03292017Wed
Last updateFri, 24 Mar 2017 12pm

 

Financial directors must embrace new opportunities, but also overcome old obstacles

69976727 m

By Jonathan Quin, CEO and co-founder at World First

Before the end of March, Theresa May will trigger Article 50 and set in chain a motion of events that will see the United Kingdom leave the European Union within two years.

The historic referendum result leaves our trading relationships with European nations in an uncertain position and UK businesses must be encouraged to adopt a more global mind-set and think beyond Europe. Financial directors will be tested over the coming months as they seek to navigate their business through economic uncertainty. Nevertheless, opportunities exist for businesses bold enough to look further afield for growth.

Whilst recent political events may suggest that individuals are turning away from globalisation, business owners will know that, increasingly, the future is international. Over the next few years, it will be those businesses that have looked for opportunities to expand, to develop new trade routes and access a new customer base that are most likely to succeed.

At World First we recently published a report with the CEBR to highlight the importance of Thinking Global for future SME exporting success. The report outlined 39 countries in Africa, Asia and the Middle East with a projected annual growth of at least 5% between 2010 and 2031.
Nevertheless as a nation, Britain lags behind its European counterparts when it comes to exporting and our economy has felt the impact of a significant trade deficit.

So what's behind such a reluctance from businesses to expand into new markets?

Although there is ample opportunity for expansion into new and emerging markets, barriers must be overcome to facilitate new trading relationships. Some barriers are established and long-standing issues that businesses often encounter when exporting to new markets such as language barriers or cultural differences in how business is conducted. Others are more market-specific such as in Asia where payments can be difficult to manage with the need to set-up new bank accounts and comply with local identification requirements just two obstacles to fast and efficient transactions.

Other challenges are much more technology driven and centre around how businesses can take advantage of multi-channel opportunities and digital marketplaces. These changes have provided consumers with the ability to purchase and receive products from anywhere in the world and digital businesses such as Amazon and Alibaba have ridden this wave of innovation to become some of the largest companies on the planet.

In parallel to this, technological innovation has pervaded our financial services system with international payments able to be conducted seamlessly across multiple borders. Businesses can now manage their supply chain more quickly, easily and from remote locations. They can now pay suppliers through mobile and web applications, rather than the long-drawn out processes of yesteryear.

Crucially, as the tectonic plates of the world's political and economic landscape continue to shift, finance directors across the UK must embrace technological innovation to drive growth and continue to thrive in an increasingly competitive and global marketplace.

https://www.worldfirst.com/uk/


Fund management mega merger shows the easyJet effect is hitting the City

44816120 m

By John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of Warwick

Some of the financial sector's biggest firms are feeling the pinch. The rise of low-cost investment products which simply track markets is forcing some dramatic moves and the proposed £11 billion merger of Standard Life and Aberdeen Asset Management is only the latest evidence of the shift. You see, even the City is not immune to the basic laws of strategy and fund managers are failing to add enough value to justify the cost of their services.

You might think the investment industry is closed off to most people. But if you have a company pension it is likely to be invested with one or more of the big fund management firms. And one of the choices the people managing our pensions have to make is whether to choose active or passive products.

In the case of an equity fund, an active product will have a team of well-paid managers who research companies and pick stocks in the hope of outperforming a benchmark. For UK stocks, it's often the FTSE 100 index of top companies. A passive fund, meanwhile, will simply try to mimic the FTSE 100's performance by making sure its holdings match that index as closely as possible.

The choice is simple then. Pay a big fee to managers who will try to beat the index, but who might fail miserably, or pay a small fee for a product that essentially guarantees you will only very slightly underperform the index (you have to account for the costs). The problem for the investment industry is that people are now opting for the latter in droves. The growing diversity and popularity of tracker funds, alongside evidence to support their relative performance, has reached a tipping point which is prompting major changes.

As profits come under threat, more firms will doubtless follow Standard Life and Aberdeen, whilst others have already jumped. UK firm Henderson and US group Janus Capital announced their merger last year, as did France's Amundi and Italy's Pioneer as they sought to rationalise product ranges and cut administration costs. Standard Life and Aberdeen are keen not to announce cost savings targets, but have dismissed some estimates that 1,000 Scottish jobs will go to save £200m. It is likely that some front line fund managers will end up losing their jobs, too, as funds are merged.

The combined firm will have about £660 billion under management but may struggle to hang on to it. Mergers tend to make people nervous and there are likely to be some withdrawals of money. The UK industry's biggest player, Legal and General, has £900 billion under management, much of it in passive tracker funds, and is likely to be one of the main beneficiaries. Those investor nerves may be sharpened by concerns over the co-CEO appointments in the Standard Life/Aberdeen deal.

The attempt to incorporate both Standard Life's Keith Skeoch and Aberdeen's Martin Gilbert into the plans is likely to result in a lack of leadership and infighting from respective factions. Such "mergers of equals" rarely do well. Take the infamous Chrysler/Daimler merger in 1995 and more recently the 2015 merger of cement giants Lafarge and Holcim. Success can come when one party begins to assert control, but that can take time.

This industry trend is a worldwide phenomenon. Research suggests that at least four out of five active funds fail to outperform trackers once costs are factored in. Fund mergers and rationalisation will sweep world markets as firms wrestle with the changing dynamics.
In the UK, passive tracker funds have taken around 20% of the near-£6 trillion market as of end-2015, which means they still have 80% to aim for. Only the best performing active funds will survive the challenge and be able to justify fees that tend to be five times greater than their passive rivals.

We can find some clues to the future in similar events in other industries. The rise of "no frills" airlines like easyJet proved that the one-time ubiquitous full service airlines were charging for things passengers didn't need or want.

More recently, German discount retailers Aldi and Lidl, with their smaller stores and ranges in lower cost parts of town, have demonstrated that many customers do not wish to pay for huge grocery product ranges and large expensive stores. The tipping point has arrived and prices have permanently crashed in the supermarket industry. Primark and other discounters are doing it in clothing retail. Ikea has changed the furniture industry.

We have just seen the start of this kind of revolutionary change for the industry which manages our pension savings and much else besides. Fund managers who cannot consistently outperform trackers should start considering their employment options now. And hopefully it won't just be City bankers who benefit as a wave of mergers generates bumper fees – investors should end up getting a better deal, too.

This article first appeared on The Conversation

https://theconversation.com/uk

Standard Life to merge with Aberdeen Asset Management

fsdfsdasdfa

Standard Life and Aberdeen Asset Management have agreed terms on an £11 billion merger that will create one of the world's industry powerhouses, overseeing £660 billion worth of global assets.

Under the terms of the potential merger, Aberdeen shareholders would own 33.3% and Standard Life shareholders would own 66.7% of the combined group. However, it is thought several hundred jobs are at risk in Scotland and in the City as the duo pointed to cost savings that could add up to £200 million.

Keith Skeoch, chief executive of Standard Life, said: "We strongly believe that we can build on the strength of the existing Standard Life business by combining with Aberdeen to create one of the largest active investment managers in the world and deliver significant value for all of our stakeholders."

Following completion of the merger, which values Aberdeen at £3.8 billion, Standard Life chairman Sir Gerry Grimstone will become chairman of the combined entity. Skeoch and Aberdeen boss Martin Gilbert will become co-chief executives of the new firm.

The new firm will have its headquarters in Scotland and Gilbert said the move will enable the enlarged business to "compete effectively on the global stage".

Standard Life employs over 8,000 and Aberdeen has over 2,800 staff. Shares in Standard Life rose 7% in morning trading, while Aberdeen was up 5.3%.

Budget 2017 at a glance

pound-news-philip-hammond-uk-spring-budget-2017-856021

Economy

The Office for Budget Responsibility has upgraded its growth forecasts for the UK economy this year from 1.4% to 2%, while public sector borrowing estimates have been slashed by billions of pounds and real wages will rise through to 2020. But Chancellor Philip Hammond signalled there will be no end to austerity.

Business rates

A package of relief totalling £435 million was announced for small businesses. Firms losing small business rate relief will have their monthly increase capped at £50 for a year, some 90% of pubs will be given a £1,000 discount on business rates in 2017, and councils will be given a £300 million fund to deliver relief to small businesses.

Transport

Transport spending of £90 million for the north and £23 million for the midlands was announced to address pinch points on roads, and a new £690 million competition for English councils to tackle urban congestion.

NHS

Hospitals will get £325 million to implement their sustainability and transformation plans and another £100 million will be put into a new triaging projects in England to help free up hospital beds.

Social care

The crisis-hit social care system will have another £3 billion pumped into it over the next three years, with £1 billion of this available in 2017/18. Hammond ruled out a new "death tax" to fund social care.

Education

Another 110 new free schools will be opened, including a new generation of grammars. Free school transport will be given to children on free school meals who attend a grammar, and £216 million will go into repairing existing schools. New T-levels will be created to improve vocational education, the hours for technical training will be increased and new university-style maintenance loans will be available.

Cigarettes and alcohol

There was no change to previously planned upratings of duties on alcohol and tobacco, but a new minimum excise duty will be introduced on cigarettes based on a packet price of £7.35.

Taxes

Higher paid self-employed workers are to pay an average of 60p a week more in National Insurance contributions as part of changes to raise an extra £145 million by 2021-22.

Will any country adopt the new Euro?

51704298 m

By Ben Barlow

There are currently 19 member nations of the Eurozone using the euro, with Lithuania the latest to adopt the currency at the beginning of 2015. Technically, adopting the euro is a mandatory condition of EU membership, which means there should be nine nations preparing to embrace the currency. However, Denmark and the UK obtained special opt-outs and Sweden has avoided fulfilling adoption requirements. Given the Greek financial crisis, Brexit vote and ongoing EU uncertainty, there may never be another new country to use the euro.

Existing Members Due to Adopt the Euro

Aside from Denmark and the UK (which is set to leave the EU by 2019 anyway) there are seven countries due to adopt the euro one day. Convergence criteria must be fulfilled before using the euro, which includes joining the European Exchange Rate Mechanism II (ERM) for at least two years. As this is voluntary, Sweden has avoided doing so, especially after Swedish citizens voted against using the euro in a 2004 referendum.

Of the other six countries, all have joined the EU from 2004 onwards. That is the same year the likes of Lithuania, Slovakia, Latvia and more did as well, all of which successfully use the euro, which suggests uncertainty is why some of them have not yet taken up the euro.

According to a survey by the European Commission, the citizens of Romania, Hungary and Croatia all support introducing the euro. Yet in the Czech Republic, Poland and Bulgaria they are against its adoption. The overall results showed a 4% decrease in support from 2015, with Romania and Hungary the two most likely existing EU countries to introduce the currency next.

Countries Hoping to Join the EU

From 2020 the Telegraph reports that all EU members will have to adopt the euro. There are currently a few candidate countries hoping to join the EU and presumably use the euro in the coming years. These are Albania, Macedonia, Montenegro, Serbia and Turkey. Negotiations are underway already for some of them to join, while Bosnia and Herzegovina and Kosovo are also listed as potential candidates.

Despite not being an EU member, Montenegro and Kosovo have already adopted the euro as their currency upon independence. This could represent a further expansion for the euro, if more nations outside of the EU and Eurozone adopt the currency unilaterally instead. For the likes of Albania and Macedonia, it may be a great way to ensure economic stability.

Various factors such as the ongoing Brexit negotiations, upcoming general elections in France, Germany and The Netherlands and any future financial crises (such as happened in Greece) could put them off introducing the euro. These are the main elements that lead many to doubt another country will take up the euro.

How New Adopters Would Affect Euro Value

For Oanda forex traders, the possibility of a new country adopting the euro will affect its value, at least in the short-term. When Lithuania began using the euro, there was little change in the currency's value despite this strengthening of the Eurozone. As a relatively small nation and population, there may have been a minor movement but nothing too significant.

Only if a few countries with large populations and GDPs join at once would there be a big boost to its value. Even then, with Brexit set for 2019, by the time any other country adopts the euro any positive effect would likely be offset by the UK leaving the EU and the uncertainty this would provide for the markets.

At the moment, it seems unlikely that any other country will adopt the euro in the next couple of years, but there is still the possibility another will in the longer term.


Subscribe to the magazine

We aim to advise you of the most up-to-date issues faced by major corporations and leading finance directors, in the form of interesting articles and individual stories.

If you are interested in subscribing to the Director of Finance magazine, register your details here.

Latest News

Most Read

Follow Us On Twitter