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SPIVA Europe Scorecard Mid-Year 2014: How Have Active Managers Fared in Europe?

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This article is sponsored by S&P Dow Jones Indices.

The active-versus-passive debate has been raging for years and, with strong opinions on both sides, this issue is likely to remain contentious. As a scorekeeper in this debate, S&P Dow Jones Indices (S&P DJI) has been publishing the S&P Indices Versus Active (SPIVA®) Scorecard since 2002. The scorecard compares the performance of actively managed mutual funds across various market capitalizations and styles, to that of their corresponding benchmarks.

While results differ from year to year, the reports across different regions highlight how difficult it is for active fund managers to consistently beat their benchmarks over the long run. Moreover, it challenges the conventional view that active managers deliver the best performance in turbulent market environments, like the conditions we have experienced in recent years.

The latest results in the SPIVA® Europe Mid-Year 2014 Scorecard show that a similar pattern has played out among euro-denominated funds in Europe. About 74% of Eurozone equity funds and European equity funds failed to keep pace with their benchmarks over a five-year time horizon. But of all the fund categories examined, active funds invested in global markets were the worst performers. Over 75% of these active strategies underperformed their benchmarks over a one-year period, and staggeringly, more than 90% trailed their benchmark indices over three-year and five-year periods. This streak of underpar performance was not limited only to euro-denominated European equity funds. Both emerging market and U.S. fund managers lagged their benchmarks substantially over medium- to long-term horizons.

There was one notable exception where active managers on the whole performed well. This was in the GBP-denominated U.K. large- and mid-cap space. Over a one-year period, just under 60% of U.K. large- and mid-cap equities posted a better performance than their benchmarks. However, this tremendous result was not repeated in the international fund GBP-denominated categories. Over 65% of global funds, over 56% of emerging market funds and over 49% of U.S. equity funds failed to keep pace with their benchmarks over the past year.

S&P Indices Versus Active Funds (SPIVA) Europe Scorecard is available at. See the Scorecard

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Transforming Saudi Arabia’s Capital Markets

This article is sponsored by State Street.

KEY POINTS

– Vision 2030 and the Aramco privatization mark a decisive point to advance Saudi Arabia’s financial sector — a critical ingredient to the country’s economic transformation

– Saudi’s “Financial Triad” remains partially incomplete with a sound banking system and a rapidly emerging equity market, but an immature bond market.

– The privatization of Saudi state assets (including Aramco) could deliver a boost to the depth and sophistication of the Saudi equity market and — if cleverly designed— have positive spillover effects into other areas of finance and policy.

– The timing is ideal to launch an accompanying systematic drive to build local currency bond markets, which is a prerequisite for achieving the broader economic goals of Vision 2030.

Saudi Arabia’s Vision 2030 is remarkable in its aspiration to engineer far-reaching economic transformation. As a global asset manager, we note that one of the three pillars of this vision sets out the aim to make the country a “global investment powerhouse.” 1

While Saudi Arabia has a strong legacy as a sovereign investor in foreign markets, this ambition also requires its local financial system to deepen across all sectors. Strong capital markets work together with a banking system to channel investment and ensure efficient capital allocation across the economy. In the absence of such channels, many worthwhile business ventures never take place, capital is misallocated and underutilized, and economic growth remains below its potential.

To read the full study please click here.

1 Foreword to Vision 2030, http://vision2030.gov.sa/en/foreword.

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Sovereign Wealth Funds as a Driver of African Development

This article is sponsored by Quantum Global.

Sovereign wealth funds (SWFs) are becoming important sources of development in many countries. African SWFs have been growing in recent years, as many countries joined the international trend in establishing SWFs, while many others are preparing to join. Growth of SWFs has been driven by rising commodity prices until 2014 and improving economic growth rates. At the same time, Africa continues to face a number of development challenges, raising the question of whether SWFs can play a role in fostering economic development on the continent. This paper analyses the dynamics and role of SWFs in promoting development in Africa. The paper notes that SWFs can play a more active role in Africa’s development by bridging the infrastructure funding gap, supporting industrial development and economic diversification, reducing macroeconomic volatility and enhancing intergenerational equity. For SWFs to be effective in delivering their mandates and supporting economic development, they need to have clear goals and objectives, improve their governance and transparency frameworks, improve their risk management frameworks and embrace the Santiago Principles. African governments need to develop more attractive frameworks and climates for SWFs to invest in the continent, especially in sectors that contribute more directly to addressing Africa’s development needs.

To read the full study please click here.

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Collateral: The New Performance Driver

This article is sponsored by BNY Mellon.

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In 2017, the global buy-side community faces considerable liquidity and funding pressures, stemming from market and regulatory reforms that are causing disruption. As a result, access to high-quality collateral, funding and liquidity is not only a pressing concern but has emerged as the essential new performance driver for the buy-side.

This disruption is the result of two opposing forces. Stringent regulatory requirements are forcing market participants to seek collateral — generally of high quality — in order to secure trading exposures. At the same time, the sell-side — or dealer-sponsored financial plumbing used to supply liquidity and collateral to the market — is experiencing challenges due to Basel III capital and liquidity constraints.

A major concern among multiple buy-side firms is that the next market-stress event will occur not because of a lack of collateral in the financial system but rather due to the inaccessibility of this collateral.¹ This scenario is forcing firms to reevaluate their collateralized trading portfolios, recalibrate asset allocation strategies and in some cases review the investment products offered to end clients.

This paper presents the findings from BNY Mellon–PwC outreach to senior buy-side executives from over 120 global firms conducted during the first quarter of 2017. It provides insights on demand-supply imbalances that are being experienced by buyside firms and the possible solutions they are exploring in response to fears that ready access to liquidity and high-quality collateral may become scarce in the years ahead.

The picture that emerged from these discussions was one of a buy-side community both grappling to adjust to its new collateralized trading obligations as well as striving to secure access to sustainable sources of funding and liquidity.

To read the full study please click here.

1. Collateral can be inaccessible due to decreasing velocity of collateral, which indicates how much, on average, a single dollar of collateral is reused over a period of time. This is analogous to the concept of “velocity of money.”

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