Matthew Feargrieve blog

airlines

Zurich Airport wins ACI Award

3:11 PM

CORONAVIRUS: Le Royaume-Uni ne sait pas Réagir

1:26 PM

aviation

AIRLINE BOSSES CASH IN ON CORONAVIRUS CRISIS

1:02 PM

CORONAVIRUS: EU Relaxes Landing Slot Rules

4:41 PM

EU Suspends Landing Slot Rules as COVID-19 Slams Airline Capacity

A British Airways flight, MXP to LCY, 9 March 2020.
BA have now suspended all flights between the UK and Italy.

Airlines operating routes in Coronavirus-stricken Europe have been flying ghost flights since the virus arrived in February. The UK's national carrier, British Airways, was reporting a 25% capacity hit around the middle of February, and it has not been alone in feeling the pain as capacity continues to get slammed.

Under EU rules, airlines operating out of Europe must run not less than 80 per cent of their flights on each slot, in order to maintain their hub presence and not forfeit slots to a competitor. This is the so-called “use-it-or-lose-it” rule. The continuing application of this rule by the EU has obliged airlines to run ghost flights, with only a handful of passengers aboard, at the cost of thousands of gallons of aviation fuel.

Following representations by the UK government to the European Commission, the EU headquarters in Brussels has indicated that the 80/20 rule will be suspended.

Before this decision, the rules had been suspended on only two previous occasions, namely 9/11 and following the outbreak of SARS in 2003 when (ironically) demand impact on routes was considerably lower than what airlines have experienced in the past three weeks. Now, the 80/20 rule has been relaxed on all routes operated in and out of mainland Europe, in addition to slots used to fly to China and Hong Kong.

Notwithstanding the UK's exit from the European Union ("Brexit"), the UK and its airlines (notably British Airways and Virgin Atlantic) are still obliged to play by EU rules until the end of 2020.

Staff at Korean Air

Ryanair have cancelled flights between the UK and Italy until 9 April, and easyJet have cancelled most of its flights to Italy, as have Air France. Spain has also banned direct flights with Italy, which amount to 9 per cent of all Spanish international air traffic. Norwegian Air has said it will cut about 3,000 flights in the next three months, about 15 per cent of its capacity.

The International Air Transport Association (IATA) has indicated that the virus could erase up to USD113 billion (GBP90 billion) from global airline sales. UK regional operator Flybe went into liquidation last week, as reduced capacity drove the final nail into the stricken carrier's coffin (more about this in our blog here:

https://matthewfeargrieve.wordpress.com/2020/03/05/matthewfeargrieve-coronavirus/

Meanwhile, Korean Air, having cut more than 80 per cent of its international capacity, has been making worrying noises about its ability to survive if the Coronavirus crisis continues. Which it looks set to do. Our eyes will soon be turning to the US, and its carriers, as the virus makes itself felt there. Delta Air Lines and American Airlines have each warned that its profits targets for 2020 are under threat, and that they will likely need to reduce capacity on a large number of routes.

You can read more of Matthew Feargrieve's blogs here: https://medium.com/@matthewfeargrieve

Matthew Feargrieve

CORONAVIRUS: Why the UK is Getting It Wrong

12:49 PM

Spread of COVID-19 in UK could be worse than in Italy

Lessons from China not being learned

COVID-19

There are worrying signs from the UK government, led by Prime Minister Boris Johnson, that the administration's handling of the rapid spread of CORONAVIRUS in the United Kingdom is based on political posturing, rather than medical science.

Does this mean that the UK will ignore the lessons being learned about the virus in Italy and in China?

British Stiff Upper Lip

The UK government seems determined to carry on as normal. Schools, universities and places of work — including Parliament — will remain open. Trains and buses will stick to their schedules. Under no circumstances will cities be closed off and their populations quarantined in their homes. The UK populace is being told to wash their hands frequently and for at least 20 seconds on each occasion. They are told to blow their noses into tissue and bin it. They are told not to touch their faces. They are told to stay at home if they are unwell. These steps are minimal, non-interventionist ones, designed to delay the inevitable spread of the virus.

Normality is to be preserved, no matter what. People in the UK are being told by the government that the mortality rate will be less than 1%, a figure based on the expectation that there are many more people with the virus than reported. On the other hand, the figure given by the World Health Organization (WHO) is 3.4%, a number that is holding up not just in China but in other major outbreaks around the world. Indeed, the WHO has urged governments around the world to spare no effort in taking pro-active measures to contain the spread of the virus.

UK Prime Minister Boris Johnson

“Negligent” and “ridiculous” is how many doctors have described the UK government’s response to COVID-19. There are insufficient beds and health workers in Britain's hospitals, even at the best of times, and beds for the critically ill and ventilators are in even shorter supply. As the UK Chancellor Stands up today in the House of Commons, the eyes of the UK population - and the world - will be on how the UK administration copes with Coronavirus from both a political, and a medical perspective. The indications at the moment, though, are not encouraging. It is to be hoped that the British government can get the balance between political robustness and the welfare of the population of the UK right.

You can read more of MATTHEW FEARGRIEVE’s blogs here: https://matthewfeargrieve.wordpress.com/author/mattfeargrieve2019/

Matthew Feargrieve

Wealth Management in Switzerland

8:04 PM

By Matthew Feargrieve

Switzerland is the third largest global centre of alternative asset management, after North America and the United Kingdom. Around three times the size of Connecticut, the small, central European country boasts approximately 15% of global assets under management. This blog examines the composition of the Swiss alternative asset management market, focusing on single managers and managers of funds of hedge funds (FoHFs); reviews the current and prospective regulatory environment in Switzerland for each type of manager; and assesses the country’s future generally as a centre of alternative asset management against the backdrop of economic austerity and regulatory zeal in Europe.

https://www.pwc.ch/en/events/sustainable-finance-conference.html

At a Glance Switzerland is the largest centre in continental Europe for managers of alternative assets, with France coming second and Germany and the Netherlands a joint third.

The main financial centres in Switzerland are Zurich, Geneva and Lugano.
There is approximately US$7 trillion of assets under management by banks in Switzerland, approximately 60% of which are booked in Zurich, 30% in Geneva and 10% in Lugano.
There is approximately US$100 billion of alternative assets under management in Switzerland held in single manager funds.
There is approximately US$300 billion of assets under management in Switzerland held in FoHFs.
Single Managers Switzerland has an approximate 5% share of the global single manager market.
The country is home to 10 of the world’s 30 largest single managers, together with around 500 smaller managers.
There is approximately US$100 billion of alternative assets managed in Switzerland by single managers, around half of which is managed in Zurich with the balance split between Geneva and Lugano. Of that US$100 billion:

- 60% is held in Cayman Islands domiciled investment funds;

- 15% is held in British Virgin Islands funds;

- 10% is held in Luxembourg funds; and

- 5% is held in Guernsey funds.

Swiss single managers, operating largely outside the EU regulatory framework, have a demonstrable preference to house their assets in the leading “offshore” financial centres (principally the Cayman Islands) and, to a lesser extent, EU fund domiciles like Luxembourg.

FoHF Managers There is approximately US$300 billion of assets under management in Switzerland and held in funds of hedge funds. Although having been hit hard by redemption pressures, illiquidity of underlying funds and the Madoff fraud during the past few years, Swiss FoHF managers control one-third of global FoHF assets. Switzerland is home to 6 of the world’s 15 largest FoHF managers, the majority of which are in Zurich. Around 75% of Swiss FoHF assets are managed in Zurich, the balance in Geneva. Swiss FoHFs attract three-quarters of their assets from European investors, mainly institutional allocators, and this goes some way to explain the domicile choice for the FoHFs. Of FoHF assets of US$300 billion:

43% is held in Swiss domiciled investment funds;
29% is held in Luxembourg funds; and
the remainder is held in Jersey and Guernsey funds.

In contrast to the domicile preferences of single managers, Swiss managers of FoHFs prefer “onshore” to “offshore” domiciles. The high level of allocations from EU institutional investors, such as pension funds, is the key driver behind their choice of EU fund domiciles over non-EU domiciles.

The Regulatory Landscape Switzerland The Swiss government and financial regulatory authorities have historically had a benign approach to the oversight of hedge fund managers. Only those managers selling fund products to the retail public in Switzerland are required to be licensed by FINMA, the Swiss Financial Market Supervisory Authority. The majority of single and FoHF managers take advantage of a provision in the Swiss Collective Investment Schemes Act (CISA) that effectively exempts managers selling to “qualified investors,” broadly supervised financial institutions and their clients.

Investment funds domiciled outside Switzerland are not subject to any supervision by FINMA. Advisers to hedge funds are not subject to regulatory oversight or licensing requirements in Switzerland as long as they do not participate in the running of the fund and do not engage in brokerage activities. The Swiss Federal Banking Commission (SFBC) is considered to have sufficient oversight of the hedge fund industry through its supervision of the banks in Switzerland, which usually hold the assets and act as prime brokers, albeit primarily through their London and New York operations.

To date, the SFBC’s view has been that this kind of indirect regulation of the Swiss asset management industry is an adequate means of ensuring an appropriate level of macro prudential oversight.

Take up of UCITS As an EU regulated investment product, UCITS can be sold throughout the EU to both institutional and retail investors. In addition to being attractive, fully regulated investment products for EU pension funds, UCITS open up to managers a previously forbidden client base: retail investors. A significant portion of Swiss FoHF managers domicile their funds within the EU, increasingly in Luxembourg, in order to maintain their leading position in the European FoHF market. Dedicated Swiss FoHFs Harcourt, Man Investments/RMF and GAM have all launched UCITS FoHFs, as have several Swiss-based private banks such as Credit Suisse, Pictet, 3A (Bank Syz), Clariden Leu and EFG.

It should be noted that the UCITS framework does not provide for direct translation of portfolios of traditionally structured hedge funds into a UCITS compliant format; however hedge fund index replication techniques remain one option to provide investors with quasi-FoHFs exposure through a UCITS fund. Given the increasing number of hedge fund strategies being operated within UCITS-compliant structures, there appears to be an increasing opportunity for growth of a nascent Fund of UCITS Funds market driven by managers in Switzerland.

On the other hand, the greater pressure to generate higher performance returns experienced by Swiss single managers (in line with single managers the world over) makes the majority of them skeptical about UCITS. They point to the significant restrictions the UCITS regime imposes on use of leverage, shorting and derivatives, and the knock-on impact that has on returns (not to mention fees). For single managers, this is a serious downside of UCITS. The problem of lower returns and lower fees is compounded for investors and managers alike by the higher organizational costs involved with UCITS which are sky-high compared to the traditional Cayman private fund model. The slow and burdensome regulatory approval process, conservatively taking two to six months, is also a major turn-off for most single managers.

The majority of Swiss single firms manage non-EU, non-UCITS funds. If they want to sell those funds into the EU, they have a number of choices: continue to market their funds on a private placement basis (and comply with the new regulatory requirements imposed by the AIFM Directive); adopt full compliance with the AIFM Directive and obtain a “passport”; or go the UCITS route, either in alternative or addition to the traditional offshore products.

Conclusion In line with their peers in the United Kingdom and, to a similar extent, the U.S., managers in Switzerland have faced a fourfold challenge in the post-AIFMD world: (1) increased prudential supervision; (2) amendment of local laws designed to ensure access to EU markets under the AIFM Directive; (3) increasing scrutiny by regulators and tax authorities of the “substance” of offshore structures; and (4) a heightened interest by regulators and investors in the corporate governance of hedge funds. These industry developments were handled with confidence by managers in the world’s third largest centre of alternative asset management.

Matthew Feargrieve is a financial services consultant and blogger.

THE NEIL WOODFORD SAGA Part III

5:31 PM

THE NEIL WOODFORD SAGA:

PART III

Matthew Feargrieve

8 February 2020

Neil Woodford's flagship UCITS fund, Woodford Equity Income Fund ("WEIF"), was placed into liquidation in October 2019. This followed the suspension of redemptions authorised in June 2019 by the fund's ACD, Link Fund Solutions ("Link"). Readers of this blog will recall that we were pessimistic about the prospects of substantial value recovery for Woodford's investors. It turns out we were right to be.

Link indicated in late January 2020 that just over 70% of the aggregate value of what remains of WEIF's portfolio value has been raised from the sale of more liquid investments, mainly consisting of large- and mid- cap equities.

https://www.theguardian.com/business/2020/jan/28/neil-woodford-investors-loss-payouts

The ambulance chasers circling Woodford's benighted investors, namely law firms Slater & Gordon and Leigh Day, cry piously and loudly about how Link's apparent inability to dispose of the remaining portfolio assets is evidence of the extent to which Woodford exceeded the maximum illiquid allowance of 10% permitted by UCITS rules.

One notable characteristic of said law firms, aside from the celerity with which they mobilise after various ambulances, is the conspicuous absence of any legal talent that can reasonably be said to have more than a passing acquaintance with the laws and regulations pertaining to UCITS investment funds or, indeed, the asset management industry in general. Have a look at the "Team" pages on their websites and have a go at finding any lawyers who profess "investment fund" or "financial services" expertise.

The truth behind the apparent illiquidity of the remnants of the WEIF portfolio is that it is a dog. Not just a dog, but a dog that is on fire. No one wants this unlisted rubbish, particularly not at any kind of price. Link would do well to realise what value it can from as expeditious sale as is possible, and put the 2,500 Woodford investors out of their misery.

Adding to their continuing misery, one suspects, are the calls they will be receiving from Leigh Day and Slater & Gordon about how they may sue the chief superannuated pusher of Neil Woodford's bullshit, Hargreaves Lansdown. What the ambulance chasers lack in legal talent, they more than make up for in their ability to isolate and reach for the lowest hanging fruit. Slater & Gordon says that it is examining whether Hargreaves was aware of the problems at WEIF while it continued to push the fund on its now infamous "best buy" list of superstar managers.

Hargreaves removed WEIF off its Wealth 50 buy list only after it suspended investors' redemption requests in June 2019. Other law firms are said to be looking at how Link Asset Services (the fund's administrator) monitored the liquidity profile of the portfolio and Woodford's management of it.

https://www.proactiveinvestors.co.uk/companies/news/912241/law-firms-probe-hargreaves-lansdown-as-part-of-woodford-challenge-912241.html

A spokesman for Leigh Day has said: "if there is some wrongdoing the aim would be to try and get investors back to zero. So if they've put £10 in and got £6 back we'd look to get the other £4 back.” So WEIF could prove to be an investment fund in which investors' capital was not at risk. Not at any risk at all, in fact. Readers of this blog could be forgiven for thinking that this breathless claim will come back to haunt Leigh Day, and it is to be hoped that the expectations of the long-suffering Woodford investors are not being hiked on such a rash representation. For it overlooks the fact that capital is rightly at risk in any pooled investment vehicle; that the majority of WEIF's portfolio assets were not improperly illiquid; that the remaining assets are distressed and accordingly harder to sell; that Hargreaves Lansdown were neither the fund's manager, nor its ACD nor its administrator, having in fact no functionality or capacity whatsoever with WEIF or its management; and that the only contract that Woodford investors can sue on is the one they have with WEIF, by virtue of being shareholders in it, not any ancillary customer agreement they may have had with Hargreaves Lansdown.

True it is that the ambulance chasers are offering much-needed solace to Neil Woodford's investors, which is more than the man himself is prepared to do. And we won't waste any time here on the FCA's inability to do anything for them. But they would be well advised not to hope too highly for any meaningful kind of recompense.

Matthew Feargrieve is a financial services consultant with more than twenty years' experience of advising managers of investment funds.