2 April 2013

Theo Vermaelen: Beating the Market through Share Buybacks

Theo Vermaelen, professor of finance at INSEAD

The “buyback anomaly” is a global phenomenon whereby long-term investors can generate significant alpha through a structured investment strategy, says Theo Vermaelen, professor of finance at INSEAD, during the recent CFA Institute Middle East Investment Conference. Vermaelen gave an analysis of the U.S. market and provided insight on how, when, and which companies can maximize their returns using buybacks.

Vermaelen explained that there are four primary ways to buy back shares. In a fixed-price tender offer and a Dutch auction tender offer companies typically would have to pay a premium to buy back shares and so these types of transactions are rarely used. The private repurchase method is used when a large shareholder wants to sell their shares and approaches the company. The most common and widely used buyback method is the open market repurchase. In an open market repurchase, when a company announces it will buy back its share, it does not translate into a firm commitment on the company’s end, and there is no premium to be paid.

Vermaelen says that in recent years the buybacks in the rest of the world started catching up with the United States because of changes in regulation and tax laws that provided greater shareholder value. But he believes the most important reason is the adoption of executive stock option plans.

Read More

tagged:

29 March 2013

Islamic Finance is Growing Fast but Faces the Form-Versus-Substance Debate

Ibrahim Warde, adjunct professor of international business at the Fletcher School of Law and Diplomacy at Tufts University

Speaking at the CFA Institute Middle East Investment Conference in Dubai, Ibrahim Warde, adjunct professor at Tufts University in the United States and a noted author on Islamic finance, argued that since the 1990s, Islamic finance has gained much more international acceptability but that it continues to grapple with the fundamental form-versus-substance debate.

With the current size of the Islamic finance market at over 1.3 trillion U.S. dollars, Warde believes “it is not an exaggeration to say that in the world of finance, the fastest growing segment is Islamic finance.” The data he shared showed that assets of the Islamic financial sector grew by 21% in 2006, 29% in 2007, 16% in 2008, 18% in 2009, 22% in 2010, 20% in 2011, and an estimated 24% in 2012. He said that in some markets, such as Malaysia, Islamic finance has appeal beyond Muslims; many non-Muslim Malaysians, of Chinese and Indian origin, are both customers and staff of Malaysian Islamic financial institutions.

Historically, Warde explained, religion has had much to do with finance, and all three Abrahamic faiths — Judaism, Christianity, and Islam — have had somewhat similar teachings on finance. Also, some secular perspectives, such as that of Aristotle, have also considered money to be sterile and “making money from money” (that is, without asset and enterprise) as problematic. He was of the view that in the heyday of conventional finance, prior to the financial crisis, ideas such as the role of religion in finance and any alternative financial system were considered needless. He added that the crisis has exposed the weaknesses of the current financial system and there has been “public outrage over excesses and support for more conservative and ethical finance.”

Read More

28 March 2013

Peter Zeihan: The World Should Watch Out for a Shift in U.S. Foreign and Economic Policy

Peter Zeihan, geopolitical analyst

At the CFA Institute Middle East Investment Conference held in Dubai on 20–21 March, Peter Zeihan, an expert in international politics, economics, and energy gave us his insights on geopolitical factors emerging on the global stage. In particular, Zeihan focused on the United States, which he believes could have a direct and substantial impact on investment strategies for the Middle East.

A central theme in Zeihan’s thesis was a perceived shift in U.S. foreign and economic policy based on the gradual realisation that through the United States’ energy supply chain in Canada, and its increasing production of shale oil, North America has the capacity to become energy self-sufficient by 2020.

Statistics shared with an increasingly intrigued audience included:

  • 50% of all natural gas as produced in the United States is from shale oil
  • Texas supplies 25% of Mexico’s natural gas and this will rise to 50% in the next five years
  • New York has moved from zero natural gas usage a year ago to using nine billion cubic meters today — in the space of 12 months (a consumption greater than Belgium’s)

Read More

tagged:

26 March 2013

Avinash Persaud: Who Will Win the Currency Wars?

Avinash Persaud, chairman at Intelligence Capital Limited

“Who will win the currency wars — the Americans or the Chinese?” asks risk expert and chairman at Intelligence Capital Limited, Avinash Persaud, at the CFA Institute Middle East Investment Conference. Currency wars, such as the “beggar-thy-neighbour” policies of the 1930s, might be thought of as domestic responses to domestic problems, but Persaud argues they are actually undeclared phoney wars on other countries with serious implications.

“Devaluation provides no long-term solution,” said Persaud. The same countries deploying the devaluation weapon also have the smallest manufacturing export sector and, when faced with difficulties, have elected to devalue. In contrast, the euro has forced countries to make decisions they have been deferring for too long. Decision makers on policy and their policies matter. “People on the sell side underestimate importance of policy and neglect the implications of policy,” he added.

Persaud believes we are facing an age of volatility. In this new age, currency management becomes more costly and more important to returns. “The strongest economies in the world are those with the lowest interest rates,” said Persaud, “What drives currency is not growth or interest rates; it is inflation.” He stated that the key policies that matter are those that contribute to low inflation and how inflation divides up the cake between creditors and debtors. Inflation is highly political, determining the allocation of wealth in a country.

Read More

tagged:

25 March 2013

Impact Investing: Making a Financial and Social Return

Dr. Harry Hummels

All investments can have a positive impact on society and the environment, but what distinguishes impact investments is their disclosed intention to make a positive impact and the fact that their impact is measured. This is how Dr. Harry Hummels, professor of ethics, organisations, and society at Maastricht University and managing director at SNS Impact Investing, explained impact investing to an attentive audience of investment professionals at the CFA Institute Middle East Investment Conference in Dubai on 20–21 March 2013.

Dr. Hummels stated that impact investments are “made into companies, organisations and funds with the intention to generate measurable social and environmental impact alongside a financial return. They can be made in both emerging and developed markets, and target a range of returns from below market to market rate.”

He emphasised that impact investing is not philanthropy; it is about making both a financial return and a positive impact. This is why it is not confined to religious foundations and charities but is also appropriate for institutional investors, like pension funds and insurance companies, seeking competitive returns. Some of the recurring sectors invested in are agriculture, microfinance, renewable energy, small and medium enterprises (SMEs), healthcare, green real estate, and community development. Some of the recurring asset classes are private equity, venture capital, private debt, and real estate. Having said that, he clarified that impact investing is also not confined to any particular investment sector or asset class.

Read More

tagged:

22 March 2013

Malik and Awadallah: Economic Fragmentation of the Arab World

Adeel Malik and Bassem Awadallah

At the recent CFA Institute Middle East Investment Conference, hosted in the modern economic miracle that is Dubai, Adeel Malik from the University of Oxford and Bassem Awadallah, founder and CEO of Tomoh Advisory, analysed the deep roots of the relative economic failure of the wider Arab world. Their diagnosis and proposed reform held the audience spellbound.  Against the backdrop of the Arab Spring and the tragic implosion of Syria, their message held an urgency.

Their argument, based on their paper “The Economics of the Arab Spring“, is that the political economy of the Middle East and North Africa (MENA) region has allowed the centralisation of much political and economic power, leading to a weak private sector, low productivity, and anaemic intra-regional trade. Combined with a population spurt, this mix has led to high youth unemployment and the pressure for social unrest.

Malik and Awadallah believe the source of the malaise lies in the centralisation of the state, with its interests served by a strong public sector, and that the state became the “provider of first and last resort” for food, housing, utilities, and jobs. A stream of external revenues through oil, aid, or remittances funded such a structure, with little need to develop the private sector. They stated that these rents have distorted economic incentives so that returns to patronage are higher than returns to production.

While such a situation was maintained for a long time, they argued that a new factor has made it more precarious.  The resources of the state are being stretched by a fast growing population.  The public sector cannot create the extra jobs needed, nor provide the expected subsidies. As a result, they think the prevailing economic model is not sustainable.

Read More

tagged:

21 March 2013

Anil Gaba: How to Make Better Investment Decisions under Uncertainty

Anil Gaba, chaired professor of risk management at INSEAD

Anil Gaba, chaired professor of risk management at INSEAD, gave the CFA Institute Middle East Investment Conference a range of practical pointers to help navigate the difficult process of making decisions under conditions of uncertainty.

Gaba began by questioning popular usage of the expression “black swan,” the term coined by Nassim Nicholas Taleb to mean a rare event that is not only completely unexpected but also difficult to imagine in advance, in other words, suggesting we could be forgiven for failing to forecast it. Gaba is not so convinced that some events are totally unpredictable. Instead, he says he finds predictability everywhere, especially in finance and financial models, which he is almost weary of poking fun at. Complex models regularly have less predictive power to interpret uncertainty than even simple judgments.

Gaba argues that much uncertainty can be usefully reduced to “subway uncertainty” or “coconut uncertainty.” Subway uncertainty captures that part of uncertainty that is fairly predictable — for example, the quantity of water that will be used by Dubai or London between certain hours of the day or the prospects of catching a subway train on time. Statistical properties in subway uncertainty are well-known and fall into specified limits.

Read More

tagged:

20 March 2013

Arnab Das: We Are Caught in a Trap of Excessive Debt

Arnab Das, managing director of research and investment strategy at Roubini Global Economics

Arnab Das, managing director of research and investment strategy at Roubini Global Economics, began his speech at the CFA Institute Middle East Investment Conference in Dubai, United Arab Emirates, by outlining a global debt crisis in which we are all caught in “this trap of excessive debt”.

Das argued that the most important parallel issues are the distribution between creditors and debtors and the balance between future and present economic activity. Central banks have sought a way out of the macroeconomic crisis by smoothing consumption through expanding public sector balance sheets. But debt, defined as spreading the cost of current investment over the future, has, as Ken Rogoff and Carmen Reinhart have pointed out, brought too much future activity to the present.

Creditor countries, such as Japan, Germany, China, and some Middle Eastern countries, are caught in the middle of this trap because their client states (countries they have lent money to) are so overleveraged. Yet money, Das says, is not the same thing as capital. Central banks have been “reflating assets as a way of maintaining wealth and mitigating liability problems,” but they are “unwilling to grapple with the fact that there is a liability problem because there is a redistributional problem”. This redistribution between creditors and debtors, between the present and future activity, has to be solved eventually.

Inflation is a key mechanism in this redistribution, but inflation is not about money alone: It is also about velocity and the multiplier. Das points out that over the financial crisis, the level of broad money has come down very sharply, along with velocity and the multiplier. Central banks have “smoothed out a drastic deleveraging that would otherwise have taken place,” Das said.

Read More

tagged:

Positive Change in the Investment Industry Must Start With All of Us

Nitin Mehta, CFA, speaking at the CFA Institute Middle East Investment Conference

Opening the Middle East Investment Conference in Dubai, Nitin Mehta, CFA, managing director of CFA Institute, EMEA; Yacoub Nuseibeh, CFA, president, CFA Society Emirates; and Obaid Saif Al Zaabi, Research Adviser, Securities & Commodities Authority, all spoke of the challenges facing investment professionals in the Middle East and the need for change.

Nitin Mehta, CFA, called on investment industry participants to drive a positive change in finance. Mehta stated that trust in the financial system has been badly broken and that change can start with the industry leaders, financial professionals, regulators, government agencies, and academics at the conference in Dubai. In fact, he argued change must start with all of us and quoted Mahatma Gandhi to reinforce this point: “Be the change that you want to see in the world.” Mehta encouraged the audience to engage with the “Future of Finance” project — a long-term global effort that CFA Institute has just launched to shape a trustworthy, forward-thinking financial industry that better serves society. And he emphasized the importance of the Middle East region as a financial hub in the global investment industry.

Read More

tagged:

Video: Yacoub Nuseibeh, CFA, on the Issues Facing Investment Professionals in the Middle East

In an interview at the kickoff of the fourth annual CFA Institute Middle East Investment Conference in Dubai, United Arab Emirates, Yacoub Nuseibeh, CFA, President, CFA Society Emirates, discusses the conference themes, some speakers, and the concerns on the minds of investment professionals in the region.

Nuseibeh highlights the key themes of the conference as being the economic outlook for the region, especially following the Arab Spring, Islamic finance, and also risk, which is an important topic for all investment professionals. Nuseibeh mentions he is looking forward to hearing Arnas Dab and the regulators’ panel, which he hopes will tackle the areas of regulatory enforcement and corporate governance. With political uncertainty in the region and global financial uncertainty, Nuseibeh believes investment professionals in the region face many issues, but he believes there will “always be opportunities and ways to navigate these storms.”

tagged: