Andrea Vacchino and Markus Schuller, Panthera Solutions
How can you know whether a multi-asset portfolio is well managed? Many institutions have policy indices built according to the investment management’s preferences and expectations on risks and returns associated to each asset class. Other institutional investors run peer group comparison between multi-asset managers or measure their portfolio against total return indices. But these are workarounds only. Surprisingly, there is no policy portfolio benchmark investors can use at the very beginning of multi-asset investment against which to measure later decisions.
Even seven years after the Great Recession, the world is still suffering significant data gaps in its understanding of the Global Capital Stock, so we decided to build an objective, multi-asset, market-weighted policy portfolio index, based on the measures of the global capital stock.
Initially, we focused on measuring the current stock of different assets worldwide, a big challenge since only limited primary or secondary research is available. We looked especially at illiquid global stock components such as real estate, land and private equity, thanks to the contribution of several international institutions such as the OECD, BIS, Global Data Gaps Initiative, SME Europe, the European Commission and (hedge) fund managers like Strategos Capital Mgmt. Due to their support, we gained access to data or won insights on data interpretation and manipulation. At this point we would like to sincerely thank all the institutions and fund managers who supported our project.
This was the most comprehensive research conducted in the field so far, but was only the beginning of an ongoing optimization process. We concentrated on the Global Capital Stock of 11 assets and their major changes since 2005 because pre-2005, the tradeoff with regards to the quality and availability of data would have been too unfavorable. It’s only in recent years that academia has benefitted from the increasing reach and quality of databases like OECD Stats. We want to highlight research on specific asset classes in certain geographies such as New Estimate of Value of Land of United States (Larson, 2015). We used this kind of work not just for retrieving data but also to interpolate applicable findings to other uncovered areas.
The two figures below visualize our findings when measuring the Global Financial Stock per asset class, firstly expressed as percentage and then in Trillions of USD (click to see full size).
Outstanding trillion USD
The graph below plots the evolution of nonsecuritized loans in terms of geographic exposure. We would like to highlight the growing weight of China and the relative decline of Japan as a result of the rebalance in the global economies.
Nonsecuritized loan composition
Lastly we tested the performance of the Policy Portfolio against a global 60-40 portfolio and the gestaltu portfolio, which represents an alternative liquid market portfolio.
By comprehensively measuring the Global Capital Stock and its two byproducts, the Policy Portfolio and the investable policy portfolio, we understand our research as a first step towards reliably defining a natural benchmark for multi-asset portfolios. When comparing a multi-asset portfolio with the policy portfolio, one can derive preliminary conclusions on asset managers’ active decisions in terms of their strategic asset allocation configuration.
The limitations of our research revolve around the margin of error in measuring the Global Capital Stock. However we feel strongly optimistic about future development about data gap initiatives which will further reduce the margin of error.
We will continue our efforts on searching for better measures of the Global Capital Stock, for finding better indices to covering the Global Capital Stock for the Policy Portfolio, and for converting the Policy Portfolio into an Investable Policy Portfolio. The results of our ongoing optimization process will be accessible through the quarterly publication of the PS Policy Portfolio Index.
For fuller details of the methodology and findings, see the report this article is based on here or click on the cover page above.
Capital stock data at the OECD – status and outlook Paul Schreyer et al, OECD (2011, Word document)
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The OECD presented today the final package of measures for a comprehensive, coherent and co-ordinated reform of the international tax rules to be discussed by G20 Finance Ministers at their meeting on 8 October, in Lima, Peru. The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low/no tax environments, where little or no economic activity takes place. The BEPS measures were agreed after a transparent and intensive two-year consultation process between OECD, G20 and developing countries and stakeholders from business, labour, academia and civil society organisations.
Revenue losses from BEPS are conservatively estimated at $100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.
Undertaken at the request of the G20 Leaders, the work to address BEPS is based on the 2013 G20/OECD BEPS Action Plan, which identified 15 actions to put an end to international tax avoidance. The plan was structured around three fundamental pillars: introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in the existing international standards, to ensure alignment of taxation with the location of economic activity and value creation; and improving transparency, as well as certainty for businesses and governments.
The final package of BEPS measures includes new minimum standards on: country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises; treaty shopping, to put an end to the use of conduit companies to channel investments; curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation.
The BEPS package also revises the guidance on the application of transfer pricing rules to prevent taxpayers from using so-called “cash box” entities to shelter profits in low or no-tax jurisdictions, and redefines the key concept of Permanent Establishment, to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition.
The BEPS package offers governments a series of new measures to be implemented through domestic law changes, including strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments.
Nearly 90 countries are working together on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016.
Examples of BEPS schemes to be eliminated
The final outcomes of the BEPS Project are being presented on Monday 5 October 2015 at 2 p.m. (CET) – more details of webcast streaming here.
Time was when the only people who had gigs were long-haired types who stayed in bed till noon and played in bars till dawn. These days, it seems, everyone’s hopping from one gig to another – drivers, software designers, cleaners. Bye-bye full-time work, hello freedom and flexibility.
Well, maybe …
The “gig economy” has emerged as potentially one of the major shifts in what the Financial Times calls “the new world of work” (paywall). It’s certainly one of the most eye-catching. Unlike other trends in this brave new world, the gig economy seems to represent a significant shift in what it means to be a worker. Depending on where you stand, it will either liberate millions of people to become mini-entrepreneurs free from the 9-to-5 grind or imprison them in a world of low-wage self-servitude and insecurity.
If you’re confused by what defines the gig economy, you’re not alone. The term is used to refer to everything from old-style temping to the sharing economy – think amateur-hotelier sites like Airbnb or car-rental sites like RelayRides. But it seems mostly to describe various forms of self-employment and independent contracting facilitated by online platforms like TaskRabbit and Uber. Indeed, in France, uberisation has become shorthand for the gig economy.
This ambiguity is not a trivial matter. Uncertainties over the gig economy, and what it means to be a gig worker, have sparked reviews and court cases in a number of countries. In the United States, for example, a judge in California recently gave the green light to a group of Uber drivers to sue to establish their legal status. The drivers contend they are effectively employees of Uber, and so entitled to be reimbursed for expenses, including the cost of buying petrol and maintaining their cars. Uber argues that they are independent contractors, which means it is not required to cover payroll taxes, health insurance and the cost of maintaining cars. As The New York Times pointed out, the outcome of the case “could strike at the heart of the ride-hailing company’s business model.”
That’s not the only uncertainty hanging over the gig economy. As the Wall Street Journal (paywall) reported last month, despite all the hype there doesn’t currently seem to be a lot of evidence in US jobs data of a big upsurge in self-employment. The same is true, too, of the United Kingdom, according to Ian Brinkley of The Work Foundation. But, as he also points, the emergence of the gig economy may still be “too recent a development to show up in the aggregate figures”.
Indeed, given the rapid growth of services like Uber so far, it’s hard not to feel that we are witnessing genuine shift in the economy. That may well continue, if for no other reason than demographics. By many accounts, the so-called Millennial generation – the oldest of whom are now approaching their mid-30s – are particularly keen on gig working. According to research in the US, almost half of millennials “will choose workplace flexibility over pay”. Of course, a few years down the road, when they’re trying to feed children and pay school fees, Millennials’ taste for job security may well increase.
Indeed, for individual workers, that tension between the freedom of freelancing and the security of the 9-to-5 may become a core issue. “There’s certainly something empowering about being your own boss,” Arun Sundararajan of the NYU Stern School of Business wrote in The Guardian. “[…] But there’s also something empowering about a steady pay cheque, fixed work hours and company-provided benefits.”
There will be dilemmas, too, for government policy, both in terms of wider regulation of the gig economy and unleashing what some argue is its potential to create jobs. According to consultants McKinsey, it could contribute $2.7 trillion, or 2%, to the global economy over the next 20 years and add the equivalent of 72 million full-time equivalent jobs.
But will they be good jobs? That question is relevant not just to the gig economy but to other trends in the world of work, such as temporary and short-term employment, both of which are on the rise. As we’ll discuss in the next post, some fear that the benefits of these shifts may be outweighed by the loss to workers of both income and job security.
OECD work on employment
Where do you stand on the income scale? Find out with the OECD’s Compare Your Income web tool.
Mounting fears of another slowdown in the global economy call for bolder policy responses. Trade and investment are a case in point.
The latest WTO forecasts suggest 2015 will be the fourth year running that global trade volumes grow less than 3%, barely at—or below—the rate of GDP growth. Before the crisis, trade was growing faster than GDP. In addition, global flows of foreign direct investment (FDI) remain 40% below pre-crisis levels. If we are to achieve the ambitious Sustainable Development Goals agreed in New York in late-September, and underpin broad-based improvements in living standards, we need to reignite these twin engines of growth and we need to do it for the ultimate goal of improving people’s prospects and wellbeing.
Trade and investment have always been intertwined in business, but they have never quite come together in policymaking. In a world of Global Value Chains (GVCs), characterised by the fragmentation of production processes across countries, the interdependencies between trade and FDI are sharper. Technological improvements, reductions in transport and communications costs, and regulatory developments allow firms to combine multiple channels–- imports, FDI, movement of business personnel, licenses — to optimize their international business strategies. Businesses do not think in terms of trade or investment, but in terms of maximizing expected profitability. On the contrary, policymakers have long addressed trade and investment on separate tracks. In the face of new economic realities, policymakers need to up their game.
The symbiosis between trade and investment is more complex than ever before. Multinational enterprises (MNEs) play a key role in this relationship, with their activities driving a large share of world trade. The decision of a firm to invest in a foreign country is influenced by the ease with which it can sell its products, but also by how easy it is to source inputs from its affiliates (intra-firm trade) or independent suppliers (extra-firm trade) abroad. Hence, trade barriers become indirect barriers to investment. In addition, “world factories” make emerging trade patterns more complex, as not only goods and services cross borders, but capital, people, technology, and data do too. Without a transparent framework, it is also difficult to upgrade and upscale responsible business conduct.
Services are an increasingly critical node in the relationship between trade and investment. The WTO’s General Agreement on Trade in Services (GATS) explicitly recognizes this by defining FDI in services as one of the four ways in which services can be traded (mode 3, or ‘commercial presence’). This reflects how trade and investment interact with one another. Clearly, services will be central in any further efforts to liberalize investment and to improve the business environment. The OECD FDI Regulatory Restrictiveness Index shows that investment barriers are overwhelmingly in the services economy. Reforms in backbone services, notably digital services, transport, and logistics are key to unclogging GVCs. Domestic reforms to allow for more competition in the service sectors is also a source of growth and equality. Moreover, there is untapped potential in services value chains that could be realized if services markets were opened further. The OECD Services Trade Restrictiveness Index (STRI) provides a tool for identifying these barriers and measuring their costs, in order to prioritize and sequence reforms.
There is still no global set of rules governing investment and trade, however. Apart from GATS, two other WTO agreements—TRIMS and SCM–cover aspects of FDI, but they are not comprehensive. The OECD Codes are also a reference on capital flows, but does not address the link with the trade dynamics. The void has been filled with a complex network of nearly 3,000 bilateral investment treaties (BITs) of different quality and with different coverage.. Investors and States need certainty. A uniform regime would help, providing a consistent interpretation of the rules that apply to investment flows, taking into account the interest of all stakeholders. We urgently need a clear, coherent and coordinated approach at multilateral level. Multiplying the number of BITs further muddies the water and moves us further away from the multilateral ideal. A better way forward may be to start consolidating and replacing BITs on the road to a comprehensive multilateral framework. We also need to take a hard look at investment dispute settlement mechanisms, transparently addressing stakeholders’ legitimate concerns.
Replace BITs with what? Regional Trade Agreements (RTAs) are already providing some closer policy linkages. Over 330 RTAs contain comprehensive investment chapters, reflecting more advanced thinking of how trade and FDI interact in the real economy. These agreements also cover ‘deep integration’ disciplines that are essential to investments, such as movement of capital, business persons, intellectual property rights, competition, state-owned enterprises, and anti-corruption. New generation RTAs are not perfect, but they are taking us several steps forward in addressing the services-trade-investment-technology nexus. Being regional, however, they are not applied uniformly at a global level, and create their own overlaps and incoherence. It would therefore be useful to create clearer rules for co-existence among RTAs and mega-regional blocs. Above all, it is important to foster information-sharing on emerging practices from these negotiations, so that good practices can be diffused more widely and uniformly, and provide a pathway for multilateral convergence. In this way, RTAs and mega-regionals can become the building blocks of an integrated and truly multilateral trade and investment regime.
We are at a critical juncture, both economically and politically. The global economy needs a helping hand for recovery from the global financial crisis and to give people the improvements they expect in their daily lives. At the same time, we have both an opportunity and obligation to upgrade the policy framework to meet the changing reality of how trade and investment are conducted across the world, to enhance policy coordination, and to ensure that both have a positive impact on people’s well-being. Mega-regional agreements like TTIP and TPP are on track to deliver new frameworks over the coming months. These can be stepping stones towards the future of global trade and investment rules. As these mega-regional deals approach the finish line, the 10th WTO Ministerial in Nairobi in December is an opportunity to break the current impasse in the Doha Round. Finally, all of this is taking place as we enter a new “Post-2015” era with the new SDGs, where trade and investment are expected to do more of the heavy-lifting in global development.
Against this backdrop, the G20-OECD Global Forum on International Investment (GFII), being held on 5 October 2015 in Istanbul, back-to-back with the meeting of G20 Trade Ministers, will bring together the trade and investment policy communities—along with the business community–to reflect on the main axes of a pragmatic strategy to enhance the international regime for investment, including through closer links with trade. The agenda cannot be delayed: trade and investment decisions must go hand-in-hand in policy, just as they do in global business.