Innovation: initial steps for fund industry players

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Recent studies continue to reinforce the empirical evidence of the positive impact of innovation on company performance. According to these studies, those companies that are committed to innovation will grow three times faster over the next five years. Companies that do not commit to innovation will tend to disappear.


In 1958, the 500 largest companies in the United States listed on the S&P500 remained in that index an average of 61 years. Today that period of permanence falls around 18 years, but the forecast for 2025 is close to 15 years. That means that no matter the size, even the largest companies in the world may disappear in 15 years if they do not innovate. Fund industry is not a horse of a different color.


In this situation, as a manager, are you leading strategies and a culture to encourage innovation in your company?


However, and before you get too excited about the idea of starting immediately with the innovation matter within your company, statistics show that almost 80% of new products and services fail during the six months after launch.


So, how can we successfully innovate considering these failure ratios? Professor Carlos Osorio view is that major problems in the company arise when the focus is more on the idea than in the challenge. According to their investigations, 75% of “great ideas” fail. Nevertheless, 99% of attempts to solve “innovation challenges” end as success. In this sense, having innovative leaders in the team will help to improve all areas of the company activity.


Another author, Roy Rothwell at the University of Sussex, provided an historic overview of industrial innovation management in the Western world. He described 5 generations of innovation models: Technology Push (1950-1960), Market Pull (1960-1970), Coupling of R&D and Marketing (1970-1980), Integrated Business Processes (1980- mid 1990s)and System Integration & Networking (since mid 90s onwards). Current innovative companies are associated to a diverse portfolio of partners which together create an innovation system based primarily in exchange of information and knowledge.


Creating this net of employees and partners with innovative capabilities can be a good way to start ensuring the growth and competitiveness of your company.


Alembeeks Group contributes with fresh ideas and IT solutions to a better fund industry. We are fund industry natives and we know IT.

Contact us at sales@alembeeks.com for further information about our services and tools.


Supertanker funds and liquidity

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Dear Fund Director,

I have found this article about the liquidity risk in supertanker funds.

I think Mr. Beckett opinion is worthy to be considered when we follow up our funds and the funds where we are invested.

Taken directly from the article find interesting paragraph:

Using the AIFMD as a template we can start to ask specific due diligence questions to assess the liquidity risk of big funds such as:

  1. Outline any illiquid, non-daily priced or low volume assets held and how you manage these positions (eg direct property, unlisted stocks).
  2. What is the maximum size (capacity) of your strategy?
  3. Have you stress-tested the current portfolio, the liquidity profile of your investors or subjected the strategy to liquidity scenarios?
  4. What is the maximum percentage of the fund’s assets held by a single client and the ratio of retail to institutional clients?
  5. What has been the largest weekly and monthly outflow from your fund and what percentage of the fund did this constitute?
  6. Indicate your current liquidity ladder at normal prevailing prices – how much of the fund you can liquidate in one day, two days, seven days, 30 days, 90 days.
  7. Are there any sub-sectors where you own more than 10% of that market? Also detail the smallest market and holding (market capitalisation) you are prepared to hold.
  8. What redemption policies (eg unit cancellation, equalisation, dilution levy, swing-pricing) can you currently employ?
  9. Provide details of the liquidity of your portfolio, including the type of cash instruments held, trading liquidity of other assets and how quickly 75% of the portfolio can be traded out.
  10. Highlight and describe any holdings held currently (or previously) in the following: Gold bullion, Commodities, Exchange traded commodities, Traded endowment plans, Milk quotas, Contracts for differences, Direct property, Infrastructure, Cash held for margin requirements, Complex derivatives (eg OTC, non-vanilla Swaps, Swaptions), Unlisted securities (inc private equity, private loans).

I hope this helps.

Yours faithfully ,

The Indeep Fund Director

Liquidating a fund

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Dear Fund Director,

If you are liquidating a fund which was under your mandate, you are not alone. Fund industry has its own trends and fashions. And trends and fashions have always a maturity date.

Last week we were informed about the end of the Goldman Sachs BRIC fund. The fund was swallowed up by the GS Emerging Markets Equity Fund. The underlying cause was that the BRIC acronym is not in vogue any longer but formally GS stated reasons were to “optimize” its assets and “eliminate overlapping products”.

Indeepfd - BRIC fund liquidation

(Source: Bloomberg)

This story can also happen to us. Some reasons to liquidate a fund could be:

  • The fund assets are low, we couldn’t reach our asset expectations 3 years after launch.
  • The fund assets are low, the asset class is no longer in fashion.
  • The fund performance was poor in comparison to the benchmark.
  • The fund manager was an “investment star” and decided to leave the company. Then we faced big redemption flows.
  • The fund is doing something very similar to another of our funds. In the end, we are duplicating the strategy and confusing the investors.
  • The investment strategy didn’t work as it was supposed to.

However, in all this cases please think about a nice wording when you inform the regulator and your investors. GS did it very well.

If possible, also as GS did, try to merge the fund you would like to liquidate with another company fund with a similar investment strategy and risk profile and inform properly your investors about the new fund (however, you should sportsmanslikely accept losing part of the investors during or just after the change).

Remember: 1 – Merging sounds much better than liquidating, specially in the headlines. 2 – Offering investors a solution is always better than simply kick them out. 3 – Cash is also a solution. In some cases, probably the best.

I hope this GS example helps you with your next fund “liquidation”.

Yours faithfully,

The Indeep Fund Director


Chinese shake

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Dear Fund Director,

Just in case the Greek turmoil headlines are hiding some other matters in current financial markets, I would like to inform you about the big sell-off in the Chinese stock market, about -20% in the last 5 days, and propose some questions you may pose to your managers.

According to data compiled by Bloomberg, almost 200 stocks halted trading after the close on Monday, bringing the total number of suspensions to 745, or 26 percent of listed firms on mainland exchanges. Most of the halts are by companies listed in Shenzhen, which is dominated by smaller businesses.

In this sense, I would suggest that you gather information about the impact in the funds under your mandate in 4 ways:

1 – Which is the exposure of the funds to these markets?

2 – Which has been the impact on performance due to these stocks during these last days (weeks, months)?

3 – In which way will the suspension of trading in terms of fund valuation be handled?

4 – What is the fund manager’s opinion on this matter and what is he planning to do in each scenario?

Having said that, find below an interesting chart and link to Bloomberg on the rise and fall of China’s Equity Market and the policies carried out during these last months for a better understanding to the matter.


Yours faithfully,
The Indeep Fund Director

4 key controls to follow as a Fund Director for a Synthetic ETF

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Dear Fund Director,

It is not very common to be a Fund Director of an ETF however, some of you may be in this position now or in the future. In this case, I would like to introduce to you 4 key elements which you should follow closely during your mandate:

1 –  Counterparty risk. The synthetic ETF’s are based on the fact that there is a Swap agreement with a counterpart which is the main driver of performance tracking with the index we intend to follow. See this explanatory document by Vanguard. In this sense, following counterparty risk is key in these funds specially in case of UCITS, where UCITS Directive states that the risk exposure to a counterparty in an OTC derivative transaction shall not exceed 5% of the assets of UCITS, or 10% when the counterparty is a credit institution. Apart from that, there is the EMIR issue that will be developed in next posts. In this sense, it may be worthwhile to pose questions to the risk managers about this issue.

2 – Tracking error. Tracking error is a measure of how closely an ETF follows the index to which it is benchmarked. As this is key for investors looking for Beta, there are public comparisons. It can be a good idea to ask the investment managers which is our historical tracking error for our ETFs.

3 – Costs. Sources of cost may vary: transaction costs, management fees, swap costs. However we must ensure that our ETFs are competitive. What about asking our business developers about the costs of our competitors? Be sure that our potential investors will check this as well.

4 – Liquidity. Investors like liquidity, specially in these days of volatility. Usually asset managers appoint market makers which ensure liquidity and a narrow bid-ask spread. Posing questions on how good our ETFs are ranked in comparison to our competitors with regards to the bid-ask spread will be a good measure to know if our market maker providers are performing well.

I hope this helps.

Yours faithfully,

The Indeep Fund Director.

NAV calculation errors review

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Dear Fund Director,

Have you checked NAV calculation errors in your funds during these first six months? Probably no fund has got a NAV calculation error over the regulatory or internal thresholds. These thresholds may vary depending on the jurisdiction and the administration company. Generally, management companies’ thresholds tend to be much less high tolerance than the regulatory ones. Make sure you have the latest version of material impact for each of the funds. For example in Luxembourg for each of these types of UCIs the tolerance threshold is specified hereunder:

money market UCIs/cash funds: 0.25% of NAV

bond UCIs: 0.50% of NAV

shares and other financial assets’ UCIs: 1.00% of NAV

mixed UCIs: 0.50% of NAV

It could be interesting to analyze which of your funds have been the ones with more NAV calculation errors and the causes. To improve this area of risk will diminish a lot the liability risk of the Management Company and the Board of Directors.

Ensure also that the internal procedures to be followed once a material impact has been detected are clear and in compliance with the latest regulations.

Yours faithfully,

The Indeep Fund Director

Graccident or Greek fright

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Dear Fund Director,

Yes, the markets in Europe fell more than 4% today due to the new episode of the Greek crisis. Last week they jumped more than 5%. Volatility has increased recently a cause this matter. We have seen thousand of headlines in the front pages of all newspapers, as Mr. El-Erian shares in this post in FT.

I hope you have already posed some questions on the impact of this matter on the funds. Otherwise, I would suggest to question the fund managers the impact so far, as well as their views and investment strategy for each of the future scenarios. Remember that it is not only an equity market related issue but it has also consequences in the EUR and the evolution of the European governmental fixed income.

Yours faithfully,

The Indeep Fund Director