This article is being written on the road from Brazil. This was my seventh trip here in three years but my first since joining the Capital International Group in July this year. Many view emerging markets as high risk and dangerous places; whilst there are areas of São Paulo that one perhaps wouldn’t wish to explore, it is also a most vibrant and remarkable city. With a population of 25m, it is quite a contrast from the tranquility of the Isle of Man.
The purpose of this trip was to attend the STEP LatAm Conference and to fly the flag for the Capital International Group.
The conference is being attended by 430 trustees, private client lawyers, tax advisors and one or two private banks and investment managers. I am the only representative from the Isle of Man and there are less folk from Jersey or Guernsey than in previous years.
There are attendees here from Argentina, Chile, Peru, Ecuador and Colombia. Then there are delegates from the Caribbean with Cayman, Bermuda, Bahamas, BVI and Barbados all in attendance. The latter are a crowd that I have gotten to know well in recent years through trips to their islands and the conference scene.
The fiduciary professionals from each of these jurisdictions all have much in common; they have private clients from Latin American countries and they share the challenges of preserving their clients’ wealth in volatile domestic and global market conditions. This task is made all the harder by the traditional private banks and global investment managers stepping away from the market in recent years.
There is a common misconception that all clients in emerging markets are high risk. Yes, some are high risk and as elsewhere, there are politically exposed persons but there are also plenty of wealthy clients. Were these clients living in developed markets, they would have no difficulty in opening a simple bank account or establishing an investment portfolio.
This has created an opportunity for a business like the Capital International Group to provide investment and cash management solutions to the trustees that have underlying clients from the region.
Our experience of managing portfolios for clients in South Africa has many parallels with clients from LatAm. Clients in both jurisdictions experience domestic political uncertainty, currency volatility (the Brazilian real has depreciated approx. 15% compared to the USD year to date), as well as the more basic security challenges that come with living in an emerging market.
From an equity markets perspective, the BOVESPA is up 20.6% year to date (as at 22.10.19), a stellar year for Brazil and an endorsement of the reforms being pushed through by Brazil’s Economy Minister, Paulo Guedes. However, when you factor in the currency depreciation and inflation of approx. 3% (see chart below), that equates to a low single digit return of approx. 2%.
‘The annual inflation rate in Brazil dropped to 2.89 percent in September 2019 from 3.43 percent in August and below market forecasts of 2.97 percent. It was the lowest inflation rate since May last year, amid a slowdown in cost of food & non-alcoholic beverages, transport and housing. Inflation Rate in Brazil averaged 342.11 percent from 1980 until 2019, reaching an all time high of 6821.31 percent in April of 1990 and a record low of 1.65 percent in December of 1998.’ (Source: TRADINGECONOMICS.COM)
From a historic perspective one can understand why the spectre of inflation is a primary concern for wealthy clients holding the majority of their wealth in Brazilian real.
Interestingly, interest rates have dropped significantly in Brazil to a historic low of 5.5% in September as part of their programme of economic reforms, as illustrated in the chart below:
One consequence of this is that wealthy clients who used to be able to earn 1% per month are now looking to international markets for growth. The typical ratio for HNW private clients is a split of 90/10 domestic vs. international portfolios; there is now a concerted effort to achieve a more balanced approach.
Most of the trustees and advisors attending the conference specialise in providing solutions to assist HNW LatAm clients in establishing international structures as their ‘Plan B’. These clients love their home countries but at the same time wish to create a backup plan should domestic circumstances take a turn for the worse.
These solutions range from trusts, companies and foundations to family office solutions for more significant wealth. You always learn something new at these conferences and one theme that has come to the fore on this occasion is the use of funds for the management of family wealth. I was sat in one breakaway session where a representative of the Bahamas fund industry was explaining the various structuring solutions that can be used for this purpose.
One can’t help but wonder whether the Isle of Man funds industry could look to pivot to the family wealth market in an attempt to revive what has become a smaller sector over the past two decades.
The stability, security and apolitical landscape of the Isle of Man makes it a compelling jurisdiction in which fiduciary professionals with clients from emerging markets can establish an international portfolio. The challenge is getting a message to the wider-world that we are open for business.
If we are to grow meaningful business from LatAm markets, we have to go in with eyes wide open from a regulatory and risk perspective, as do the trustees and corporate service providers who may ultimately become our clients. We are cognisant of the changing and challenging regulatory and operational issues that trustees are managing. We are also aware that the provision of services to trustees with clients from emerging markets has become more difficult particularly for sub $10m accounts.
The Chairman of the Cayman Branch of STEP delivered a speech entitled ‘Trustees as Compliance Detectives’. The subject speaks to our belief at the Capital International Group that if a regulated trustee knows their client, then we as a regulated Investment Business can take comfort in that and can offer our services safe in the knowledge that our client (the trustees) are fulfilling their responsibilities. This is a distinction that many of the larger private banks and investment businesses do not seem to comprehend.
CRS and FATCA have now become normalised; clients now expect to fulfil whatever due diligence requirements are needed by their professional service providers. The latest challenge the industry is facing and a major topic at this conference is substance. What is meant by substance? Without going into too much technical detail, it is in essence a means by which the OECD and EU are trying to ensure that entities registered in International Financial Centres are not just a brass plaque, that core income generating activities (CIGA) are undertaken in the jurisdiction in relation to the relevant activity and that businesses are adhering to global standards.
Substance will soon become part of normal processes. The Isle of Man trust and corporate service providers therefore have an opportunity to position our island as part of the solution. Blessed with experienced staff, as a jurisdiction we possess the expertise that international clients are seeking in order to meet these international standards.
Trustees are always trying to balance privacy and public scrutiny. This is a fine art, particularly for clients in emerging markets where the public safety of family members remains of primary importance.
Building a credible and thorough due diligence story for each client has become a key service and responsibility of trustees when they take on a new client. This story is constantly being updated and extended over the life of client structures, creating a robust track record that enables smooth transactions across multiple jurisdictions and counter parties.
On my return flight from São Paulo to Heathrow I watched the cinematic dramatisation of the Panama Papers, ‘Laundromat’, staring Antonio Banderas and Gary Oldman as the two unscrupulous lawyers from Mossack Fonseca as well as Meryl Streep and David Schwimmer as the societal victims of offshore companies without substance.
Whilst an entertaining film, it misses the mark in many ways by playing to an audience across the onshore world who would love to see IFCs fail. The media like to focus on the bad apples. This makes it all the more important to ensure that the reputations of our island and the Capital International Group are maintained through relationships with competent fiduciary, tax and legal professionals.
Attending STEP Conferences enables us to engage with the best practitioners and to nurture relationships that can bring growth to our island. In November I will be embarking on a similar trip to attend the STEP Asia Conference in Singapore and look forward to flying the flag for the Capital International Group and continuing my quest for business from distant lands.
Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.