Welcome to our MASECO Blog. This thought leadership page is updated regularly to cover events that we believe will be of interest to our clients and the communities in which we actively participate.
8th April 2013
Josh Matthews, Managing Partner of MASECO Private Wealth, continues his series of articles in the American in Britain magazine. The most recent article explains gives a few tips about what to be wary of in the investment world.
22nd March 2013
As part of his commitment to developing his knowledge of the financial markets, James Sellon recently attended a day's seminar at the Social Investment Academy about Social Impact Investment.
This topic was highlighted in the Chancellor's Budget, with potential tax incentives likely to be announced in the Autumn Statement to be put in place for April 2014.
For some further inforation on this subject, you can read an interesting report on the role of tax incentives to encourage social investment here.
20th March 2013
Chancellor George Osborne has delivered his fourth budget amidst news of continuing pressure on public finances and poor economic conditions. His “aspiration” budget has halved the growth forecast, but has also provided some good news for hard working people and the low paid, while putting in place measures to curb both tax avoidance and tax evasion.
The increase to £10,000 of the personal allowance (the annual income tax exemption) for people born after 5 April 1948, from April 2014 will be cheered.
Corporation tax will now be reduced to 20% from April 2015. This will be applicable to all companies with the distinction between the small profits rate and main rate abolished. This is remarkably low for an "onshore" economy. To some extent the banks are paying for this, with the Banking Levy increasing to 0.142% next year.
There are a cluster of measures intended to encourage the UK's asset management industry including the scrapping of the SDRT charge on the surrender of units in collective investment schemes.
The full budget statement is available from the HM Treasury website here.
18th February 2013
For the third year running, Josh Matthews and James Sellon have been included in the prestigious Citywealth Leaders List 2013.
The Citywealth Leaders List, a directory of the leading lights of the financial sector, is the result of the input of a huge number of people within the private wealth management sector as well as their clients.
If you would like to view the list, it can be found here.
21st January 2013
Four years after the US sued UBS A.G. - a case which triggered the withdrawal of billions of dollars of US assets from Zurich and Geneva - the fight to bring those assets back to Switzerland among Swiss wealth managers is back on.
Yann Rousset, CEO of MASECO's Swiss operations, has commented in a Bloomberg article discussing the renewed competition for American clients. You can read the full article here.
7th January 2013
It turns out that almost all of Wall Street got its forecasts for 2012 wrong. Bloomberg has put together a synopsis of some of the worst prognoses made by active managers for last year - well worth a read if you are considering making any predictions yourself! Click here for the full story. The story also highlights the differences between active and passive wealth management.
4th January 2013
Even with all of the bad headlines, the pundits' fear mongering, sovereign debt woes in the EU, Greece and the predicted Mayan Apocalypse, many markets are at or near all-time highs.
Below you will find a chart showing the S&P500, Small caps as represented by the Russell 2000 Index, and Mid-Caps as represented by the Russell Mid-Cap Index.
Markets are highly efficient at pricing in new information. If it’s on the TV or in the newspaper, it’s hardly new to Mr. Market. This is another reminder to focus on what we can control; namely risk tolerance, fees and taxes.
4th January 2013
It is always fun to highlight the differences between the US and the UK. It seems that the two countries are separated by more than just a common language:
Daily Mail - 2nd January 2013
PRESIDENT'S VACATION EXTENSION COSTS TAXPAYERS MORE THAN $3M
The US House passed the fiscal cliff bill about 10.45pm on Tuesday and Obama boarded Air Force One to return to Hawaii just hours later.
The President cut short his holiday vacation to return to Washington and oversee fiscal cliff negotiations. The second flight to Hawaii is costing taxpayers an estimated $3.2million. That's on top of the $4million already spent to ferry the First Family to their beachfront rental home on the island of O'ahu.
Air Force One costs about $180,000 an hour to fly - so the ten-hour trip to Hawaii costs about $1.7million each way.
The Sun - 12th January 2011
CAM'S FLIGHT SAVES £200K
Cash-conscious David Cameron flew out to meet President Barack Obama last night on a regular BA flight — astonishing other passengers.
For the first time on a major official visit, the Premier turned down chartering his own plane to make the two-day trip to Washington DC. And he even spurned First Class tickets to travel in the far cheaper Business Class. The move saved £200,000 in costs, Downing Street officials said.
2nd January 2013
The US House has, at the last minute, passed a bill to avert the Fiscal Cliff coming into full effect. Below is a summary of the main points of the bill:
The bill extends the decade-old tax cuts on incomes up to $400,000 for individuals and $450,000 for married couples. Earnings above these thresholds would be taxed at a rate of 39.6% (up from 35%).
The caps still continue on itemised deductions and the phase-out of personal exemptions of individuals earning more than $250,000 and married couples earning more than $300,000.
Inherited Estates would be taxed at a top rate of 40% with the first $5.12mm in value exempted for individual estates and $10mm for family estates.
Tax on capital gains and dividend income where total compensation exceeds $400,000 for individuals and $450,000 for families would increase from 15% to 20%.
Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle and upper-middle income tax payers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that some did not avoid owing tax by using loopholes.
Congress delayed for two months the $109 billion worth of across the board spending cuts set to start striking the domestic agencies this week. This and the debt ceiling will be the next areas of focus for the media agencies over the next few months.
14th December 2012
From an evolutionary perspective, we are conditioned to never buck the trend and 'fit in' in order to survive. While this may be somewhat true for life in general, it's not always the case when vying for investment survival. In fact, for investing it can pay to be contrarian and buy what everyone else is selling (of course in a well-diversified manner).
Staring into the face of increased market volatility, a considerable number of investors en masse have sought out the safety of fixed income investments (blue Line) this year.
While in aggregate, many investors have left equities for dead (blue line):
As you can see from this Wall Street Journal Info graphic, investors tend to shed equities after they are already fallen:
Forecasting returns is extremely hard - if not impossible - to do over any length of time. Unknowing of the future, it is imperative to hold a balanced portfolio that is designed to withstand volatile market movements that are bound to happen from time to time. By doing this, the investor is able to prudently rebalance the portfolio and enjoy any eventual rise in risk assets. By not holding a balanced portfolio, the investor runs the risk of permanently impairing capital by trying to time the market and selling completely out of risk assets at the bottom of a market cycle. While some market pundits believe equities are dead, with equity ownership currently failing to reach its previous highs and sentiment so negative towards risk assets, we believe the future for equities could be quite bright.
If you enjoyed these charts or would like a bit more in-depth explanation of them, please visit Dr.Ed’s Blog. Additionally, you can find more information on the info graphic from Barry Ritzhold’s The Big Picture Blog. Please note that MASECO Private Wealth does not endorse these articles.
8th December 2012
Josh Matthews, Managing Partner of MASECO Private Wealth, has written the second instalment of a series of articles in the American in Britain magazine. This second article discusses pension planning for US taxpayers living in the UK.
You can read the full text of the article here. If the article highlights any challenges that you might be facing, please contact us.
7th December 2012
As advocates of passive investing, MASECO takes a lot of flak from an industry predicated on selling false promises to investors. Many times, our competition has claims of being able to time markets or have superior insight into selecting equity investments which will greatly outperform the market. While there is certainly no dearth of academic literature on the ability to time to equity markets (or lack there of), that doesn’t mean it isn’t worth trying. If it has potential to increase returns in a systematic, non emotional manner, it is worth finding out whether the tactic has merit.
With that being said, we have tested everything from economic indicators such as GDP growth and ISM PMI readings, to fundamental metrics such as P/E and dividend yield, and everything in between. None of the common metrics have proved to have any predictive power over about 52% (P/B being the best metric and also a building block of the Fama & French three-factor model), which is why we are such strong advocates of not trying to time the market and letting asset allocation dictate your risk level.
Recently the good folks at Vanguard wrote a paper talking about this same topic entitled Forecasting stock returns: What signals matter, and what do they say now? We highly encourage you to read the entire article, but it is quite lengthy so we have provided some bullet points for your review.
We could not agree more with the findings of this article. The full article can be found here for your review.
23rd November 2012
James Sellon and Brent Jaciow, MASECO's Global CIO attended the PAM Annual Investment Dinner recently and listened to a few keynote speeches given by luminaries in the investment world. Below are digests of a few of the addresses:
FISCAL POLCY MORE IMPORTANT THAN MONETARY POLICY IN 2013 - Guy Monson, CIO, Sarasin & Partners
VOLATILITY AND INFLATIONARY FEARS WILL DRIVE ASSET ALLOCATION IN 2013 - Michael Turner, Head of Strategy and Asset Allocation, Aberdeen Asset Management
ACTIVE VERSUS PASSIVE PASSÉ AS 'SMART BETA' EXPANDS OPTIONS - Dan Draper, Global Head of ETFs, Credit Suisse
THE 'INS' and 'OUTS' OF INVESTING IN 2013 - Neil Beaton, CIO, LJ Athene Investment Advisors
13th November 2012
Just in case you missed it, Global CIO Brent Jaciow appeared on CNBC this morning. You can see his appearance here. Currently we are able to provide the 5 min summary out of the 25 min discussion. We look forward to following up with a clip of the whole session.
9th November 2012
James Bailey, Managing Director of Henry & James, one of London's elite property agencies, shares his insights about the nature of the London property market with us, focusing particularly on the dynamics affecting international buyers.
For a while now, we have seen the Greek, Italian and the French buyers seeking to buy in London. Even before them, we were seeing Russians redefining the market in their quest for trophy homes. What we have not seen for a while – for a very long while, in fact – are American buyers. That has begun to change.
Prior to the start of the financial crisis, we had a steady stream of Americans but many were seeking to rent, not buy. They were here on short to medium term expat packages with the major investment banks and wisely avoided buying as they knew they would not be putting down roots in London. As the economy started to improve, we, at Henry & James Estate Agents saw a major increase in the number of corporate tenants of all nationalities but unless they had some other connection to London, Americans made up only a small percentage of prime central London buyers.
Recently, however, we launched an eight million pound home on Victoria Road. On the day of its launch, we had 10 carefully selected buyers arrange viewings. Of these ten buyers, four were American. This is not an anomaly, either. We have seen the number of American applicants on our books quadruple in the past year. Some of them are on short to medium term secondments but see prime central London property as a sound investment. Rather than renting, they are buying as part of a diversified portfolio of investments. Some are even renting their primary home at their company’s expense but opting to purchase buy-to-let properties in the capital. They see Britain as a safe haven outside the Eurozone and are confident in property’s future growth potential.
We are also seeing another type of Americans who are coming here on a much longer term basis. The British government has made it easier for investors to gain visas if they invest a significant amount of money into British equities or other companies. Keen to take advantage of non-dom status, these Americans are often entrepreneurs or independently wealthy. As global citizens, basing themselves out of London makes sense as the capital provides the perfect geographical and financial centre to access much of Europe, Russia or Africa but still within easy reach of the US.
Even American politicians seem to recognise the impact of US citizens on our shores. In 2008, one of the Obama campaign’s most successful fundraisers was here in London amongst American expats. Mitt Romney recently tried to replicate his rival’s success by hosting fundraisers of his own back in July. By some accounts, he raised as much as $2 million during his brief stay, such is the political and financial power amongst Britain’s 250,000 strong American expat community.
I think we will soon start to see Americans as a major influence on the London property market. Our language, business practices and even our high street brands are familiar to them yet some might argue that Britain offers greater opportunities than their homeland.
8th November 2012
Josh Matthews, Managing Partner of MASECO Private Wealth, shares his insights with Spear's Wealth Management, discussing the impact of the recent Presidential election in the US and the re-election of Barrack Obama.
You can read the full text of the article here.
7th November 2012
Josh Matthews, Managing Partner of MASECO Private Wealth, has begun a series of articles in the American in Britain magazine. The first article explores the challenges facing US taxpayers who are living in the UK.
You can read the full text of the article here. If the article highlights any challenges that you might be facing, please contact us.
17th October 2012
Last night MASECO co-sponsored the American in Britain (AiB) Drinks Reception at the US Embassy in London. AiB has been hosting receptions at the US Embassy for over a decade and we were delighted to sponsor the reception last night.
Over two hundred guests attended the reception and, after the initial bun-fight of passing stringent US security, we were welcomed into the inner sanctum of the Embassy and enjoyed an evening of drinks, canapés and a prize raffle. With the US Embassy moving to Vauxhall (and the introduction of a moat!), we wonder whether AiB will continue to hold its receptions at the Embassy. I for one hope they continue to do so as it does feel like a small island of America in central London.
28th September 2012
As a student of the great market maven Ned Davis, I have been made painfully aware of his most famous quote time and time again, in markets “there's being smart and making money”. Make no mistake, the two are the not the same. That is not to say that smart people don’t make money as the world is certainly full of brilliant individuals with incredible investment acumen. Though, more often than not, people try to outsmart the market using either sophisticated models, technical indicators or in the worst case, gut instinct. Furthermore, many people fail to recognise that the market and the economy - while related - are not the same thing.
My comments are best exemplified by John Hussman, PHD President of the Hussman Investment Trust which manages the Hussman series of funds. Dr. Hussman’s command of valuation methodology, financial history and econometric modeling is second to none. Over the years, Hussman has stayed true to his philosophy, using his models to outperform and direct his every investment decision.
From the funds' inception in 2000 until 2008 the funds’ performance had been stellar; delivering very high risk adjusted returns. Though, as noted in one of Research Puzzler’s posts, after 2008 performance started to taper off. While Hussman’s process hadn't changed, markets did. Unable to adapt to this change or adapt his methodology, the funds’ performance and assets under management have suffered terribly.
The moral of this story is that markets are quite efficient. In the short run, it is possible to outperform, but the odds of successfully doing it over long periods of time are exceedingly low. This example also serves to highlight just how hard it is to select active managers who outperform. As shown by the chart in the aforementioned blog post, AUM reached its highest point when performance just started to wane.
14th September 2012
Josh, James, Rory and Emilia started the week off by having lunch with Senator and basketball legend Bill Bradley. Senator Bradley discussed the history of retirement savings in the US and contrasted the history in Europe. It was a fascinating discussion that gave us all an excellent understanding as to how Americans have become so heavily reliant on 401(k) and IRAs compared to Europeans who still rely more heavily on Defined Benefit plans for their retirement income.
Josh Matthews with
Senator Bill Bradley
With the upcoming rollout of NEST in the UK over the next few years, it will be very interesting to see if the public in the UK start to become more comfortable with investing in a similar manner to their counterparts in the US. Senator Bradley also discussed his views on healthcare in America and the upcoming presidential election before giving us signed copies of his new book 'We Can All Do Better'.
Claude Bossi with
On Monday evening, we joined a dozen or so other advisers attending the DFA European Study Group for dinner at The Cube restaurant perched above Royal Festival Hall overlooking the Thames. We enjoyed the most amazing seven-course meal prepared by Claude Bosi the 2 star Michelin Chef from Hibiscus Restaurant in London and Ludlow. We then all failed to stay up and watch Andy Murray win the first British Grand Slam victory since Fred Perry won 76 years ago - well done Andy!
Bo Eason with
On Tuesday we attended the DFA European Study Group Conference and heard from Bo Eason, the former Houston Oilers and San Francisco 49er safety now turned playwright and global speaker. We attended his Personal Story workshop and learned about human communication and interaction. We all found Bo to be one of the best speakers we have ever heard and were touched by his personal story and want to thank him for helping us develop ours. You'll see more about this in later communications from us.
On Thursday we attended the Kensington & Chelsea Women's Club Annual General Meeting at the lovely British Academy. We met some new people, talked with old friends and clients and raffled off a bottle of Laurent Perrier Rose Champagne. The ladies did an excellent job with the event and Mark was successful at giving away all of our Krispy Kreme donuts in the closing minutes of the event (before the ladies headed off to lunch) - well done Mark!
14th September 2012
Having followed Ray Dalio for over a decade, when the founder of the world’s largest, most successful hedge fund speaks, I listen. Most recently while at the Council on Foreign Relations, Dalio opined on how the average investor should allocate their portfolio. Dalio’s comments echo many of ours. Below you will find a link to full hour long interview, but for those who do not have an hour, I have summarised the main points below:
1. “I think that the first thing is you should have a strategic asset allocation mix that assumes that you don't know what the future is going to hold.”
2. “…the average investor and most people should not be playing that game [market timing]. They're going to lose at the poker table."
3. “[the] key thing is that there are basically four economic environments. There are two main drivers of asset class returns: inflation and growth. When growth is slower-than-expected, stocks go down. When inflation is higher-than-expected, bonds go down. When inflation is lower-than-expected, bonds go up.”
4. “I would encourage them [investors] to understand that there's inflation and growth. It can go higher and lower and to have four different portfolios essentially that make up your entire portfolio, that gets you balanced. Because in every generation there is some period of time, there's a ruinous asset class, that will destroy wealth and you don't know which one that will be in your life time. So the best thing you can do is have a portfolio that is immune, that is well diversified.”
5. “I'm saying based on the notion that you don't know which one it is. And therefore when you say which should it be today?' It should be balanced today like it is in the future and it should have that mix of assets. And now you get into a whole conversation...But you need to achieve balance.”
In short, no one has a crystal ball. Building a portfolio that has a well-diversified asset mix commiserate with your personal risk tolerance offers the highest probability of investment success.
Click here to watch the interview.
3rd August 2012
The US is tightening its grip on offshore centres’ ability to ‘hide’ money from the US authorities. The firepower that the US has to uncover assets has grown steadily and the recent experiences in Liechtenstein have shown that US investors should not try to avoid paying US tax, not only on moral grounds but on the fact that the long arm will find them eventually. We enclose an excellent article by Bill Sharp explaining how this long arm was extended over Liechtenstein.
The US Department of Justice has requested administrative assistance from Liechtenstein. This is not surprising, given the continuing efforts of the US government over the past several years to combat tax evasion through the use of offshore entities and accounts putatively sheltered by bank secrecy. What is interesting, however, is the magnitude of 'weapons' the US government has amassed to facilitate the further eradication of global offshore abuses.
This was evident in the pressure brought to bear on Liechtenstein in reaching the point of cooperation after a request for assistance. In the future, no jurisdiction can provide an assured safe haven for such abuses, at least with respect to stable countries where one might be willing to park significant assets.
Click here to read the full report.
27th July 2012
Yesterday, the UK Government issued a joint statement with the governments of France, Germany, Italy, Spain and the United States, announcing the publication of the Model Intergovernmental Agreement to Improve Tax Compliance and to Implement the United States Foreign Account Tax Compliance Act (FATCA).
This is viewed as a key step towards delivering on the commitment to an intergovernmental approach to implementing FATCA made by the same countries in their joint statement published on 8 February 2012 in which the UK Government aimed to:
• Address the legal barriers to complying with FATCA.
• Ensure the burdens imposed on financial institutions are proportionate to the goal of combating tax evasion.
• Establish a reciprocal approach to FATCA implementation.
More specifically, The Model sets out a framework within which:
• The legal barriers to compliance, such as those related to data protection, have been addressed.
• Withholding tax will not be imposed on income received by UK financial institutions.
• UK financial institutions will not be required to withhold tax on payments they make.
• The due diligence requirements are more closely aligned to the requirements under the existing anti-money laundering rules.
• HM Revenue & Customs (HMRC) will receive additional information from the US Internal Revenue Service (IRS) to enhance its compliance activities.
The UK Government said it was aiming to conclude negotiations with the US and sign the Intergovernmental Agreement as soon as possible. Financial institutions and other interested parties will then be consulted on the implementation of the agreement in the UK and draft legislation will be published later in 2012. The publication of the model was welcomed by George Osborne, Chancellor the Exchequer, who pointed to the benefits it offered to UK financial institutions and the strengthening of the UK ability to tackle tax evasion.
It was greeted more cautiously by the director general of the Association of Investment Companies (AIC) who whilst welcoming the agreement as creating a workable regime allowing UK firms to avoid the punitive consequences of FATCA, also pointed to the issues yet to be resolved such as how exactly the UK will approach implementation.
13th July 2012
Over the last decade, many commentators have argued for reasons why correlations are increasing or decreasing across asset classes. During the financial crisis, many have felt that within the global equity market there was nowhere to hide. An article in the Financial Times (click here - this may require a subscription) goes a long way to explaining the changing correlations.
It is interesting to see the argument put forward that the growth of passive investment vehicles is 'to blame' for this increased correlation. We firmly believe that during times of market stress, correlations increase across asset classes and, goodness, we have experienced enough of those times during the last decade. These "interesting times" will not last and correlations will fall, and indeed have fallen, which in turn means that diversification across asset classes should lead to higher risk adjusted rewards.
12th July 2012
US President Barrack Obama has called for the rich to pay higher taxes in a bid both to assist with his spending priorities and to cut the deficit. He said that the time had come "to let the tax cuts for the wealthiest Americans...expire". The tax breaks are in place for those earning over $250,000. President Obama wants the tax rates for these high earners to revert to those that were in place under the Clinton administration.
"We've got this huge deficit, and everybody agrees that we need to do something about these deficits and these debts. So the money we’re spending on these tax cuts for the wealthy is a major driver of our deficit, a major contributor to our deficit, costing us a trillion dollars over the next decade," the President said. "The American people are with me on this. Poll after poll shows that’s the case. And there are plenty of patriotic and very successful, very wealthy Americans who also agree, because they know that by making that kind of contribution, they’re making the country as a whole stronger.”
Tax cuts that were put in place by the Bush administration for the majority of Americans (98% of US earners are below the $250,000 threshold) are likely to stay in place, at least for another year, in order to provide stability for business owners and middle class Americans who would, on average, see their taxes increasing by $2,200 from 1st January 2013 if the tax cuts were stopped for everyone.
These measures will, of course, be discussed in Congress, but President Obama has urged that the extension for lower earners is passed soon.
11th July 2012
Brent Jaciow, Global CIO at MASECO Private Wealth A.G., spoke to CNBC this morning on the subject of buying fixed income even with yields at generational lows.
Click here to watch Brent discuss why the bond markets may be a good way to limit a portfolio's volatility.
9th July 2012
Unless one has been living under a rock as of late, news of the most recent banking scandal involving the manipulation of LIBOR has stretched to every corner of the MSM. Honestly, I do not understand why this story has received so much attention. Yes Bankers rigged a number. Yes some people lost money on derivatives tied to said number. Yes this is yet another nail in the coffin of public’s faith in banks. But, what has occurred in LIBOR, happens every day in the US Fixed Income markets. Namely a government body that has a monopoly on reserves, increases or decreases open market operations to ensure a rate remains at target. This institution is the US Federal Reserve.
Save for the population of hedgers and traders who may have been hurt by the rate fixing, there is always the possibility that some of us may even have benefited from it. LIBOR is used as the reference rate for many debt instruments, though it is most commonly used for floating rate mortgages. By artificially setting the rate lower, when a mortgage rate is reset it would likewise reset lower, thus producing a lower monthly interest payment. The saving might not represent a massive sum on an individual basis, but add that up across a significant number of floating rate mortgages and it could represent a substantial saving, that in turn could be used to buy goods and services and thereby increase economic growth. I do not believe that what Barclays or any of the other institutions did was right. Rigging, manipulating, or any other adjective describing their activity was decidedly and morally wrong. However given the oligopoly that is banking, it is hard to imagine LIBOR being set in any other manner than as an average of the rates of major players.
Our friend Cullen Roche at Pragmatic Capitalism has done a great job writing the article I wanted to write on this “scandal” before I could get to it. His full article can be found here.
In short the reasons you need not worry about the LIBOR fixing “scandal”
• Fed Funds Rate and LIBOR have a 99% correlation
• LIBOR is an average, if Barclays had put in much higher numbers, they would have been removed as outliers
• Banks have awful internal controls…what else is new?
I will leave you with a funny fake advertisement:
27th June 2012
Today is our 4th birthday and we are celebrating in style! We'd like to extend a HUGE THANK YOU to all our clients and contacts for their support over the past four years and look forward to working with you for many more years to come.
We have grown from a small team of four people to a team of over 30, combined with a steady growth in assets under management. We are delighted that we have been able to provide you with the services you need and our team is always striving for the best.
Keep up the good work, MASECO!
11th June 2012
One does not need to venture too far to hear or read about the demise of the Euro. From every analyst on Bloomberg to the investment bank research that fills my inbox, no one has had anything inspiring to say about the Euro. In fact, while doing research for this post, Google came back to me with this:
While not very promising, the grossly lopsided sentiment about the Euro tells a much larger tales than its woes. The Euro is not without its problems. Clearly some nations have taken on more debt than they can service which has created a host of problems. These problems include everything from inability to access debt markets for funding at “reasonable” rates (think Italy and Spain) to outright questioning of if a nation is a going concern (Greece). Within this article we will cover what the problems are and how this time is different, what we feel ultimately needs to happen and why we believe the Euro wont fail.
To any Bill Murray fan, what we have seen in the markets since 2010 surely makes us feel as though we are living out Ground Hog Day (insert IMBD link). Every year around March, the economic data out of Europe starts to get worse and the markets fall. After an extreme amount of volatility and policy response out of the EU, global capital markets shake off their rut and end the year largely unchanged. This year is no different, with the economic data out of Spain, Italy and even the much vaulted Germany missing expectations. So why are things different this time around? The major difference is the plumbing. The plumbing, or the funding markets for the greater EU banking system, have been made flush with liquidity. The exact name for this was called the Long Term Repurchase Operation or LTRO for short. The LTRO accomplished two very important goals. First, it ensured that banks were able to meet their short term funding requirements, regardless of the amount, backed by the European Central Bank. Thus there would be no Lehman Brothers type event as all institutions would have short term funding facilities available. Second, with the funding rate set artificially low, banks could then use these monies to purchase higher yielding Sovereign Debt. By being able to monetize the funding spread (the spread between the fixed income banks can buy vs their cost of funds) the banks would be able to repair their balance sheets to better equip them to handle negative economic shocks. This would also help drive down the borrowing costs for the EU banking system as confidence was restored.
So if the “Black Swan” banking event was taken off the table, why are people still concerned?
What got most of these nations in trouble was their inability to spend within their means, taking on far too much debt relative to their income. In order to combat this issue and prove to the funding markets they could get their financial house in balance, many governments have chosen the path of austerity to solve their problems. Austerity in and of itself is not wrong, though when every one of your major trading partners is undergoing the same financial malaise and is responding with austerity, there is no way to generate growth. The clear difference in US policy response can be seen in the chart below, where the US Government has chosen to fill the gap of private sector spending with public spending.
The issue is such, without the government of many troubled EU nations filling the consumption gap, it is nearly impossible for them to grow their way out of their debt burden. Thus, it is the austerity measures combined with the large debt balances which are hindering the abilities for these economies to heal their wounds.
So what happens?
While the path is uncertain, the end result is quite clear; the Euro will continue to operate as one of the world’s reserve currencies. Currently the Maastricht Treaty has no provisions for a nation to exit the Euro. For lack of a better term it’s a Suicide Pact. With no plan in place to map out how an exit from the EU would work, it’s unlikely (but not impossible) that a nation will be allowed to leave, given the years of legal issues which would arise. What is more likely is the formation of a Fiscal Union. This solution has its own problems, but in our opinion is much better than the alternative. Upon the creation of a Fiscal Union, debt (also known as Euro Bonds) could be raised that would be backed by all nation states. This would help create a system much like in the US with municipal vs governmental debt. By having this two tier system of debt, markets could more effectively value each nation’s balance sheet and subsequently their debt. By doing this, we would see an immediate revaluation of such nations as Italy and Spain, where debt haircuts (jargon for debt restructuring) could be arranged that would not put the whole system at risk. The system would have true risk free debt back stopped by all nation states and individual nation-state debt which would trade based on a spread to those Euro Bonds. This would avoid situations like we have now, where the Germans end up paying (begrudgingly, I might add) for Greece’s fiscal imprudence. It would also prevent nations from obtaining artificially cheap funding rates by joining the Euro and allow nations to go bankrupt without systematic implications. Setting up a Fiscal Union is no small feat, but those toilings are certainly preferable to the alternative of dissolving the Euro. It is also worth noting here, that the system is run by politicians. The politicians and their promises are what got many of these nations in trouble. While politicians are not the most financially savvy individuals, they do understand the financial benefit of continuing to receive their paychecks. Since they are the only ones able to change the rules and effect policy, it is highly, highly unlikely they will jeopardize their own personal income by letting the Euro fail. It is not clear at what level of turmoil they will take action, but one can be certain they will come to action and do whatever is necessary should a systematic risk present itself. The claims of the Euro’s death have been greatly exaggerated. As we have discussed, the outlook is not rosy and the road to recovery will have many ups and downs, but the Eurozone and the Euro will remain intact. We look forward to hearing any and all of your questions.
8th June 2012
We would like to share with you the text of the now famous speech on the European economic crisis by George Soros. While we do not agree on all of Mr Soros’ points we agree with the main thrust of the argument. It is impossible to predict outcomes of random events but it is useful to understand the different routes forward.
23rd April 2012
We have recently been enjoying ‘Thinking Fast and Slow’, a book by Daniel Kahneman. The book attempts to synthesise how humans make decisions. Of particular interest was the way in which the author used his vast experience to study how humans make financial decisions. Daniel talks about a variety of problems: overconfidence when making financial decisions; that financial markets are largely random; and that optimism is fine but only if you do think in a probabilistic way. At MASECO, we consider investment decisions in a probabilistically, and rely on that framework to make good quality investment decisions. This means we minimise the behavioural biases that affect all of us. We have included a link to an interview with Daniel Kahneman recently published in the CFA Institute magazine and an article by Michael Lewis in Vanity fair to give you an insight into the concepts.
6th April 2012
It’s one of the great tokens of faith of our times, that hedge fund managers can systematically deliver superior returns – so-called ‘alpha’. Researchers from Oxford University have recently published an innovative academic paper that will arouse the curiosity of college bursars and private investors alike, seeing as it calls this belief into question. In the paper, they reveal that 40% of hedge funds mislead investors by routinely revising historic performance data. This is possibly due to the secrecy of an industry that is largely unregulated compared to listed equities or registered mutual funds. Because mandatory, audited reporting of performance has not been required of them, hedge funds have typically self-reported monthly performance figures to public databases in order to attract further investment.
The three authors, all members of the Oxford-Man Institute of Quantitative Finance, examined 18,382 hedge funds between 2007 and 2011, and found that of the 7,000 that revised their performance, the majority did so downwards. “On average, initially-provided returns present a more rosy picture of hedge fund performance that finally revised performance.” The authors, Professor Andrew J Patton, Dr Tarun Ramadorai and DPhil student Michael Streatfield, suggest that such revisions should be taken negatively by potential investors, arguing that ne reporting regulations proposed by the Securities and Exchange Commission in the US should be broadened to include private investors and not just regulators.
In a related paper, three US academics extend the inquiry to self-selection bias, namely the practice of withdrawing poorly performing funds from the voluntary datasets. By returning these ‘dead’ funds to the datasets, they reveal that the reputation of the hedge fund industry for delivering superior risk-adjusted performance for their investors is a myth. They conclude that, after fees, hedge funds deliver risk-adjusted returns of essentially zero.
30th March 2012
"And you thought 2011 was tough?" So went the headlines in December as media and market pundits, reflecting on a miserable year, saw no respite for investors in 2012. But markets have a funny way of confounding expectations.
To be sure, the reasons to be anxious were piling high as the year turned, with European politicians dithering over how to tackle a tottering mountain of sovereign debt, policymakers in the US running short of options, and emerging markets not providing the cushion that many investors had hoped for. The general view, as expressed through the media, was that there would be more muddling through in early 2012. "Buckle up!" warned the respected Barron's magazine. "For investors frightened by the stock market's volatility in the past six months and tired of worrying about places in Europe once given little thought, 2012 promises scant comfort—at least in the first half."1
As an investor, if you had taken that advice, you might be ruing it now, as global equity markets—as measured by the MSCI World Index—have registered their best start to a calendar year in twenty-one years. The index was up by just over 10% in US dollar terms as of the end of February. You have to go all the way back to 1991 to find a better start.
Added to that is that much of the leadership for the turnaround is coming from the US, an economy that many observers just two years ago were writing off in favor of the emerging powerhouse economies in Asia. The US benchmark S&P 500 was up by 9.0% at the end of February. This is also its best start since 1991 and returns the index to the levels of June 2008, before the Lehman collapse.
The US market's strong start followed a standout 2011 in which it was one of the best-performing markets in the world. And that included most of the emerging markets.
Even Europe, the epicenter of concerns for much of the past year, has exploded out of the blocks in 2012. The Euro Stoxx 50 was up by nearly 12% over the first two months of the year, with the German market rising by close to 20% in US dollar terms.
The renewed buoyancy extended to Asia, where the MSCI Asia Pacific Index has registered ten consecutive weeks of gains, its longest uninterrupted winning streak since 1988, and powered by strength in energy stocks. Australian stocks have firmed as well, to be up 12.5% year to date in US dollar terms—although in local currency terms, the gain has been less stellar at just over 7%.
Why the change in mood? There are several catalysts for the turnaround in markets so far in 2012.
First, by the end of last year, market participants were discounting a lot of bad news, including a couple catastrophic scenarios. Fears of mass defaults in Europe and a possible breakup of the euro were seen as entirely possible.
While Europe can hardly be described as being out of the woods yet, the agreement by creditors on a new round of official funding for Greece has eased nerves, as has the European Central Bank's provision of another half-trillion euros in cheap funding to financial institutions.
Second, there have been signs of a turnaround in the US economy, at least compared to the view the market was taking a few months ago. At that time, another recession was seen to be in the cards. Since then, data has shown an improvement in the labor market, a rise in manufacturing orders, and a climb in consumer confidence.
Third, central banks are pumping out massive amounts of cheap cash—essentially printing money—to provide liquidity to the financial system and to support the recovery. As well as the ECB's latest cash injection, Japan and Britain have recently extended their so-called "quantitative easing" programs, while China has cut the reserve requirements for its banks.
Of course, just as it was wrong to extrapolate the pessimism of last year into 2012, it would be foolish to forecast that the rest of this year will resemble the first two months in tone. No one knows how markets will perform going forward, because that requires an ability to forecast news. You can always guess, of course, but we tend to think that's not a sustainable investment strategy.
The point of this is to highlight the virtues of discipline and the tendency of markets to absorb news very, very quickly and to look forward to the next thing. Unless you know what the next thing will be, you are wise to stay in your seat.
1. "Buckle Up!" Barron's, December 19, 2011.
23rd March 2012
While this is something we have known for quite some time, Charles Rotblut highlights a couple of great points from the most recent S&P Indices Versus Active Funds Report (click here to read his article). Namely, in aggregate, active funds fail to beat their benchmark over a 5-year period. This is not to say that active management does not have a place in a person’s portfolio, but as this report shows there are only certain pockets of inefficiency from which outperformance can be found.
All else being equal, individuals can reap higher rates of after tax returns and lower fees by investing with asset class funds. In fact, rather than spending inordinate amounts of time searching for that manager which may or may not outperform their index over a 5 year period, investors can buy an asset class fund and have (statistically) a 75% chance of beating the category average returns. This probability increases to over 90% when talking about Fixed Income mandates. It is great to see hard data prove that the highest probability for achieving returns in the top 25% of a category is by taking an index based approach. If you have any questions about this study or its ramifications, please feel free to reach out to us: email@example.com.
12th March 2012
A recent article published on Bloomberg highlights the fact that equity mutual funds had their worst year in 2011 since 1997, relative to the Standard & Poor's 500 Index.
The DFA Tax-Managed US Equity fund was up 1.18% on the year and, although it underperformed the S&P 500 by less than 1%, it outperformed the S&P 500 by 0.16% per annum over the last five years (and also outperformed 73% of funds). The largest ETF that tracks the S&P 500 was also up 1.18% last year, but has underperformed the Index by 0.19% (per annum) over the past five years and outperformed only 19% of funds.
9th March 2012
The Economist last month had a great article entitled “From alpha to smart beta” (click here to read the artice). With their tongue firmly pressed against their cheek, the Economist highlights a concern of every investor; what was my performance and subsequently how much am I paying for it. The fact of the matter is markets are a zero sum game. That is, for every person that makes a profit, there is another person with an equal and opposite loss. Hedge funds, the high priests of market inefficiency, charge high (typically 2% asset management and 20% performance fees) in order to produce returns above their benchmark aka to find Alpha. Because not everyone can create alpha, it is very hard to produce consistently. So hard in fact many hedge funds have failed to deliver on their promises, producing very underwhelming returns with very hefty fees attached. While there are certainly a number of hedge funds that produce alpha, in aggregate they have not been able to do so.
We would like to bring your attention to the industry’s dirty little secret: a 60/40 stock/bond portfolio produces nearly the same returns as the HFRI Index (even when shown Gross of Fees), but without the fees associated. We believe, as I’m sure you would agree, it’s better to have that money re-invested in your portfolio than overpaying for performance.
24th February 2012
The investment world has historically been driven by a number of ingrained assumptions which are heavy on opinion and light on facts. When talking about investing one's hard-earned money, it is crucial to guide investment decisions based on fact and not some pundit’s opinion. This is no more apparent than in the majority of the investment industry, which is predicated on delievering outperformance from active management. Certainly, active management has had some great successes such as Warren Buffett and George Soros to name a few but, in aggregate, the active management industry segment has generated a mountain of revenue and a molehill of outperformance. In fact, 70% of all investment managers fail to beat their benchmark over a five-year period.
A recent article (highlighted by the blog Research Puzzle) examines the need for every organisation to have an Assumption Hunter.
The blog states:
“...assumptions will eventually collide with an evolving world. Therefore, they can’t be viewed in isolation, but in light of what’s on the horizon. That’s tough (and creative) work — anticipating change is easier said than done.... You need assumption hunters to ferret them out, to identify the decaying and destructive ones for what they are and to recognise when a firm is ill-suited for the environment on the horizon. Who should do it? McCracken says such a role is naturally the province of those trained in the liberal arts. (That sound you just heard was a bunch of clicks from investment types, leaving this posting just as I was about to speak to them.)”
We at MASECO could not agree more. To the investment management business we are the assumption hunters. Rather than manage assets with the status quo, we delve deep into the data to better understand the fundamental relationship of risk and return. Furthermore we strive to see where our actions can add value and where our actions can detract value. Having taken the Hippocratic Oath of Investment Management, we seek to do no harm and only add value. This means a stringent focus on asset allocation, cost cutting and steadfast resolve to deliver high levels of after-tax performance.
Are we always right? Certainly not. But we are never afraid to roll up our sleeves and get dirty with the data. By continuously testing and re-evaluating our ideas via new academic literature and proprietary research we aim to deliver our clients with the most empirically robust investment structure.
The real question is, what other assumptions are we operating under that need to be radically changed? We look forward to your comments and please be sure to send any questions you have directly to firstname.lastname@example.org.
30th January 2012
Many are asking how Europe has got into such a mess. Indeed, today's EU summit will be taken up with discussion as to how to resolve the eurozone crisis.
Some would point the finger at the southern states of Europe being to blame for the debt crisis, but it may be that the finger should point further north - towards Germany. The costs associated with German reunification led to a 2003 budget overspend in Germany, which was concurrent with a budget overspend in France.
These overspends pushed France and Germany's budget deficits outside the 3% of GDP which was allowed under the Stability and Growth Pact - a tool used to police the economies of member states to ensure that they followed the rules laid down for the single currency in the Maastricht Treaty.
The EU Commission had the power to fine member states who stepped outside the rules of the pact, but in this instance, the finance ministers of the then 15 eurozone member states met in Brussels and voted against the Commission, in effect voting not to enforce the rules that they had signed up to to protect the single currency's stability.
"The credibility of the Commission and the readiness of the members states to accept the authority of the Commission as the independent enforcer of the Maastricht criteria was obviously gravely undermined," according to Sir John Grant, the UK's ambassador to the EU at the time.
The fact that two of the biggest players in Europe were able to ignore the rules opened the gates for the smaller economies to break the rules and, if necessary, hide this fact from the Commission. Now these opportunities are being removed, with eurozone member states having to submit their budgets to Brussels in advance for approval (and with the centre of gravity shifting towards Berlin, some states are increasingly feeling that these two countries are the ones to 'approve' their budgets).
How long before the rest of Europe starts resenting Germany? Already there are signs that a revolt may be beginning. It will be interesting to see how seeds that were sown nearly ten years ago grow.
16th January 2012
The Item Club's latest forecast is that the UK may already have slipped back into recession. The think tank has said that the UK's GDP shrank in the final quarter of last year and is very likely to contract again during the first three months of this year.
Even if the eurozone could resolve its problems, the UK economy would likely grow by just 0.2% this year, it said. A gloomy forecast for unemployment was also highlighted, suggesting that the figure would rise by some 300,000 to just below three million.
The Item Club predominantly blames the eurozone crisis for the UK's negative outlook and Europe is responsible for close to 70% of the UK's exports and because the eurozone crisis was unlikely to ease any time soon, the outlook remains bleak until 2014.
13th January 2012
US President Barack Obama has requested Congress to approve a further £1.2 trillion rise in borrowing to meet existing spending commitments. The move is likely to spark another row with Republicans, who will claim that the President is failing on deficit reduction.
The proposal would raise the US debt ceiling to a staggering $16.4 trillion. Last year the government came close to default in a row over the debt ceiling but a fragile truce was agreed, dependent on long-term plans to reduce the nation's deficit.
President Obama was keen to increase the limit before the end of last year but was blocked until the House and the Senate were back in session, meaning that the administration had to dip into its Exchange Stabilization Fund, a fund normally used to maintain currency stability. Other measures may be required until the debt limit has been agreed.
12th January 2012
MASECO Private Wealth, the London-based wealth manager that advises US nationals living in the UK, is delighted to announce the appointment of Maria Chapman as Head of Business Development. Before joining MASECO, Maria was Head of Private Banking Relationships with currency management firm The ECU Group plc (“ECU”), for 13 years and was responsible for developing and maintaining the company’s currency lending and asset management banking relationships and performing a business development role. Maria was also on the board of directors.
Prior to joining The ECU Group, Maria held senior business development and private banking positions with Kleinwort Benson, Bank Boston and The Boston Safe Deposit and Trust Company where she was responsible for implementing structured marketing programmes to IFAs, banks and investment houses, specifically targeting US nationals living and working in the UK.
Cormac Naughten has joined MASECO as Head of MASECO Institutional. Cormac will be working with advisers and intermediaries to further develop MASECO’s offering to this core market.
Prior to joining MASECO, Cormac was Head of Private Client Sales and Marketing at ECU and served on the board as a director following ECU’s MBO from ED&F Man. Over a ten-year period he created and led a team which won over £1 billion in currency management mandates leading to ECU being awarded 19th place in the 2007 Sunday Times Fast Track 100 awards which recognises the private companies in the UK with the fastest sales growth.
Previously Cormac worked as a foreign exchange broker in London and Switzerland after graduating in modern history from Jesus College, Oxford.
James Sellon, Managing Partner, MASECO Private Wealth, commented:
“The addition of Maria and Cormac to our team represents another significant step forward for MASECO’s continued growth. We are delighted to enhance our offering to clients and intermediaries with two such high-calibre professionals. Cormac and Maria will help to further strengthen MASECO’s focus on the relationships that help our broad range of clients to achieve their investment goals.”
10th January 2012
A survey carried out by The British Chambers of Commerce (BCC) has suggested that the UK economy is likely to remain weak for some time to come, but slipping back into recession is by no means inevitable.
However, the survey of more than 6,000 UK businesses also found that domestic demand is at its lowest level for more than two years. But the BCC said that the results do not indicate a recession and are still better than those seen in the worst phase of the last downturn that began in 2008.
9th January 2012
According to recent figures, the US economy created an additional 200,000 new jobs in December, beating analysts' estimates of 150,000. This represents the sixth month in a row that the employment rate has risen.
Officially, the unemployment rate has now dropped to just 8.5%, from a revised 8.7% in November. This is the lowest level in nearly three years. A large proportion of the job gains were in retail, manufacturing, transportation, warehousing and healthcare. For 2011 as a whole, the US economy saw a rise in employment of 1.6 million - the highest rise since 2006.
On the other side of the Atlantic, the euro is in continued decline and has breached $1.27 for the first time in more than a year. In the UK, Rolls Royce has announced that it sold more cars during 2011 than in any other year since it began production. The previous record was in 1978. The sales growth was particularly strong in Germany, Russia and Asia-Pacific.
6th January 2012
The euro has dropped to its lowest rate against the dollar and pound in 16 months, as concerns continue over the health of Europe's banks.
The euro fell as low as $1.2780 against the dollar and was at an 11-year low versus the yen. Against the pound, it fell to 82.52p, the lowest since September 2010.
Markets were unsettled after France's cost of borrowing rose and a Spanish minister suggested its banks may face a higher bad loan bill.
5th January 2012
Three bankers in Switzerland have been charged with conspiring to help US clients hide more than $1.2 billion from American tax authorities.
The bankers helped Americans open dozens of accounts and hide them from the IRS after a US crackdown on offshore tax evasion led clients to flee bigger Swiss banks in 2008 and 2009, according to a new indictment.
The bank concerned no longer has US clients, and is negotiating with US authorities and the indictment doesn’t name the bank.
The indictment signals a broadening crackdown by US prosecutors, who filed tax charges against more than three dozen US clients of UBS AG and Credit Suisse Group AG, Switzerland’s two biggest banks, and London-based HSBC Holdings Plc, Europe’s biggest bank. They have also charged at least 24 bankers, advisers and attorneys, including seven Credit Suisse bankers.
The indictment comes amid US-Swiss talks to resolve a US probe of offshore tax evasion. Officials seek to reach a civil settlement with Swiss banks and resolve criminal probes of 11 of them.
US prosecutors charged UBS in 2009 with helping Americans hide assets from the IRS. UBS avoided prosecution by admitting it aided tax evasion, paying $780 million and handing over data on 250 accounts. It later disclosed another 4,450 accounts, causing US customers to seek new banks.
As those clients fled UBS and another large Swiss bank, the indicted bankers wooed them. The bank also solicited accounts through a third-party website, prosecutors said.
The men told clients their undeclared accounts would stay hidden from the IRS because the bank “had a long tradition of bank secrecy, and, unlike UBS, did not have offices outside Switzerland,” making it “less vulnerable to United States law enforcement pressure,” according to the indictment. The men, who live in Switzerland, face as long as five years in prison if convicted. Since 2009, about 30,000 Americans have avoided prosecution by disclosing their offshore accounts to the IRS. Prosecutors have debriefed hundreds of those clients to learn which banks and advisers helped them cheat the IRS. The Justice Department has used those interviews to build several criminal cases.
4th January 2012
The US Internal Revenue Service (IRS) has recently released additional guidance for US citizens and dual citizens of the US and another country residing outside the US. The guidance, FS 2001-13, provides welcome relief in that it outlines more effectively the process to remedy any previous failure to file US tax returns and foreign bank account reporting (FBAR) forms without imposing penalties.
The provisos are that the taxpayer either owes no US tax due to the application of the foreign earned income exclusion (or foreign tax credits), or, if there is a US tax liability, the failure to file was due to reasonable cause.
The Guidance includes an example of a situation where a US citizen lives and works abroad, initially fails to file a US income tax return, and then subsequently files an accurate (but late) tax return showing no US tax liability due to the application of the section 911 foreign earned income exclusion or foreign tax credits for taxes paid to the country in which he resides and works. In such a situation, the guidance states that the taxpayer is not liable for penalties in connection with the previous failure to file the return.
Where there is an unpaid US tax liability, the guidance notes that “reasonable cause” relief may still be granted where the taxpayer is able to show that they were not aware of their specific obligations to file returns or pay US taxes, taking into account factors including their education, whether they had previously been subject to these tax or reporting requirements, whether they had been penalised for any violations in the past, whether these obligations are the result of recent changes in the tax law or forms, and the level of complexity of the tax or compliance issue.
With regards FBAR filing, the guidance specifically addresses the failure to file Forms TD F 90-22.1 (Foreign Bank and Financial Account Reports), and includes an example where a US citizen residing and working abroad files accurate but late FBARs accompanied by a written statement setting forth an explanation as to why the taxpayer believes their previous failure to file this form was due to reasonable cause.
This could represent a significant opportunity for US citizens and dual citizens residing abroad, who have until recently been unaware of the obligation that they file this form, to submit late FBARs along with a reasonable cause letter and thereby avoid the significant penalties that otherwise could apply.
Whether the IRS might grant such relief depends on a number of factors, and US citizens and dual citizens who believe this reasonable cause procedure may be to their advantage should contact their advisers in order to determine whether they would potentially qualify for such relief.
1st January 2012
A very happy and prosperous 2012 to all our clients and business contacts, and hope that you have enjoyed the holiday season with your families.
We are very excited about what 2012 will bring and look forward to continuing to deliver the products and service levels that you expect from MASECO Private Wealth.
The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not necessarily a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. In the case of some investments, you should be aware that there is no recognised market for them, and that it may therefore be difficult for you to deal in them or for you to obtain reliable information about their value or the extent of the risks to which they are exposed. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. It may be possible to lose all your initial capital in certain types of investments. Before contemplating any transaction, you should consider whether you require financial advice, which we would be pleased to provide upon request.
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