what Scottish independence could mean for pension plans, their sponsors and financial institutions.

June 17, 2014 Comments off

The big questions about Scottish independence; Towers Watson summarises what Scottish independence could mean for pension plans, their sponsors and financial institutions.
Source: Towers Watson

As we enter the final three months of the countdown to the Scottish Independence referendum, Towers Watson has released a short paper, entitled The big questions, outlining how a yes vote to Scottish independence could affect UK-wide financial institutions and pensions plans. It poses questions in several fundamental areas such as currency, membership of the European Union and tax and fiscal policy.

In the paper Towers Watson summarises the main questions for pension plans, as well as some of those likely to affect the investment and insurance industries, in the event of a yes vote. It suggests that these will only be answered through the developing economic, social and regulatory policies of an independent Scotland and not ahead of time.

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