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Crisis Investing: How 14 Different Asset Classes Performed in Times of Distress

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Crisis Investing: How 14 Different Asset Classes Performed in Times of Distress

Crisis Investing: How 14 Different Asset Classes Performed in Times of Distress

Note: to see the bigger version of this infographic, click here.

History does not repeat itself, but it often rhymes. This could not be truer for crisis investing.

Between China’s stock market and the debt troubles of Greece and Puerto Rico, it is clear that we could be entering a time of potential financial crisis.

Every situation is unique, but generally the types of asset classes that protect investors in times of crisis are not necessarily the same as those during a bull run. Therefore, it’s worth taking a look at five previous periods of distress to see the returns of conventional and alternative asset classes.

1994: Surprise Rate Hike

In 1994, the economy was recovering from a significant recession and treasury yields started to rise from the lows of the previous year. The Fed and Alan Greenspan surprised markets by tightening monetary policy with the first rate hike in five years.

Returns: Large cap (-7.75%) and small cap stocks (-9.84%) got crushed. Managed futures (4.07%), commodities (3.15%), and gold (0.28%) did okay.

1998: LTCM Goes Under

Long-Term Capital Management started off with promise as it brought in annualized returns (after fees) of 21%, 43%, and 41% in its first three years with high leverage and normal macroeconomic conditions. LTCM directors Myron Scholes and Robert Merton would share the Nobel Prize in Economic Sciences in 1997. Promptly after, the hedge fund would lose $4.6 billion in four months in the aftermath of the Asian financial crisis, requiring a bailout from the Federal Reserve and various banks.

Returns: Stocks and REITs get crushed. Bonds (0.78%) and managed futures (5.61%) survive.

2000: Dotcom Bubble Bursts

Fledgling internet companies with no profits and limited revenues went public, reaping huge gains on IPOs. Prices went up and up, but eventually came crashing down in March of 2000 with the Nasdaq losing up to 70% of its peak value.

Returns: Large cap stocks (-40.33%), small cap stocks (-35.29%), private equity (-25.40%), and international stocks (-46.53%) get hammered. REITs (49.48%), bonds (19.65%), global macro (44.69%) all did well. Gold (0.47%) remained virtually unchanged.

2001: 9/11 Tragedy

Coordinated attacks on the United States shock markets, and the NYSE and Nasdaq remain closed until September 17th. Upon re-opening, the Dow drops 7%.

Returns: Almost all asset classes struggle, but gold (3.73%) got the highest return.

2008: Global Financial Crisis

Lehman Brothers goes under and the Greenspan real estate bubble crashes and burns. Excessive speculation, lenient mortgage lending, and the proliferation of derivative financial products such as credit default swaps contribute to the problem. The Fed has $29 trillion in bailout commitments while 8.8 million jobs and $19.2 trillion in household wealth are lost.

Returns: Again, most assets get crushed. It is no surprise that worst off are REITs (-63.77%). Gold continues to shine, gaining double digits (16.33%).

Original graphic by: Attain Capital

The Silver Series

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Banks

Why Anti-Money Laundering Should Be a Top Priority for Financial Institutions

Anti-money laundering cost financial institutions about $25.3B in 2018. How can organizations improve their processes & gain a competitive advantage?

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anti-money laundering

Why AML Should be a Top Priority for Financial Institutions

The to-do list for any financial executive is surely daunting. From navigating technology changes to managing talent effectively, there’s many initiatives competing for attention.

One issue that’s been in the headlines for many years is anti-money laundering (AML). When criminals are able to successfully hide the illicit origins of their cash, both the financial institution and society suffer. So, what makes AML more important now than it has been in the past?

Rising up the Priority Ladder

Today’s infographic from McKinsey & Company explains the factors which have brought anti-money laundering urgently to the forefront in recent years.

1. Regulatory Action

Enforcement actions related to AML have been on the rise. Since 2009, regulators have levied approximately $32 billion in AML-related fines globally.

2. Threat Evolution
Criminals are using more sophisticated means to remain undetected, including globally-coordinated technology, insider information, and e-commerce schemes.

3. Reputational Risk

AML incidents put a financial institution’s reputation on the line. There’s a lot at stake: today, the average value of each of the top 10 bank brands is $45B.

4. Rising Costs

Most AML activities require significant manual effort, making them inefficient and difficult to scale. In 2018, it cost U.S. financial services firms about $25.3B to manage money laundering risk.

5. Poor Customer Experience

Compliance staff must have multiple touch points with a customer to gather and verify information. Perhaps not surprisingly, one in three financial institutions have lost potential customers due to inefficient or slow onboarding processes.

It’s no wonder anti-money laundering has now become a top priority for many CEOs in the financial industry.

A Wave of Innovation

In the last five years, there has been an explosion of “RegTech” startups—companies that address regulatory requirements using technology.

Global RegTech Investments, 2014-2018

YearAmount Invested (USD)
2014$923M
2015$1,110M
2016$1,150M
2017$1,868M
2018$4,485M

Over 60% of these are focused on solving Know Your Customer (KYC) and AML issues. What does this technology look like in practice?

Customer onboarding

A hypothetical U.S. retail firm, ABC Electronics, applies online to open an account at AML Innovators Bank. Their information is verified and screened using a fully automated process.

If they are determined to be a lower-risk client, they will be fast-tracked through the approval process with decisioning in six hours or less. For high-risk clients, decisioning occurs within about 72 hours.

Transaction Monitoring

ABC Electronics requests to send multiple international wire payments to various beneficiaries. Each transaction is automatically screened based on various factors:

  • A same name or subsidiary transfer carries the lowest risk
  • Transfers to a known, similar industry in a high-risk jurisdiction carry medium risk
  • Transfers to an unknown industry in a high-risk jurisdiction carry high risk

These transaction scores, combined with algorithms that track a client’s expected vs. actual transaction behavior, will update ABC Electronics’ risk rating in real time.

Management oversight

As risk updates occur, ABC Electronics’ rating is integrated into AML Innovator Bank’s overall portfolio risk.

Senior risk management teams will be able to view a heat map that highlights the highest risk areas of the business.

Structural Change, Big Gains

Just as financial crimes continue to evolve, so do AML schemes.

How can organizations stay ahead of the game? They can focus on actively managing risk, deliberately investing in technology and analytics, and prioritizing areas where RegTechs will have the highest near-term impact.

By investing in AML, financial institutions create competitive advantages:

  • Improved efficiency
  • Superior customer experience
  • Scalability
  • Readiness to adapt to new regulations
  • Reduced reputational risk
  • Ability to attract top talent

With such benefits on the table, one thing is clear: Anti-money laundering efforts are more important now than they have ever been.

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Visualizing the Importance of Trust to the Banking Industry

In the digital age, the issue of trust is emerging as the game-changing factor in how consumers choose financial services brands.

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Visualizing the Importance of Trust to the Banking Industry

In the digital age, money is becoming less tangible.

Not only is carrying physical cash more of a rarity, but we are now able to even make contactless payments for many of the products and services we use on the fly.

Our financial transactions are starting to be analyzed and optimized by artificial intelligence. Meanwhile, investments and bills are paid online, and even checks can now be deposited through our phones. Who has the time to visit a physical bank these days, anyways?

Trust in the Digital Age

The migration of financial services to the cloud is increasing access to banking solutions, while breaking down barriers of entry to the industry. It’s also creating opportunities for new service offerings that can leverage technology, data, and scale.

However, as today’s infographic from Raconteur shows, this digital migration has a crucial side effect: trust in financial services has emerged as a dominant driver of consumer activity.

This likely boils down to a couple major factors:

  • Tangibility
    Financial services are becoming less grounded in physical experiences (using cash, visiting a branch, personal relationships, etc.)
  • Personal Data
    Consumers are rightfully concerned about how personal data gets treated in the digital age

Further, the above factors are compounded by memories of the 2008 Financial Crisis. These events not only damaged institutional reputations, but they elevated trust to become a key concern and selling point for consumers.

Trust, by the Numbers

In general, trust in banks has been slowly on the rise since hitting a low point in 2011 and 2012.

At the same time, consumers are consistently ranking trust as a more important factor in their decision of where to bank. To the modern consumer, trust even outweighs price.

Top Five Factors for Choosing a Bank:

  1. Ease and convenience of service (47%)
  2. Trust with the brand (45%)
  3. Price/rate (43%)
  4. Service resolution quality and timeliness (43%)
  5. Wide network coverage of ATMs (40%)

It’s important to recognize here that all five of the above factors rank quite closely in percentage terms. That said, while they are all crucial elements to a service offering, trust may be the most abstract one to try and tackle for companies in the space.

With this in mind, how can financial services leverage tech to increase the amount of trust that consumers have in them?

Tech Factors That Would Increase Consumer Trust:

  1. Reliable fraud protection (36%)
  2. Technology solves my problems (13%)
  3. Useful mobile application (9%)

Better fraud protection capability stands out as one major trust-builder, while designing technology that is useful and effective is another key area to consider.

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