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How Investors Are Leaving Billions on the Table

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This article is sponsored by Goal Group.

Written by Noah Wortman

Noah Wortman

Noah Wortman

The degree to which fund managers and custodians have a fiduciary responsibility to ensure that their clients have the opportunity to participate in securities class and collective redress actions is a hotly debated subject.

Securities class actions have been moving away from the relatively straightforward focus on a single judiciary – the US – to a multiple and complex series of legal systems throughout the world. This trend for global class actions has been induced largely by the 2010 US Supreme Court decision in Morrison v. National Australia Bank Ltd. The case limited the ability of non-US based investors in bringing securities class action claims within the US, and in some instances, US investors from bringing cases against non-US listed companies within the US. Since this ruling, investors are instead instigating class and collective redress actions in alternative and sometimes more flexible jurisdictions across the globe.

As a result, international companies listed on multiple exchanges are now defending themselves against securities class actions across multiple jurisdictions, in a climate of tightened regulations and fierce enforcement measures for governance standards.

Goal Group’s analysis shows that just under 24% of possible claims are still not being filed by eligible investors.

Fiduciary responsibility

Institutional investors, mutual fund companies, investment firms, brokerage firms (including investment advisors and their retail clients), hedge funds, custodians, trustees, endowments and foundations have contractual relationships with their clients. It can be argued that there is a moral duty of care to disclose to clients notice of class action settlement information and to determine their eligibility per the appropriate legal standard on a case-by-case basis.

It is likely that the sheer volume, and international variety, of tracking and participation will continue to rise throughout the next decade. As a result, it is important for institutional investors to have a regime in place to make sure they are monitoring and managing securities class actions and potential legal redress options across the world.

Keeping track of the opportunities to participate and the actions required to do so successfully can appear to be a complicated and daunting task – especially when class actions are spread across the globe and can vary in procedure and construction from country to country. However, this doesn’t have to be the case, and neither does participation require jumping straight into being an active litigant.

Participation can be successfully achieved by methodically monitoring, understanding and evaluating securities class and collective redress actions on a global scale. The following three-stage process provides a potential model.

The three-stage process

1. Monitoring and understanding
The first step towards more active participation is to regularly monitor securities class and collective redress actions pending around the world. Goal Group’s internal analysis shows that the typical European share portfolio is international, with the average weighting currently 60% in domestic shares and 40% in foreign shares. These weightings have been driving European shareholders’ awareness of the need to monitor securities class action lawsuits and collective redress actions filed across different jurisdictions and the various legislatures across the globe, as well as the development of mechanisms that promote investor protection.

Understanding the different jurisdictions and claims processes is key. Most jurisdictions outside the US require participants in a class or collective redress action to opt-in at the start of a case. Therefore, it is imperative that claims are lodged as soon as possible in order to secure rightful returns, especially as it can take five years or longer from case inception through to settlement and ultimate distribution of funds.

2. Evaluation
Investors should review and evaluate relevant securities in their portfolios that may have been exposed to corporate malfeasance and have been damaged as a result. This overall evaluation includes understanding the exposure and situation to the alleged wrongdoing and understanding the rights and options for getting involved.

3. Participation choice
Evaluation leads to making the choice between either passive participation in a class action – only submitting settlement claims in the first instance – and more active participation in seeking legal redress via participation in a class, collective or individual action, such as being a plaintiff/claimant in a case. It is worth noting that one course of action does not rule out the other: an investor could choose to participate passively before then moving towards active involvement.

US$ 2.02 billion of investors’ rightful returns will be ‘left on the table’ unclaimed each year by 2020.

Embracing cross-border opportunities

The process involved to participate in class actions can nevertheless be a complicated task that requires a great deal of time. As a result, custodians, trustees and fund managers have sometimes regarded the effort (and cost) to participate as disproportionate to the likely settlement payouts or recovery.

This is no longer the case, with a number of service providers automating the process of class action participation across a number of jurisdictions. On the other hand, despite the availability of such services, a number of investors are still not ensuring client participation in the non-US class actions, and there even remains a level of non-participation by eligible parties in US cases. Goal Group’s analysis shows that just under 24% of possible claims are still not being filed by eligible investors.

Moreover, it is predicted that global class action growth will mirror the growth of the US class action scene in the early part of the 21st century, with Goal Group research predicting that settlements in securities class actions outside the US will rise to US$ 8.3 billion per year by 2020. If these non- participation rates seen in the US are experienced in non-US activity, US$ 2.02 billion of investors’ rightful returns will be ‘left on the table’ unclaimed each year by 2020.

It is very much in the interests of investors and fiduciaries to claim back their rightful returns through securities class actions and other potential means of legal redress. Indeed, it could be argued that it is an integral part of fulfilling their duty to deliver value by promoting and safeguarding the interests of beneficiaries or clients over an appropriate time horizon. This extends to protecting the assets in their schemes, as well as demonstrating business integrity, financial transparency and strong corporate governance. Regardless of whether investors participate in class actions in an active role as a plaintiff/claimant, or in a passive role by joining an existing action, all investors should remain vigilant and monitor international opportunities to participate in actions to reclaim rightful returns.

In short, as the globalization of securities class actions in its various forms continue, all parties should acknowledge and embrace these cross-border opportunities in international jurisdictions and recover rightful earnings wherever possible.


About Goal Group
Goal Group is the world’s leading class actions and tax reclamation services specialist. With headquarters in London and offices in Philadelphia, New York, San Francisco, Melbourne and Hong Kong, Goal Group monitors client assets with a total value in excess of £8 trillion. It has a truly blue-chip client base including many of the world’s largest global custodians, asset managers, private banks, pension funds, local government authorities, hedge funds, investment banks, prime brokers, and fund managers spread widely across the Americas, EMEA and Asia Pacific.

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How Does Geopolitics Affect Financial Markets?

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This article is sponsored by State Street Global Advisors.

In Alexandre Dumas’s 1844 novel The Count of Monte Cristo, news of an impending cross-border revolution in Spain leads to financial panic among French investors. Some investors end up selling Spanish bonds at a great loss, only to see the price bounce back after the news proves to be erroneous.

Geopolitics matters to markets in the real world too and has been a major theme in 2018, as the post-war global order is dismantled and protectionism takes hold. But, as in Dumas’ tale, it can be hard for investors to know how to react to such uncertainty. In this paper, we examine attempts to assess the impact of geopolitics on markets and conduct our own analysis on how it plays out over different time periods. Our hope is that investors can use this analysis when considering how best to respond to future geopolitical events, in terms of both the risks and opportunities they may present.

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By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

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Through the looking glass

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This article is sponsored by Dominion.

The decision taken by the British Government to require the 14 British Overseas Territories (BOTs) to establish Public registers of the beneficial owners of Companies registered in these territories has so far created a divided reaction. The BOTs, have generally taken the view that it is grossly unfair for the UK Government to use ancient Constitutional rights to impose the new legislation whereas the Crown Dependencies who are not affected by this decision have unsurprisingly provided a more measured response. This is reflected by Deputy Gavin St Pier in statements very similar to those issued by Politicians in Jersey stating that ‘Guernsey will introduce a public register if that becomes the agreed global standard.’

Gavin St Pier’s words have I am sure been chosen carefully since the body that has the necessary authority to end this debate is The Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) that has been the multinational framework within which work in the area of transparency and exchange of information has been carried out by both OECD and non-OECD economies since 2000. The Global Forum is the only international body endorsed by the G20 on issues of transparency and Exchange of Information for tax purposes.

So what does the Global Forum have to say on this issue. Well, paragraph 14 of the report of the Plenary Meeting of the Global Forum held in Cameroon in November 2017 states ‘The second round of peer reviews launched in 2016 reflects the latest developments in international tax transparency, including the requirement to have beneficial ownership information which strengthens the fight against anonymous shell companies and the use of legal arrangements to conceal ownership of identity.’ So reasonably one might expect, this issue should already have been dealt with. Unfortunately not it seems. The information sharing framework created by the Global Forum is designed as an exchange of information programme between Governments. Information exchanged is not available to the Public. So therein lies the problem. Public disclosure of beneficial ownership, despite what paragraph 14 might say, does not appear to have been clarified by the Global Forum, leaving it to Governments, pressure groups and other Organisations around the World to set the Public Agenda on this thorny subject.

Hopefully at this years Plenary Meeting of the Global Forum guidance will be provided on this issue that will feed through into legislation in all Countries that have adopted CRS. In the Plenary Meeting in Cameroon it was noted that ‘Some Members expressed concern that the ongoing EU listing process (referring to a proposed blacklisting of certain jurisdictions by the EU) is occurring outside the framework of the Global Forum… Statements like this would not I imagine encourage the Crown Dependencies to make further comment on this issue or to take any specific action as the Global Forum is clearly through these remarks reinforcing it’s mandate granted to it by the G20. The direction of travel, if one considers EU anti-money laundering Directives and bodies such as the EITI of which the UK is an important Member, would appear to favour a new regime creating a framework for Public Disclosure but when and in what form all stakeholders in this process will just have to wait and see what develops and whether the Global Forum will opine and then issue model legislation on this important issue.

To read more on this subject please visit: expertsinwealth.com/globalregisters

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How Do Public Pension Funds Invest?

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This article is sponsored by State Street.

Public Pension Funds (PPFs) are highly idiosyncratic and distinct from other types of institutional investors. The universe of investors that fall within our definition of a PPF is numerous and varied. We count 115 institutions in 70 jurisdictions, diverse in geography and economic development. For the purposes of our study, we examined the top 16 funds whose assets constitute just over two-thirds of the total universe. Despite all the idiosyncrasies of PPFs, we have found some shared characteristics in the evolution of their asset allocation over the past decade.

According to our definition, PPFs held around $5.9 trillion in total assets of 2016 and over 4% of all publicly traded assets, making them a significant global investor group. In particular, given their preferences for specific asset classes, their share is disproportionate in some segments. For example, we estimate that by year-end 2016, PPFs owned over 7% of global tradeable fixed income assets (including 8% government bonds and over 13% of inflation-linked bonds) and over 3% of listed public equities.

Similar to other asset owners, PPFs have undertaken a major reallocation of assets over the past decade. However, the motivating driver has not only been the low yield environment, but also changing regulatory and macro policy settings, which either permitted or encouraged greater diversification along asset classes and geographical exposure.

In detail, the most dominant trend has been the move away from holding domestic (local currency) bonds; in their place, PPFs have redeployed assets towards equities and alternatives, with a small share also diverted into foreign bonds. These allocation trends have been almost universal despite a huge diversity of geography and economic development.

It is important to acknowledge how much this investor group has changed over the past decade, with the asset pool growing by over 40% in dollar terms, and even more if measured in local currencies. While some funds are still predominantly captive buyers of government debt, the bulk of PPFs have been transforming into financial institutions with independent firepower and income-generating capacity. The long-term trend towards more diversified fixed income portfolios is likely to continue, as is the shift towards taking on more risk via equity allocations, subject as ever to changes in market cycles. In this context, we expect most PPFs to not only continue taking on more risk overall, but to further internationalise their portfolios.

Finally, one consideration is that maturing funds catering for aging populations will have to make further adjustments to their asset allocations to account for changing cash flow directions and seek greater contributions and investment returns to bridge any funding gaps.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

Tracking Code: 2172159.1.1.GBL.RTL

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Disclaimer
By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

Authors
Elliot Hentov, Ph.D. Head of Policy and Research, Official Institutions Group Elliot_Hentov@ssga.com
Alexander Petrov Policy and Research, Official Institutions Group Alexander_Petrov@ssga.com
Sejal Odedra Business Analyst, Client Strategy, Official Institutions Group Sejal_Odedra@ssga.com

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