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Rockefeller Partners with Gregory J. Fleming to Create Independent
Financial Services Firm
Firm to Focus on Wealth Management, Asset Management and Strategic Advisory
Viking Global Investors to Back New Firm
October 04, 2017 06:30 AM Eastern Daylight Time
NEW YORK--(BUSINESS WIRE)--Rockefeller Financial Services, Inc. (“RFS”), the parent company of Rockefeller & Co.,
and Gregory J. Fleming have agreed to form Rockefeller Capital Management (“Rockefeller” or “the firm”), an independent
financial services firm focused on wealth management, asset management and strategic advisory. The firm will look to
build upon the 135-year history of excellence in wealth and investment management associated with the Rockefeller family
through the addition of broader capabilities and new growth capital.
Greg Fleming will become the Chief Executive Officer of Rockefeller upon closing. Mr. Fleming, a longtime financial
services executive, was most recently the President of Morgan Stanley Wealth and Asset Management and prior to that,
the President of Merrill Lynch. Viking Global Investors LP (“Viking”) will back the firm through an investment by one of its
investment funds. Financial terms were not disclosed.
“The team at Rockefeller Financial Services has spent years building the highest-quality investment management firm for
families and institutions,” said David Rockefeller, Jr., Chairman of RFS. “We look forward to Greg’s leadership and Viking’s
support to expand the Rockefeller platform and bring new products and services to our clients.”
This combination will allow Rockefeller to build on its distinguished legacy of serving families, including the Rockefeller
family, as well as foundations, endowments and institutions. Under Mr. Fleming’s leadership, the firm plans to expand its
asset management focus on global equities and ESG investing, add to its wealth management capabilities, and build a
strategic advisory business. Rockefeller will have four operating units: Wealth Management, Asset Management, Family
Office Advisory, and Strategic Advisory.
“I look forward to leading Rockefeller into its next chapter, backed by the Rockefeller family and my new partners at
Viking,” Mr. Fleming said. "This is an opportunity to create a unique independent firm focused on wealth management,
asset management, and strategic advisory."
Rockefeller will be owned by a Viking investment fund, a trust representing the broader Rockefeller family, and the firm’s
management. The ownership group anticipates making substantial additional capital investments in Rockefeller over
multiple years. This will provide the capital necessary for Rockefeller to execute its strategy, enabling the firm to broaden
its products and services and accelerate its growth.
The board of the new firm will include Mr. Fleming, David Rockefeller, Jr., Peter M. O’Neill, Reuben Jeffery III, and Brian
Kaufmann of Viking. Additional independent directors will be added in due course.
The transaction is subject to certain customary closing conditions and is expected to close in the first quarter of next year.
Ardea Partners acted as the financial advisor to RFS, and Willkie Farr & Gallagher LLP was the legal advisor to RFS. Paul,
Weiss, Rifkind, Wharton & Garrison LLP was the legal advisor to Viking.
About Rockefeller Financial Services
As of June 30, 2017, Rockefeller & Co. has approximately $16.2 billion in assets under advisement for individuals and
families, family offices, nonprofit organizations, foundations, endowments, and global institutions. This number includes net
assets under management of approximately $10.9 billion plus approximately $5.3 billion in advisory assets. Advised assets
represent non-managed assets that receive services, such as financial planning, administration and/or consulting for open
architecture programs or other assignments, consolidated reporting, and accounting and tax return preparation services.
About Viking
Viking Global Investors LP is a global investment firm founded in 1999, with offices in Greenwich, New York, San
Francisco, Hong Kong and London. The firm manages approximately $25 billion in capital and uses fundamental analysis
to select investments, primarily public and private equity securities, from a wide range of industries globally. Viking is
registered as an investment adviser under the U.S. Investment Advisers Act of 1940.
Contacts
Media:
Teneo Strategy
Stephen Cohen, 212-886-9332
stephen.cohen@teneostrategy.com
or
Vested
Binna Kim, 917-765-8720
binna@fullyvested.com
11/14/2017 Viking Global to Back Rockefeller Wealth Firm Led by Fleming - Bloomberg
Viking Global to Back Rockefeller Wealth Firm Led by Fleming
By Jennifer Surane and Simone Foxman
October 4, 2017, 6:12 AM PDT
Updated on October 4, 2017, 9:48 AM PDT
➞
➞
Ex-Morgan Stanley executive Greg Fleming to be firm’s CEO
Hedge fund to become majority owner of high-net-worth adviser
Greg Fleming, a former top executive at Morgan Stanley, is joining with the Rockefeller family office to create a wealth-management firm that
will be backed by Viking Global Investors.
Fleming will be chief executive officer of Rockefeller Capital Management, an adviser to the ultra-wealthy that will be acquired by Viking
Global after the deal is completed early next year, the New York-based company said Wednesday in a statement
. Terms weren’t disclosed.
Fleming, 54, who was most recently president of Morgan Stanley Wealth and Asset Management, left the Wall Street firm last year after CEO
James Gorman indicated he planned to stay on at least five more years and installed an older deputy in the bank’s No. 2 position, people with
knowledge of the decision said at the time. Before joining Morgan Stanley, Fleming was president of Merrill Lynch & Co.
Replay
In addition to wealth and asset management, the new company will create a unit focusing on advising large multinational companies, Fleming
said in a phone interview.
‘Strategic Advice’
“Many wealthy families own companies that they need to take public or sell,” he said. “They’re looking for strategic advice, and they’re looking
for interesting investments.”
https://www.bloomberg.com/news/articles/2017-10-04/viking-global-to-back-rockefeller-wealth-firm-led-by-fleming 1/4
11/14/2017 Viking Global to Back Rockefeller Wealth Firm Led by Fleming - Bloomberg
He said a deal to purchase the Miami Marlins baseball team that he was involved in earlier this year was an example of the sort of investment
the firm’s clients might be interested in.
A private-equity fund managed by Viking will own the majority of the business, while Fleming and others in management will invest, he said.
A trust representing the broader Rockefeller family will remain an owner, though it’s selling some of its stake as part of the transaction.
Rockefeller & Co., which began 135 years ago as the family office of oil baron John D. Rockefeller, oversees about $10.9 billion for families and
other institutional investors, and advises on another $5.3 billion, according to the statement. Fleming said that Viking’s capital will be used to
expand these businesses, as well as building an advisory arm.
“The industry is very fragmented," Fleming said. For independent companies that combine wealth and asset management, as well as advisory,
“there’s room, if you do it well, to really generate some market share, especially for a firm with a brand as good as Rockefeller," he added.
Viking Global, which was founded by Andreas Halvorsen, has about $25 billion under management, making it one of the biggest hedge funds in
the world.
The Rockefeller family office was advised by Ardea Partners, an investment bank formed last year by Goldman Sachs Group Inc. veteran Chris
Cole and a handful of former colleagues. Willkie Farr & Gallagher LLP provided legal advice, according to the statement. Paul, Weiss, Ri ind,
Wharton & Garrison LLP was legal adviser to Viking Global.
The Wall Street Journal reported on Fleming’s new role earlier Wednesday.
https://www.bloomberg.com/news/articles/2017-10-04/viking-global-to-back-rockefeller-wealth-firm-led-by-fleming 2/4
11/14/2017 Viking Global to Back Rockefeller Wealth Firm Led by Fleming - Bloomberg
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11/14/2017 Rockefeller & Co. :: Who We Are
WHO WE ARE
O U R F I R M D E F I N E D O U R C U LT U R E C E O M E S S A G E
O U R L E A D E R S H I P T E A M
OUR FIRM DEFINED
Rockefeller & Co. is a distinctive nancial services rm that is privately held and independent.
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11/14/2017 Rockefeller & Co. :: Who We Are
DRIVEN
BY
the intellectual soundness,
creative acumen, and personal
dedication of our people
FOCUSED
ON
assessing investment
opportunities through a global
lens
COMMITTED
TO
providing insightful solutions
for the sophisticated needs of
our clients
C L I E N T L O G I N
WHO WE ARE WHAT WE DO INSIGHTS & NEWS
CAREERS
CONTACT
1 1 / 1 5 / 2 0 1 6
1 0 / 3 / 2 0 1 7
0 6 / 3 0 / 2 0 1 6
About Rockefeller & Co.
Thirty Years Later
Rockefeller & Co. team
members summarize the
breadth of services available
to non-pro t clients.
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11/14/2017 Rockefeller & Co. :: Who We Are
OUR CULTURE
Rockefeller & Co. is privately owned and focused
on the diverse investment and nancial needs of
our sophisticated clientele. From our beginnings
As global citizens—with a geographically
unconstrained approach to asset management—
we know how important it is to perceive the world
as the Rockefeller family o
ce, we are today a
in its totality in seeking to bene t from the wealth
full-service, independent asset management and
of opportunities held therein. Our asset
wealth advisory
rm, with a mission to help our
management team speaks 13 languages, an
clients achieve their goals.
indication of the global perspective we apply to
our business.
1882
1979
T O D A Y
1980
Rockefeller & Co. has approximately $16.9
billion in assets under advisement for
2012
individuals and families, family o ces,
nonpro t organizations, foundations,
endowments, and global institutions. 1
1 As of September 30, 2017. This number includes net
assets under management of approximately $11.4
billion plus approximately $5.5 billion in advisory
assets. Advised assets represent non-managed assets
that receive services, such as consulting for open
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11/14/2017 Rockefeller & Co. :: Who We Are
architecture programs or other non-managed
investment assignments.
CEO
MESSAGE
establishes a family
growing investment
In this video, Reuben Je ery III discusses Rockefeller
needs of his family.
& Co.’s commitment to service and stewardship. We
pride ourselves on our client focus and the strong
relationships we develop with individuals, families, and
institutions.
P L A Y V I D E O
882
OUR LEADERSHIP TEAM
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11/14/2017 Rockefeller & Co. :: Who We Are
REUBEN JEFFERY III
JIMMY C. CHANG, CFA
YVETTE M. GARCIA
DAVID P. HARRIS, CFA
Managing Director,
Managing Director,
Managing Director,
Managing Director,
President & Chief
Chief Investment
General Counsel &
Chief Investment
Executive O
cer
Strategist
Chief Administrative
O
cer
O
cer
STUART HENDRY
TIMOTHY J.
ELIZABETH P.
KARA VALENTINE
Managing Director,
MCCARTHY
MUNSON
Senior Vice President,
Chief Operating
Managing Director,
Managing Director,
Director of Marketing
O
cer
Chief Compliance
President of
O
cer & Counsel
Rockefeller Trust
Company, N.A. & The
Rockefeller Trust
Company (Delaware)
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11/14/2017 Rockefeller & Co. :: Who We Are
RAYMOND N.
WAREHAM
Managing Director,
Head of Wealth
Advisory
DAVID WESTBROOK
Managing Director,
Chief Financial
O cer
WHO WE ARE
WHAT WE DO
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USE PRIVACY STATEMENT
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11/14/2017 Rockefeller & Co. :: News
INSIGHTS & NEWS
INSIGHTS
NEWS
H A P P E N I N G S
I N T H E M E D I A
HAPPENINGS 01 02
0 9 / 0 8 / 2 0 1 6
0 7 / 2 2 / 2 0 1 6
ROCKEFELLER & CO. PARTICIPATES IN
OPERATION BACKPACK 2016
As part of our community outreach initiative, Rockefeller & Co. again participated in
Operation Backpack 2016. Thousands of children live in New York City’s homeless
and domestic violence shelters. One of the most devastating consequences of
homelessness is the impact it has on a child's education.
ROCKEFELLER & CO. HOSTS GUESTS
SIXTH ANNUAL NEXUS GLOBAL YOU
SUMMIT
From July 20th through 22nd in New York, Karen Wawrzaszek, Sen
Advisor and Managing Director, and Jack McMackin, Client Associa
delegation of “Next Generation” clients and other guests at the Sixt
Nexus Global Youth Summit.
C L I E N T LO G I N
WHO WE ARE WHAT WE DO INSIGHTS & NEWS CAREERS CONTACT
0 6 / 1 5 / 2 0 1 6
ROCKEFELLER RESEARCH SERIES: THE
DRIVERLESS ECONOMY
Rockefeller & Co. hosted 2016’s rst installment of the Rockefeller Research Series
at the Boston o
New York at The Modern.
ces on Wednesday, June 8th with a subsequent presentation in
0 5 / 0 4 / 2 0 1 6
MEREDITH BLOCK PRESENTS AT THE
ATLANTA SOCIETY OF FINANCE &
INVESTMENT PROFESSIONALS (ASF
Rockefeller & Co. was invited to discuss Sustainability & Impact Inve
ASFIP in Atlanta, GA on May 4th, where Judy Lee, analyst and mem
Institutional Sales and Consultant Relations team, introduced a pres
Meredith Block, S&I Vice President and Analyst.
http://www.rockco.com/news 1/3
11/14/2017 Rockefeller & Co. :: News
0 4 / 2 9 / 2 0 1 6
DAVID HARRIS PANELIST AT ESG WORKSHOP
AT INSTITUTIONAL INVESTOR FORUM
On Friday, April 29th, David Harris was featured in a workshop at the Institutional
Investor Forum entitled “ESG: Divestment, Governance and Future of Sustainable
Investing.”
0 4 / 1 9 / 2 0 1 6
MATT GELFAND SPEAKS AT NAFOA A
CONFERENCE
On Tuesday, April 19th Matt Gelfand, Managing Director, participat
the Native American Finance O
Conference in Phoenix, AZ.
cers Association’s (NAFOA) 34t
WHO WE ARE WHAT WE DO INSIGHTS & NEWS CAREERS
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11/14/2017 Rockefeller & Co. :: Insights
INSIGHTS & NEWS
INSIGHTS
NEWS
W H AT ’ S N E W V I D E O S A N D P O D C A S T S I N V E S T M E N T C O M M E N TA R Y
C L I E N T LO G I N
WHO WE ARE WHAT WE DO INSIGHTS & NEWS CAREERS CONTACT
WHAT’S NEW
1 1 / 0 1 / 2 0 1 7 M O N T H LY M A R K E T
R E V I E W
A “Vixing” Puzzle — Market’s unusual
lack of volatility; Be fearful when others
are greedy
0 9 / 0 1 / 2 0 1 7 M O N T H LY M A R K E T
R E V I E W
Fire & Fury — A chaotic presidential
summer vacation; Government
shutdown now a distinct possibility
Q 4 2 0 1 7 G L O B A L F O R E S I G H T
Thirty Years Later — Reagan’s Berlin Wall Speech, Rising Debt, the 1987
Crash and Implications for Today’s Equity and Fixed Income Markets
Q 3 2 0 1 7 G L O B A L F O R E S I G H T
Aging Bull — Where we see investment
opportunities after eight years of rising
markets
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WHO WE ARE WHAT WE DO INSIGHTS & NEWS CAREERS
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11/14/2017 Rockefeller & Co., Inc.: Private Company Information - Bloomberg
Capital Markets
Company Overview of Rockefeller & Co., Inc.
Snapshot
People
November 14, 2017 6:15 PM ET
Company Overview
Rockefeller & Co., Inc. is a privately owned
investment manager. It provides its services to High
net worth individuals, their families, family offices and
related entities, funds organized as domestic or
offshore (non-U.S.) companies, limited partnerships,
limited liability companies or other types of legal
entities; U.S. registered investment companies;
Trusts and other fiduciary accounts , Foundations,
endowments, charitable and other nonprofit
institutions; Taxable and tax-exempt accounts, and
Sovereign Nation(s). The firm manages separate
client-focused equity and fixed income portfolios. The
firm invests in the public equity markets across the
globe. It invests in the fixed income m...
Detailed Description
Key Executives For Rockefeller & Co., Inc.
Mr. Reuben Jeffery III, J.D.
Managing Director, President, CEO, and Member of
the Board
Age: 64
Mr. David Westbrook
Chief Financial Officer and Managing Director
Mr. Stuart Hendry
Chief Operating Officer and Managing Director
Mr. David Peter Harris CFA
Chief Investment Officer, Managing Director, and
Portfolio Manager
Ms. Yvette Marie Garcia J.D.
Chief Administrative Officer, Secretary, Managing
Director, and General Counsel
10 Rockefeller Plaza
New York, NY 10020
United States
Founded in 1882
Phone: 212-549-5330
Fax: 212-549-5524
www.rockco.com
Compensation as of Fiscal Year 2017.
Rockefeller & Co., Inc. Key Developments
Rockefeller & Co Names David Rockefeller, Jr. as Chairman
Oct 31 16
Rockefeller & Co announced that director David Rockefeller, Jr. has been appointed chairman of the board of
directors. Mr. Rockefeller, a founding member of the board of directors, succeeds Colin G. Campbell, who
has served as chairman since 2003. Mr. Campbell will remain a member of the board of directors. As
chairman, Mr. Rockefeller will lead the board of directors in its oversight of the firm’s business, and will work
closely with Rockefeller & Co. CEO and president, Reuben Jeffery III, in supporting the firm’s delivery of best
in class wealth advisory and asset management services to high net worth individuals, families and
institutions.
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11/14/2017 Rockefeller & Co. :: Contact
CAREERS
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CAREER
OPPORTUNITIES
Rockefeller & Co. is a distinctive nancial services rm that is privately held and independent. We
take great pride in the integrity, depth and vision of our professionals.
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ROCKEFELLER
INSIGHTS
ACTIVE STEWARDSHIP
IN FINANCIAL SERVICES
Mariela Vargova, Ph.D.
Senior Vice President, Senior Sustainability and Impact Analyst
Emmanuel L. Sobong, CFA
Senior Equity Analyst
ROCKCO.COM
© 2017 by Rockefeller & Co., Inc. All rights reserved. Does not apply to sourced material. Products and services may be provided by various subsidiaries of Rockefeller & Co., Inc.
“THE CONCEPT
OF ‘ACTIVE
STEWARDSHIP’ WAS
FIRST INTRODUCED IN
THE UNITED KINGDOM
IN 2010 WHEN THE
COUNTRY’S FINANCIAL
REPORTING COUNCIL
INTRODUCED THE UK
STEWARDSHIP CODE.”
– Mariela Vargova, Ph.D.
1
ACTIVE STEWARDSHIP IN FINANCIAL SERVICES
Active Stewardship
Nine years ago, in mid-March, Bear Stearns, which in 2007 traded
at over $125 per share, was sold to J.P. Morgan for $10 per share
in a transaction that many mark as the beginning of, what we now
know as, the Global Financial Crisis of 2008. While it is said that
the passage of time heals all wounds, the disastrous contagion
across the global financial landscape, the collapse of numerous
large financial institutions and the loss of public trust in the
financial services sector remains on the minds of many. Whether it
was opaque counterparty exposure, excessive leverage, insufficient
risk management, or a lack of corporate transparency, we now
know that these factors in combination led to the near collapse
of the entire global financial system. While the financial markets
have moved well beyond that terrible day in March of 2008, the
public trust of a very large sector of the global economy is still
severely marred due to continued bad behavior, lack of corporate
transparency, accountability and proper risk management, as well
as risky business practices.
ACTIVE STEWARDSHIP IN FINANCIAL SERVICES
2
Accountability & Reflection
As the Governor of the Bank
of England Mark Carney said
in 2015, the “crisis and its
aftermath laid bare that many
of our markets didn’t live up to
these standards” of transparency,
responsibility and accountability,
and warned that until markets
regain those qualities they cannot
retain their social license to
operate. 1
The crisis also underscored the
lack of effective shareholder
scrutiny of boards of directors
and senior management on
essential corporate governance
issues such as risk management,
corporate strategy, independence
and long-term value creation.²
To overcome these shortcomings,
the global investment community
took on the role of “active
stewardship” in capital markets.
It started to adopt stewardship
codes to engage with companies
in seeking to improve business
practices and disclosures. These
efforts were focused on seeking
major reforms towards financial
stability and greater corporate
responsibility.
2010: Active Stewardship is Born
The concept of “active
stewardship” was first introduced
in the United Kingdom in
2010 when the country’s
Financial Reporting Council
introduced the UK Stewardship
Code.³ According to the code,
stewardship means that investors
are expected to proactively
engage with companies on issues
of strategy, performance, risk,
capital structure, and corporate
governance, including culture and
remuneration.⁴
In January 2017, a group of U.S.
and international institutional
investors with combined assets
of $17 trillion followed suit
and launched the first U.S.
Stewardship Code.
The adoption of stewardship
codes in many national
markets highlights a new set of
responsibilities for shareholders.
By signing on, institutional
investors commit to closely
monitor their companies and
to use their voting power to
improve corporate behavior.
As fiduciaries, investors also
commit to be more transparent
about their own activities to their
clients and other stakeholders.
Today, active stewardship
includes many environmental,
social and governance (ESG)
issues that are priorities for those
investing with a sustainability
mindset. As fiduciaries, we
at Rockefeller & Co. seek to
engage with boards of directors
and senior management on
ESG issues to identify potential
long-term business risks and
encourage opportunities such as
management quality and ethics,
human capital and labor issues,
climate change and low carbon
economy. We believe that such
engagements can have a longlasting
impact both on business
profitability and competitive
advantage.
Beyond the potential longterm
investment growth and
sustainability benefits of
implementing these engagement
activities, institutional investors
are leading the efforts to rebuild
trust in public markets after the
financial crisis, starting where the
issues were most apparent – the
financial services sector.
Embracing Change: Financial Services Sector
Borne out of the trauma from
2008 and a new stricter regulatory
environment, financial
services companies were the first
to face this new level of shareholder
scrutiny and engagement.
Wall Street came under pressure
by regulators and society to take
significant steps to change its
corporate governance guidelines,
business practices and culture.
It may come as a surprise to learn
that several large banks led the
reform efforts in 2010 by reviewing
their business standards and
ethics codes and implementing
3
ACTIVE STEWARDSHIP IN FINANCIAL SERVICES
“AS THE GOVERNOR OF
THE BANK OF ENGLAND
MARK CARNEY SAID
IN 2015, THE ‘CRISIS
AND ITS AFTERMATH
LAID BARE THAT MANY
OF OUR MARKETS
DIDN’T LIVE UP TO
THESE STANDARDS’
OF TRANSPARENCY,
RESPONSIBILITY AND
ACCOUNTABILITY...”
employee trainings on new values
and culture.
One of the largest banks significantly
improved public disclosures
by adopting new policies and
processes on ethics, and publicly
committing to high-quality practices
to ensure financial stability
and economic opportunity.⁵ At
the core of these efforts was the
goal to be client-oriented, with
accountability to stakeholders
and regulators alike.
It was in the areas of risk management
and board oversight
that banks made the most visible
changes. They created risk committees
at the board level and
implemented company-wide risk
management programs. For example,
we saw how a leading bank
in the U.S. also established a new
position of Chief Risk Officer
reporting to the board and tasked
with ensuring that incentive programs
in the organization do not
encourage excessive or unnecessary
risk-taking.⁶
One of the largest banks also
showed corporate leadership by
publicly acknowledging responsibility
for unethical practices and
recognizing past mistakes.⁷ They
shifted their focus to identify
and monitor “material risk-taking”
in their organization and
increased managerial oversight.
Other banks publicly committed
to seeking responsible business
growth and to conduct their business
in a more transparent way.⁸
ACTIVE STEWARDSHIP IN FINANCIAL SERVICES
4
A New Course for Financials
Banks and insurance companies
play a vital role in our financial
system, providing savings, financing,
investment, and payment
services to consumers and
businesses of all sizes. Our modern
economy requires a stable,
trustworthy, and efficient financial
services industry to function
and grow. Active stewardship
can serve a role in maintaining a
strong financial system.
Bank managements should be
motivated to pursue best practices,
having experienced the consequences
of bad behavior long
after the Global Financial Crisis.
Tighter regulations, enacted in
the aftermath of the Global Financial
Crisis, including Basel III
and the Dodd-Frank Wall Street
Reform and Consumer Protection
Act, have increased capital
requirements and compliance
costs for financial institutions.
They have also limited aggressive
forms of lending and risk-taking.
In addition, banks have also incurred
substantial legal penalties
for poor conduct ranging from
consumer loan servicing, market
manipulation, fraudulent activity,
and money laundering.
However, while new regulations
and legal settlements have placed
incremental financial burdens
on the financial services industry,
banks and insurers have
since made substantial progress
to comply with new rules and
adjusted their business models
accordingly. Balance sheets have
been reinforced with additional
capital and liquidity, and tighter
underwriting. While this may limit
loan growth, it has also resulted
in reduced risk costs in their
lending businesses. Banks have
added headcount in their compliance
and risk control divisions in
an effort to monitor and prevent
future misconduct.
With a new administration in
power in the United States, there
is some concern that an aggressive
pullback of regulations is
imminent. However, we believe
that higher quality banks and
insurers should remain conservative
in maintaining their increased
regulatory capital, underwriting
standards, and compliance and
risk monitoring capabilities, as
failing to do so could draw the ire
of legislators and regulatory bodies,
as well as the general public.
This could lead to additional costs
through loan losses, further litigation
expenses, and even more
stringent regulations. We believe
that through active stewardship,
we can continue to promote responsible
practices among these
companies.
Going forward, we expect banks
and other financial institutions
with adjusted business models,
that exhibit greater stability in
earnings and balance sheet quality
to benefit financially in the
long run. A reduction of earnings
cyclicality should result in higher
investor confidence in dividend
payouts over time, and financial
stocks could see higher valuations
as a result. Swedish banks are
a prime example. Highly capitalized
by global standards, with
minimal loan losses in their home
market even during economic
downturns, Swedish banks have
maintained premium valuations
(14x to 16x forward earnings, 1.6x
to 2x book value) compared to
their European peers (many trade
at 10x to 12x forward earnings,
<1x book value). We believe this
represents significant potential
upside for long-term investors in
the sector.
“OUR MODERN ECONOMY REQUIRES
A STABLE, TRUSTWORTHY, AND
EFFICIENT FINANCIAL SERVICES
INDUSTRY TO FUNCTION AND GROW.
ACTIVE STEWARDSHIP CAN SERVE
A ROLE IN MAINTAINING A
STRONG FINANCIAL SYSTEM.”
5
ACTIVE STEWARDSHIP IN FINANCIAL SERVICES
Doing Our Part at Rockefeller & Co.
Over the past several years,
the Sustainability & Impact
team at Rockefeller & Co. has
implemented active stewardship
with the financial services sector.
On behalf of our clients, we have
engaged with boards of directors
and senior management, focusing
on the following issues:
• Implementing strategy on
long-term financial stability
• Improving transparency over
business standards, values
and culture
• Establishing sound risk
management systems and
processes
• Compensation and incentive
programs tied to long-term
performance
• Implementing new employee
engagement and trainings
• Sustainable finance and
climate related investments
• Financial inclusion
and access to underserved
populations
As engaged investors, we believe
we have made significant progress
in many of these areas. We
worked together with some of
the largest banks in the United
States in seeking to improve
their disclosures over business
standards and encouraged
them to embrace ESG in their
operations and investments. We
continue to monitor their progress
through regular meetings and
communications.
Despite making significant
progress in the areas of governing
business risk and regulatory
compliance, many financial
companies continue to be involved
in irresponsible business practices.
Such behavior can potentially
hurt long-term shareholder value
and damage their corporate
reputation. This is where we
believe our active stewardship and
constructive shareholder voice can
have the most positive impact.
ROCKEFELLER & CO. HISTORY OF CO-FILING SHAREHOLDER RESOLUTIONS
IN THE FINANCIAL SERVICES SECTOR AFTER 2008:
2017 Wells Fargo, Report on Business Standards
2017 J.P. Morgan Chase, Proxy Voting
2015 Bank of America, Separation of Chair &
CEO
2014 J.P. Morgan Chase, Report on Business
Standards
2014 Bank of America, Report on Business
Standards
2014 Wells Fargo, Report on Business Standards
2013 Wells Fargo, Payday Lending
2012 Morgan Stanley, Transparency in the
Repurchase Markets
2012 Bank of America, Internal Controls Related
to Mortgage Loan
2011 State Street, Separate Chair & CEO
2011 Morgan Stanley, Restore Confidence in the
Financial System
Our engagements with the
financial services sector are
supported by our long-term
collaborative work with the
Interfaith Center on Corporate
Responsibility (ICCR). We also
utilize other investor networks
such as the UN-backed Principles
for Responsible Investment
(PRI) and the CERES/Investor
Network on Climate Risk (INCR)
to engage with companies on
sustainability across various
sectors.
Finally, the outlook for possible
increased deregulation under
the new administration could
potentially undermine the
gains achieved by shareholders
through active stewardship and
engagements. We believe that
institutional investors should
be more proactive than ever
as stewards of companies and
capital markets, and raise their
voice in seeking to ensure good
governance, accountability and
responsible growth.
ACTIVE STEWARDSHIP IN FINANCIAL SERVICES 6
INSIGHTS@ROCKCO.COM
NEW YORK, NY
10 Rockefeller Plaza
New York, NY 10020
T. 212-549-5100
WASHINGTON, DC
900 17th Street NW
Washington, DC 20006
T. 202-719-3000
BOSTON, MA
99 High Street, 17th Floor
Boston, MA 02110
T. 617-375-3300
ROCKEFELLER TRUST
COMPANY, N.A.
10 Rockefeller Plaza
New York, NY 10020
T. 212-549-5100
THE ROCKEFELLER TRUST
COMPANY (DELAWARE)
1201 N. Market Street, Suite 1401
Wilmington, DE 19801
T. 302-498-6000
¹ http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech865.pdf
² http://www.oecd.org/corporate/ca/corporategovernanceprinciples/43056196.pdf
³ https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Stewardship-Code-September-2012.pdf
⁴ https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-Stewardship-Code.aspx
⁵ http://www.goldmansachs.com/who-we-are/business-standards/committee-report/business-standards-committee-report.html
⁶ https://www.morganstanley.com/about-us-2015ams/pdf/2015_Proxy_Solicitation_Presentation.pdf
⁷ https://www.jpmorganchase.com/corporate/investor-relations/document/How_We_Do_Business.pdf
⁸ http://about.bankofamerica.com/assets/pdf/Bank-of-America-2015-Business-Standards-Report.pdf
These materials are provided for informational purposes only and are not intended, and should not be construed as investment advice. The views
expressed are as of a particular point in time and are subject to change without notice. Certain examples are intended to demonstrate aspects
of Rockefeller & Co.’s engagement process with companies. Rockefeller & Co. may take different approaches with other companies and there is
no guarantee that any engagement effort will be successful. Certain information contained in these materials may constitute “forward-looking
statements” and/or may be obtained from, or based on, third party sources that Rockefeller & Co., Inc. believes to be reliable. No representations or
warranties are made as to the accuracy or completeness of such statements, and actual events or results may differ materially from those reflected
or contemplated. Although the information provided is carefully reviewed, Rockefeller & Co. cannot be held responsible for any direct or incidental
loss resulting from applying any of the information provided. Company references are provided for illustrative purposes only and should not be
construed as investment advice, or a recommendation to purchase, sell or hold any security. Past performance is no guarantee of future results
and no investment strategy can guarantee profit or protection again losses. These materials may not be copied, reproduced or distributed without
Rockefeller & Co.’s prior written consent.
Cover and interior images: Shutterstock
THIRD QUARTER
2017
Foresight
G L O B A L
Aging Bull
Where we see investment opportunities after eight years of rising markets
BY DAVID P. HARRIS, CFA pages 2-5
Yesterday Once More;
Tomorrow Never Knows
BY JIMMY C. CHANG, CFA
pages 6-9
Leveling the Playing Field
BY MICHAEL D. SEO, CFA
pages 10-13
The Promise of Governance
Reform – South Korea
BY MARIELA M. VARGOVA, PH.D.
pages 14-15
GLOBAL FORESIGHT THIRD QUARTER 2017 1
Cover Story
DAVID P. HARRIS, CFA
Chief Investment
Officer
212.549.5210
dharris@rockco.com
Eight plus years into the market recovery, we see valuations extended as most
of the gains since 2014 have been driven by multiple expansion rather than
earnings growth. In this issue of Global Foresight, we highlight potential
investment opportunities, as well as challenges to sustaining this bull market.
We examine emerging markets with Jimmy Chang focusing on China, and
Michael Seo on South Korea. We also comment on corporate governance in an
article by Dr. Mariela Vargova.
The Charging Bull
The lifespan of a bull market typically lasts many years, at times
ending abruptly. Conversely, the statue now on Lower Broadway
known as Charging Bull had a very short-lived initial run on
Wall Street. It is not widely known that Charging Bull was never
commissioned by the City of New York nor by any one of its
major investment banks. Rather, the three-and-a-half-ton
statue was simply unloaded one December day back in 1989 by
a private citizen in front of the New York Stock Exchange.
The benefactor was Italian sculptor Arturo di Modica who created
Charging Bull to demonstrate his belief in the strength of
the U.S. economy after the stock market crash in 1987. Hours
after di Modica delivered his statue, it was removed by the
NYPD and was not expected to be resurrected. This was not the
end of this bull’s run, however, since its removal generated an
amazing amount of media buzz—particularly noteworthy considering
this happened before the internet was available to the
general public, so “going viral” was not even a concept. After a
couple of weeks of public pressure, Charging Bull was retrieved
and installed at its current home at the intersection of Broadway
and Whitehall, where it has been a staple for tourists’ photos
ever since.
The current equity bull market may have more years left, but its
age and valuation make the case worth revisiting. As we assess
potential investment opportunities, we see valuations elevated
in the U.S. market, while we believe Europe is likely to continue
its cyclical rebound. We are also encouraged by political developments
on the continent. We believe there are a number of
attractive emerging market (EM) opportunities, but are mindful
of the challenges most of these once-rapidly-growing economies
face. Frankly, it is not just the bull market that is aging; it
is most of the world, which has important sociological, economic
and investment implications as demographics and debt
are likely to constrain long-term global economic growth.
highest it has been except during two famous market peaks—
1929 and 1999. We believe the CAPE ratio is cause for concern,
but not alarm. It most likely suggests that U.S. equities will have
subdued future returns. However, unlike the market’s prior
peaks at the end of the Roaring Twenties or the dot-com era,
we do not believe we are in the midst of an economic or market
bubble. If there is a benefit to the subdued economic recovery
we have recently experienced in the U.S. where GDP growth
has been averaging about 2.0%, it is that the economy has not
built up the excesses that it did during past peaks in the CAPE
ratio. By contrast, during the 1920s, U.S. real GDP growth averaged
4.2%, and from 1996-1999 it grew at least 4.3% in each
calendar year. Since the CAPE ratios in those periods calculated
off a base of very strong economic activity and earnings,
those periods were more susceptible to crashing than today’s
more muted environment.
The Challenge of High Valuations
In 1998, professors Robert Shiller and John Campbell conceived
the cyclically adjusted price-earnings (CAPE) ratio,
which averages earnings over a 10-year period to minimize the
impact of economic cycles when valuing equity markets. The
CAPE ratio has been widely cited as evidence of U.S. stock market
overvaluation. The present U.S. equity CAPE ratio is the
Source: New York Post
2
GLOBAL FORESIGHT THIRD QUARTER 2017
EM Growth?
CAPE ratios are lower outside the U.S., with emerging markets
even lower than those in developed markets. While we
have been more constructive in recent issues of Global Foresight
on non-U.S. opportunities, we believe there is limited relevance
of CAPE ratios when comparing the very deep, diverse
set of companies in the U.S. with most other markets. While
valuation from 30,000 feet looks better in many places, there
are reasons to discount CAPE as a reliable valuation tool when
analyzing smaller markets. As an extreme example, Russia has
the lowest CAPE ratio in the world, but its equity market is
very concentrated in commodity businesses whose earnings
are highly cyclical.
TABLE 1 highlights data from the 10 largest emerging markets,
which account for 89.2% of the MSCI Emerging Markets
Index. The growth prospects of this group appear surprisingly
tepid. The median real GDP growth for the next
five years is forecasted at 2.5%, while population growth is
expected to be less than 1.0%. The term “emerging markets”
was coined in the 1980s, but frankly, most of these economies
have already “emerged.” The countries with the most
long-term economic growth potential are arguably those
with young, growing populations—namely, India, Indonesia
and Malaysia. However, these countries have small equity
markets that, when combined, do not even equal South
Korea’s in size.
TABLE 1: KEY DATA FROM THE TEN LARGEST EMERGING MARKETS
COUNTRY
INDEX
WEIGHT
LAST 5 YEAR
GDP GROWTH
FORECAST
NEXT 5 YEARS
GDP GROWTH
ESTIMATED
POPULATION
GROWTH TO
2021
INFLATION
RATE
MEDIAN
POPULATION
AGE
FISCAL
DEBT/GDP
LEADING
MARKET P/E
10-YEAR
BOND YIELD
SOVEREIGN
DEBT RATING
CHINA
27.7%
7.3%
6.4%
0.6%
2.0%
37.1
46.2%
13.6
3.5%
AA-
SOUTH KOREA
15.4%
2.8%
2.7%
0.4%
1.3%
41.2
38.6%
9.7
2.2%
AA
TAIWAN
12.2%
2.1%
2.2%
0.2%
1.4%
40.2
35.7%
13.8
1.0%
AA
INDIA
8.8%
6.3%
7.5%
1.3%
5.0%
27.6
69.5%
18.8
6.5%
BBB
SOUTH AFRICA
7.0%
1.6%
1.5%
1.6%
6.3%
26.8
50.5%
15.9
8.4%
BBB-
BRAZIL
6.7%
-0.4%
1.8%
0.7%
8.8%
31.6
78.3%
12.0
10.7%
BB
MEXICO
3.7%
2.5%
2.4%
0.9%
2.8%
28.0
58.1%
18.7
7.1%
A
RUSSIA
3.3%
0.5%
1.5%
-0.1%
7.1%
39.3
17.0%
5.8
7.6%
BBB-
INDONESIA
2.5%
5.6%
5.3%
1.3%
3.5%
29.9
27.9%
15.7
6.8%
BBB-
MALAYSIA
2.4%
5.1%
4.6%
1.7%
2.1%
28.2
56.3%
17.9
3.8%
A
SOURCE
MSCI *AS OF
MAY 31, 2017
BLOOMBERG
BLOOMBERG
IMF/
BLOOMBERG
BLOOMBERG
CIA WORLD
FACTBOOK
IMF
MSCI/
BLOOMBERG
BLOOMBERG
S&P
TOTAL
89.7%
MEDIAN 2.7% 2.5% 0.8% 3.2% 30.8 48.4% 14.8 6.7%
AVERAGE 3.3% 3.6% 0.9% 4.0% 33.0 47.8% 14.2 5.8%
Sources: Bloomberg, IMF, CIA World Factbook, MSCI, S&P
China is a market that has looked attractively valued at times
relative to its growth prospects. However, China has already
had a spectacular recovery from a correction that rattled markets
globally in August 2015 and again in January 2016. China
is the largest emerging market and a vital trading partner for
many other key emerging markets, such as Brazil. While China
remains an important source of long-term global economic
growth, it faces some cyclical and structural challenges that
Jimmy Chang discusses in his article.
South Korea is an emerging market that has screened well for
valuation and poorly for governance. As the second largest
emerging market after China, we believe that South Korea is
an important economy and source for potential investments.
We cover it in more detail in the articles from Michael Seo and
Dr. Mariela Vargova.
Aging Populations
A major challenge South Korea and China already face, is an
aging population. Countries that are major economic powers
are aging rapidly, while most of the youth in the world is
concentrated in the poorest nations. One useful country demographic
is the median age of its citizens. The U.S., with a median
age of 37.9 years (half of all Americans are 38 or older), ranks
62 out of 230 nations, making it one of the older nations in the
world, though one of the world’s younger developed markets.
Aging in the U.S. is dwarfed by comparison to most of Europe
and Japan. Japan and Germany have median population ages of
46.9 and 46.8, respectively. Remarkably, if people in the U.S.
ceased having kids for the next nine years, only then would we
have a median population age approaching those today in
Japan and Germany. Europe has a median age of 42.7 as a
region and is nearly five years older than the U.S.
GLOBAL FORESIGHT THIRD QUARTER 2017 3
CHART 1: CHINA POPULATION DISTRIBUTION 2015
Male
Female
Source: United Nations; World Population Prospects, The 2017 Revision
While we consider demographics as an important long-term
factor for investing (as discussed in the Third Quarter 2015
issue of Global Foresight: Investing for the Ages), in the short
run, it is eclipsed by economic cycles and political changes. For
instance, Japan’s and Germany’s economies have each been
performing well over the last few years, despite being the
second and third oldest countries in the world with the median
population age of 47 years (Monaco has the world’s oldest
population at 52 years). However, in the longer run, demographics
factor into economic
growth as consumption declines
dramatically in your 50s and 60s
from where it is in your 30s and
40s. Health care burdens also
increase and presumably need to
be funded with higher taxes that
will eventually weigh on the
disposable incomes of younger
workers.
The largest emerging market,
China, has a median age comparable to the U.S. and arguably
has far worse demographics as China faces a big decline in new
workers over the next ten years when the number of retirees
may exceed the number of new entrants into the labor force as
shown in CHART 1.
South Korea is the oldest emerging market with a median age
of 41. East Asian economies, including Japan, have grown over
the years due to migration from villages to urban centers,
resulting in productivity gains that have fueled economic
expansion. Although this migration may continue a while
longer, EM investors should understand the reality that the
economic growth case outside of South Asia and Southeast
Asia is mostly limited to productivity gains. India has the best
demographic profile of any major emerging market as shown
in CHART 2, with progressively younger population brackets
getting steadily larger, indicating a stable increase in labor force
for long-term economic growth.
Young Ideas
“...in the longer run,
demographics factor into
economic growth as consumption
declines dramatically in your 50s
and 60s from where it is in your
30s and 40s.“
Japan has seen a long, steady economic recovery behind the
market-friendly policies of Prime Minister Abe. The U.S. has
experienced slow but consistent growth, arguably being driven
more by its culture of innovation
and leadership in the tech sector that
has led its market’s returns. By comparison,
Europe has been plagued
by infighting and rotating economic
and political crises for most
of the last nine years. In addition,
when we consider the challenges to
growth Europe faces longer-term
as a result of its aging populations,
it would seem difficult to make the
case that the bull market centered in the U.S. may see its next
leg driven by its counterparts across the Atlantic. However,
we see the European continent energized by the electoral success
of 39-year-old Emmanuel Macron, who not only won the
French presidency in May, but also a strong party majority
in its legislative body, the National Assembly. This mandate
should pave the way for economic reforms that we believe investors
will embrace. It is a massive change in sentiment from
six months ago when markets were fearing the “anti-European
Union” rhetoric of since-defeated Marine Le Pen.
Unifying Europe is no easy task, but the best chance appears
to be in the hands of a political outsider with pro-business
and economic policies that manage to be sufficiently mainstream
to keep France from fracturing into far-left and far-
4
GLOBAL FORESIGHT THIRD QUARTER 2017
CHART 2: INDIA POPULATION DISTRIBUTION 2015
Male
Female
Source: United Nations; World Population Prospects, The 2017 Revision
right camps. So far, Macron has fostered a good rapport with
German Chancellor Angela Merkel, whom we expect to be reelected
in September. The political risk in continental Europe
is now centered in Italy, but we were encouraged that its farleft
Five Star Movement suffered key defeats in recent regional
elections, which could bode well for their next national election,
likely to occur next spring.
In addition to Italy, Brexit remains a large political risk for
2018 as the weakened Tories will be negotiating with at best
a tenuous alliance with the Democratic Unionist Party (DUP)
and at worst may face another election and lose power altogether.
We believe it is too soon to make major portfolio shifts
based on Brexit, but we are watching this closely as substantial
progress in negotiations will need to materialize months
ahead of the March 2019 deadline. By this time next year, we
would expect to see traction in negotiations and stability in
Parliament or begin to consider reducing exposure to the British
pound and companies exposed to that economy.
Aging Business Models
The “FANG” stocks—Facebook, Amazon, Netflix, and Google
—have disrupted countless business models while seeing their
own revenues and market values soar. Empty storefronts from
Manhattan to malls in Middle America are evidence of the
disruption facing rapidly aging business models like brick-andmortar
retail. When you include Apple and Microsoft in the
FANG stocks, the six companies account for 12.83% of the S&P
500 Index. At the start of this bull market on March 9, 2009,
these companies had a market value of $326 billion. Today,
their market value is $2.97 trillion. Their sheer size alone
suggests that they cannot keep compounding like they have. To
maintain its ascent, the U.S. bull market will need new sectors
to emerge as market leaders. The challenge will be economic
growth. Companies that disrupt mature businesses, like many
of the FANG stocks have, typically have not relied on a robust
global economy to generate their amazing revenue growth.
Most other sectors in the S&P 500 Index, however, would likely
benefit from a stronger economy.
Summary and Conclusion
Many bull markets have interesting back stories as to how they
begin and end. The latest bull market can arguably be traced
back to March 9, 2009 when the CEO of Citibank, Vikram
Pandit, released a memo to employees announcing that the
company was having its best quarter since early 2007. The
market embraced that memo as a sign the worst was over,
especially for the beleaguered banking sector. The S&P 500
rallied from that day and eight years later is up nearly four-fold.
As we consider future returns, valuation matters. In March
2009, the S&P 500 was selling for roughly 10 times depressed
earnings and is now selling for about 18.7 times. The U.S.
market leads the world in innovative companies and is priced
for it.
As we look for opportunities overseas, we see political fortunes
improving in Europe with some lingering headwinds that may
appear in 2018. We could argue the same in the U.S. as the
leadership in the House of Representatives can easily switch
parties next year. If Europe can continue its economic improvement,
we see the potential for more gains ahead for the region
after a robust start to 2017.
The emerging markets offer some attractive valuations, but are
not likely to be a panacea for global growth as the largest ones
face the same challenges of aging and maturing development
that confront most of the developed world. This bull market
may keep moving, but like all of us past a certain age, not at a
pace that we are used to.•
GLOBAL FORESIGHT THIRD QUARTER 2017 5
JIMMY C. CHANG, CFA
Yesterday Once More;
Tomorrow Never Knows
China’s housing boom once again fueled
global growth, but how long will it last?
Chief Investment
Strategist
212.549.5218
jchang@rockco.com
Let us begin with a trivia question—what was the most
consequential publication in 1776? With this article
being published around July 4, you would probably think
we are hinting at the U.S. Declaration of Independence. That
would be a good response, but unlike the laws of physics or
mathematics, there is not exactly a right answer to such a
question.
One could also point to a book published on March 9, 1776,
that has had a transformative impact over time. It has a long
title: "An Inquiry into the Nature and Causes of the Wealth of"
Nations, and is generally referred to as The Wealth of Nations.
This seminal work supposedly took Scottish economist and
philosopher Adam Smith 10 years to complete, and was based
on notes and observations spanning 17 years. It challenged the
mercantilist and physiocratic economic theories that dominated
the intellectual debate during the mid-18th century.
Mercantilist theory held that countries grow wealthier by maximizing
domestic production and exports, and was the basis for
European imperialism. Physiocratic theory postulated that the
wealth of nations was derived from the value of agricultural and
land development, and could trace the inspiration to China’s
agrarian traditions.
The Wealth of Nations marked the birth of modern capitalism
and also had an influence on our Founding Fathers. James
Madison cited the treatise in arguing against the need for a central
bank in 1791; Thomas Jefferson referred to it as the best
book on money and commerce. In February 1977, in celebration
of America’s Bicentennial, the Federal Reserve Bank of
Richmond published the paper The Relevance of Adam Smith.
It pointed out the striking similarities between the intellectual
spirit of The Wealth of Nations and the Declaration of
Independence. Both railed against the heavy hand of the state,
and emphasized individual liberty and the harnessing of individual
self-interest to the welfare of the greater society.
So it is perhaps a tie between these two publications. One gave
birth to modern economics that created the greatest prosperity
in human history, and the other marked the founding of arguably
the most powerful and wealthiest nation ever.
Do Not Bet Against the House
At around the time that America celebrated its Bicentennial,
China reached a historic turning point. Chairman Mao passed
away in September 1976, and a month later, the arrest of the
Gang of Four marked the end of the decade-long Cultural
Revolution. Deng Xiaoping then returned to power and
embarked on reforms that powered roughly 10% real GDP
growth per annum for the next four decades and lifted more
than 800 million people out of poverty. Today, the Chinese
economy is the largest in the world based on purchasing power
parity.
Interestingly, China’s rise had little to do with Adam Smith’s
free-market capitalism. While China’s unprecedented economic
ascension was indeed fueled by unleashing the energy and the
profit-seeking self-interest of the individual, its development
has always been shaped by the government’s heavy hand.
Successive Five-Year Plans, which first started in 1953,
continued to guide social and economic development, and key
industries remained mostly state-owned. Some argued that
China has been pursuing a mercantilist policy in building up its
manufacturing base to drive exports and accumulate foreign
exchange reserves. Indeed, its share of global exports has
remarkably grown from about 1% in 1980 to around 15% by
2016, the largest in the world. Some claimed that China even
produces more sombreros than Mexico.
In the wake of the Global Financial Crisis in late 2008 and early
2009, China realized that the country’s growth model could no
longer depend on external demand, and responded by
unleashing massive stimulus for infrastructure projects. It
worked so well that China’s growth skyrocketed, asset prices
shot up, and the housing market became overheated. Globally,
China’s reflation and the Fed’s quantitative easing generated an
echo bubble in commodities and emerging market stocks.
6
GLOBAL FORESIGHT THIRD QUARTER 2017
By early 2011, China had to cool the economy and tackle the
rising leverage and speculation. Policymakers also declared a
shift in China’s growth model to be more consumption-driven.
The transition probably turned out to be more complicated
than Chinese policymakers may have expected. Unlike the
infrastructure-driven growth model under which the pace of
growth could be controlled by adjusting the pipeline of
construction projects, a consumption-driven model would let
the “invisible hand” of self-interested consumers exert more
influence. In other words, a consumption-driven model would
cede more control to market forces and experience more
unpredictability. While variability in realized growth versus
projection is a fact of life in the rest of the world, Chinese
officials have sought to minimize this uncertainty as the failure
to hit growth targets could affect confidence.
With an estimated homeownership rate around 90% and many
families holding multiple apartments as investments, China’s
housing market has an outsized impact on wealth, consumption
and construction, as well as the general economy. As shown in
CHART 1, the rapid housing price increases in 2010 and 2011
prompted regulators to cool the housing market, which resulted
in price declines in 2012. However, the slowing economy soon
pushed them to relax home purchase restrictions. Predictably,
housing prices rebounded as a response, with double-digit
increases in tier-one cities, prompting measures to tame the
bubble once again by 2014.
It is quite clear that there is a momentum-driven herd mentality
among Chinese buyers, as expressed in the Chinese adage “buy
up market, not down” ( 买涨不买跌 ).
In an attempt to wean investors off real estate and channel their
capital to highly leveraged state-owned companies,
policymakers engineered a stock market rally in the second half
of 2014. As the rally gained momentum, the herd flocked in
(buy up market, not down) and pumped up a huge stock bubble
that eventually blew up by mid-2015. This was followed by the
renminbi’s official devaluation in August 2015 to alleviate the
pressure from the surging U.S. dollar.
Confronted with slowing economic growth, declining foreign
exchange reserves, rising capital flight, and a collapsing stock
market, Chinese policymakers shelved the reform agenda and
went back to the proven playbook—infrastructure and real
estate buildout. China even eased property investment rules for
foreign institutions and individuals. The result was perhaps the
biggest housing bubble ever in China’s tier-one cities—prices
surged over 30% year-over-year by the spring of 2016. It is as if
China was validating the old physiocratic economic theory
which postulated that the wealth of a nation lies in its land
development.
For years China has justified its rapid property price increases
on the basis that it is just catching up to global metropolises
such as London, New York, Hong Kong, Tokyo, etc. The latest
price surge has indeed accomplished that and more. For
example, a run-of-the-mill two-bedroom apartment in Beijing’s
financial district now costs more than $2,000 per square foot.
Skyrocketing domestic property prices have also distorted
many Chinese investors’ views of foreign properties—they are
bargains relative to prices in Beijing, Shanghai and Shenzhen.
It is no wonder Chinese investors have bid up property prices
in many major cities around the globe. As a sign of the times,
Warren Buffett’s Berkshire Hathaway HomeServices has
recently teamed up with China’s Juwai.com to bring American
residential property listings to China.
An Under-Appreciated Reflation Story
According to a U.S. State Department memo released by
WikiLeaks, when Chinese premier Li Keqiang was serving as
the party secretary of Liaoning Province in 2007, he supposedly
told a U.S. ambassador that he did not have confidence in the
provincial GDP data. He preferred to monitor three indicators
to assess the state of the local economy: the rail freight volume,
electricity consumption and bank loan volume. In 2010, The
Economist introduced the Li Keqiang Index, which takes the
weighted average of these three metrics’ annual growth rates to
track Chinese economic growth.
The Li Keqiang Index has indeed tracked the direction of
China’s reported GDP data as shown in CHART 2. There was a
clear growth deceleration in 2015 and a strong rebound in 2016.
CHART 1: YEAR-OVER-YEAR CHANGE IN CHINA NEW PROPERTY PRICES
China 70 Cities New Apartment Prices
China First Tier Cities New Apartment Prices
Source: Bloomberg
GLOBAL FORESIGHT THIRD QUARTER 2017 7
CHART 2: THE LI KEQIANG INDEX VERSUS CHINESE REAL GDP GROWTH
Li Keqiang Index (Left Hand Side)
Chinese Real GDP Year-over-Year (Right Hand Side)
Source: Bloomberg
Furthermore, CHART 3 shows that, directionally, the Li Keqiang
Index maps pretty well to the ebb and flow of Chinese property
prices, confirming the thesis that property prices have much
impact on the Chinese economy.
A close examination of CHART 2 raises an interesting observation:
Lately, the Li Keqiang Index has accelerated much more than the
reported GDP growth. One could surmise that China’s actual
GDP growth (measured on a year-over-year basis rather than on
an annualized sequential change) may have been greater than
the reported 6.9% in the first quarter of 2017. This could be
rationalized by the conjecture that the actual growth in early
2016 may have been lower than the reported 6.7%.
One indicator of China’s strong growth is the year-over-year
changes in its imports as shown in CHART 4. Imports surged
24% year-over-year in U.S. dollar terms, and 31% in renminbi
terms during the first quarter of 2017. To be fair, part of the
surge was due to the rebound in commodity prices. However,
China’s $58 billion import from Germany and Japan, two noncommodity
countries, was still up an impressive 17% year-onyear.
In the first quarter of 2016, China’s imports from those two
countries had declined 10%.
We believe China’s strong reflation, thanks to the infrastructure
buildout and the unprecedented property price increases in
major cities, may have been the most impactful yet underappreciated
catalyst that fueled the synchronized global
economic recovery since the summer of 2016. The good news
is that China’s growth is likely to remain healthy for the
remainder of 2017, as stability is paramount ahead of the
quinquennial power transition this autumn. However, the
uncertainty starts to rise as we look beyond 2017.
Shadow Boxing
Over the past few years, China watchers have been urging
Chinese policymakers to introduce bold reforms and market
forces to tackle the country’s rapidly growing leverage, over
capacity, and housing bubble. However, with stability being of
utmost importance, policymakers could not afford to take a
chance with the market’s invisible hand. Tough reforms in the
context of slowing economic growth also ran the risk of
jeopardizing social stability. Now, however, with the economy
on a much stronger footing, Chinese policymakers have started
to push through some needed reforms.
CHART 3: LI KEQIANG INDEX VERSUS YEAR-OVER-YEAR PRICE CHANGE IN CHINESE PROPERTIES
Li Keqiang Index
Year-over-Year Price Change in Chinese Properties
Source: Bloomberg
8
GLOBAL FORESIGHT THIRD QUARTER 2017
With Chinese President Xi calling for a heightened effort to
reduce systemic financial risk, regulators have started to tackle
the bloated shadow banking system. Since taking office in
February, Guo Shuqing, China’s top banking regulator—with
the nickname “Whirlwind Guo” for his no-nonsense
management style—has already issued a series of directives to
reduce leverage. For example, banks were asked to implement
higher standards for interbank lending and for selling thirdparty
wealth management products (a primary source of
funding for the shadow banking system). In April, China’s top
insurance regulator was detained for corruption, and the
regulatory agency has since taken disciplinary actions against
some high-profile insurance companies that have deviated
from the core insurance business by using shorter-term funding
to finance corporate takeovers, as well as overseas acquisition
sprees.
Tomorrow Never Knows
While we believe China’s economy should hold up well going
into the 19th Party’s Congress this autumn, its growth is likely
to decelerate, and the lagged effects of the tightening measures
on the shadow banking system and on the housing market
could become quite visible by 2018. Housing price changes
could be flat or even negative by this time next year.
If the past is any guide, Chinese policymakers may once again
loosen property purchase restrictions next year to stimulate
growth. Therein lies the moral hazard—it is well known that
Chinese policymakers would not risk a sizeable correction in
the housing market, and therefore would reflate again to
strengthen economic growth. However, with property prices in
China’s tier-one cities already on par with or even exceeding
those of major global cities, it will be hard to rationalize another
CHART 4: YEAR-OVER-YEAR CHANGE IN CHINESE IMPORTS (BILLIONS OF USD)
Source: Bloomberg
These measures have driven up China interbank lending rates,
as well as corporate bond yields. The squeeze on the shadow
banking system has led to a big jump in aborted bond issuance.
In May, China’s net corporate bond issuance dropped to a
record low of negative 217 billion yuan as some bond issuers
were unable to roll over their maturing bonds.
On the housing front, various cities have rolled out new
administrative measures with the aim of keeping housing prices
flat. A few cities even resorted to the draconian measure of a
10-year lock-up period for new apartment purchases—buyers
of new apartments built on recently auctioned off land are
prohibited from selling their units for a decade.
China has also continued to stem the capital outflow. Starting
this July, Chinese banks and financial institutions have to report
all domestic and overseas cash transfers of more than 50,000
yuan ($7,700), compared to the prior threshold of 200,000 yuan
($29,338). Funds transferred overseas are prohibited from
purchasing properties, investments, and insurance products.
Various new restrictions have also been placed on Bitcoin
trading exchanges, as well as overseas use of credit cards. In
short, it appears that capital flight from China will get somewhat
more difficult for ordinary citizens.
round of substantial price increases. In other words, using the
property market as a lever to stimulate economic growth is not
a sustainable long-term solution.
Although equity volatility picked up some in June, most equity
investors still appeared to be basking in the glow of a
synchronized global recovery. However, the canary in the coal
mine may be iron ore: having rallied from the December 2015
low of $37.50 per metric ton to nearly $95 in February 2017, it
has lost roughly 30% to $65 a metric ton by the end of June.
In the final analysis, the global economy has benefited from
China’s rapid growth. However, China will likely be at a
crossroads as President Xi embarks on his second term in 2018.
Will policymakers inflate the housing bubble further to support
economic growth? Will they find new levers to keep the
economy growing above 6% per annum, or will they settle for
a lower but more sustainable pace? The law of large numbers
portends that the next five years will likely be more challenging
for Chinese policymakers than the last five years. •
GLOBAL FORESIGHT THIRD QUARTER 2017 9
MICHAEL D. SEO, CFA
Director of Equity
Research
212.549.5232
mseo@rockco.com
Leveling the Playing Field
Investment opportunities in the
changing South Korean landscape
South Korea has grown over the last 50 years from a poor
mostly agricultural economy to a powerful exporter with
the 11th highest GDP in the world. Its growth has been
built on the back of its chaebol system – conglomerates of
companies that are family-controlled, often spread across
multiple industries. While this structure has served Korea well
in terms of rapidly developing its industrial base, it has also
been associated with ongoing governance issues. The risks
associated with investing in Korea have historically resulted
from its stock market having a much lower valuation than those
of comparable economies.
As an example of recent governance issues, consider that Chey
Tae-Won, chairman of the SK chaebol, had been serving a fouryear
prison sentence for embezzling $40 million from the SK
companies. He was pardoned by former President Park Geun-
Hye in the summer of 2015 and soon found himself back in the
familiar leadership role of his family conglomerate. Political
actions such as this pardon or nepotism within large publicly
traded corporations are common, if not expected, in Korea.
Throughout its history, the nation’s gyrating politics and
powerful businesses maintained a symbiotic relationship that
propelled tremendous GDP growth while tarnishing the
political reputation of a nation. The cultural and regulatory
disregard of misconduct is at the root of Korea’s corporate
governance, especially among the chaebols.
The five most recognizable chaebols as shown in CHART 1
(Samsung, Hyundai, SK, LG, and Lotte) collectively represent
over 50% of the market capitalization of the Korea Composite
Stock Price Index (KOSPI) and 47% of its revenues. Samsung
Electronics alone represents a 21% share of the KOSPI market
capitalization and 21% share of employees which is emblematic
of the chaebols’ influence in Korean society.
During Park Geun-Hye’s 2012 presidential election campaign
and political career, Ms. Park had been critical of past presidents
who had abused the power to pardon individuals and sought to
limit the government’s role in granting pardons. Her decision
CHART 1: CHAEBOL % SHARE OF THE KOSPI INDEX
2%
6%
7%
8%
3%
7%
9%
4%
9%
2%
9%
29%
13%
15%
26%
Samsung
Hyundai SK LG Lotte
Source: Bloomberg
10
GLOBAL FORESIGHT THIRD QUARTER 2017
Pyongyang, North Korea, is home to the largest stadium in the world with a seating capacity of over 114,000.
Source: Getty Images
to release Chey Tae-Won accelerated the demise of her political
career. Ironically, she finds herself in prison awaiting trial while
the Korean stock market continues to trade at a discount to
peers. In addition, MSCI Korea’s relative valuation is also
suppressed by the mercurial behavior of North Korea whose
recent missile tests have dominated global headlines.
A truly embarrassing South Korean political scandal emerged
in the fall of 2016 when a journalist discovered a computer
belonging to a personal confidant of President Park Geun-Hye.
The contents of the device, belonging to Choi Soon-Sil, revealed
that she had access to confidential presidential documents
including speeches that were ultimately altered and influenced
by Ms. Choi Soon-Sil. In the weeks following this revelation,
the mighty chaebols of Samsung, Lotte and SK were once again
linked to the current political impropriety. It is alleged that
members of these chaebols (among others) were coerced into
contributing large sums of money to a foundation established
by Ms. Choi Soon-Sil in order to maintain a positive relationship
with President Park Geun-Hye.
The Korean stock market languished as a result of President
Park Geun-Hye’s miscues as shown in CHART 2. The performance
of the MSCI Korea Index starting from the beginning of
President Park Geun-Hye’s term was down 25% by late August
2015, which coincided with Mr. Chey Tae-Won’s pardon in the
week prior. The Korean market drastically underperformed the
MSCI Asia ex. Japan Index which was down 14% and the MSCI
ACWI Index which was up about 9% during that period.
Korea’s recursive political environment was frustrating for
many Koreans. It is widely believed that chaebols sapped the
entrepreneurial vigor of small business owners and young
adults who were experiencing unemployment rates of over 9%.
However, the decision to impeach President Park Geun-Hye on
CHART 2: PERFORMANCE SINCE PARK GEUN-HYE INAUGURATION
MSCI KOREA
MSCI ACWI
MSCI ASIA EX. JAPAN
Source: Bloomberg
GLOBAL FORESIGHT THIRD QUARTER 2017 11
CHART 3: PERFORMANCE SINCE DECISION TO IMPEACH
MSCI KOREA
MSCI ACWI
MSCI ASIA EX. JAPAN
Source: Bloomberg
December 9, 2016 proved to be a pivotal point for the country.
The large-scale protests seeking a permanent change from the
cronyism that runs rampant within Korea were finally being
heard.
It is no coincidence that since December 9, 2016, the MSCI
Korea Index has outperformed as shown in CHART 3 the same
indices it lagged during President Park Geun-Hye’s tenure.
Investors and Korean citizens alike were finally sensing hope
with the leading presidential candidates. Moon Jae-In’s eventual
victory on May 10 secured the
belief that a president in the Blue
House was working for the
people and not exclusively for
the chaebols.
President Moon Jae-In has
increased investor expectations
for corporate reforms and it is
critical for the nation to continue
down this path of weakening
family ties that maintain a
stranglehold on the Korean
economy. President Moon Jae-In
has quickly appointed key
members for advisory and
cabinet roles that are aligned
with the vision of eliminating corruption, enhancing corporate
governance, and revitalizing a fractured economy.
Korea’s decision to install the Terminal High Altitude Area
Defense system (THAAD) under the prior administration
resulted in escalating political tension between China and
South Korea. In the weeks leading up to President Park’s
impeachment hearings, China discouraged its citizens from
traveling to Korea and restricted the sale of Korean consumer
goods. President Moon Jae-In has moved swiftly to improve the
crumbling relationship with China by reevaluating the
deployment of the system. A friendly call with President Xi
Jinping after his election gradually improved the relationship
“President Moon Jae-In has
increased investor expectations
for corporate reforms and it is
critical for the nation to continue
down this path of weakening
family ties that maintain a
stranglehold on the Korean
economy.“
and is expected to help navigate the complex political
relationship with North Korea.
President Moon Jae-In, who was once the Chief of Staff to
President Roh Moo Hyun (1998-2008), assisted President Roh
in implementing the “Sunshine Policy.” The Sunshine Policy
was an attempt by the South Korean government to engage
North Korea with a softer, humanitarian stance in an effort to
build a peaceful relationship. President Moon will likely
reengage communications with North Korea in a similar
manner.
Electronics, and others.
The president appointed Jang
Ha-Sung, formerly the dean of
Korea University’s Business
School, to the position of Chief of
Staff for Policy. Jang Ha-Sung is a
familiar face within the world of
corporate reform as the founder of
the People’s Solidarity for
Participatory Democracy (PDSD),
a civil organization pursuing
shareholder reform. The PDSD
was formed in the late 1990s and
successfully fought for minority
shareholders in legal battles
against SK Telecom, Samsung
Another governance advocate with a boisterous history of
shareholder activism, Kim Sang-Jo, a professor of economics at
Hansung University and executive director of “Solidarity for
Economic Reform” (SER) was appointed as the Head of the Fair
Trade Commission (FTC) in early June. Kim Sang-Jo and Jang
Ha-Sung are longstanding allies in the field of corporate
activism with Mr. Kim succeeding Mr. Jang as first chairman of
PDSD’s future organization in 2006.
The Korean stock market has been a star performer in 2017
with the KOSPI up approximately 24%, year-to-date in $USD
basis and outperforming neighboring markets, such as Japan,
12
GLOBAL FORESIGHT THIRD QUARTER 2017
CHART 4: REGIONAL VALUATIONS
P/E RATIO (12M FORWARD)
P/B RATIO
RETURN ON COMMON EQUITY
DIVIDEND PAYOUT RATIO
MSCI ACWI
MSCI KOREA
MSCI ASIA EX. JAPAN
Source: Bloomberg
Hong Kong and China. Despite the recent strong performance,
the market is still inexpensive relative to other regions and
indices. MSCI Korea’s price-to-book (P/B) ratio of 1.1x and
price-to-earnings (P/E) (12 month forward) ratio of 9.4x are
30% and 31% lower than MSCI Asia ex. Japan Index, respectively
as shown in CHART 4.
Three Korean industry groups or sectors currently offer
compelling relative valuations when contrasted against other
geographies. The Korean Automobiles and Components
industry group currently trades at a P/B ratio of 1.0x which
compares favorably to Japan’s P/B ratio of 1.4x. When
comparing the automobile original equipment manufacturers
(OEM), Korean OEMs trade at a P/B ratio near 0.5x book,
which is a steep discount to their Japanese rivals. The Korean
Automobiles and Components industry group appears
undervalued when you also consider the fact that the five-year
average return on equity (ROE) was 14.4% versus 11.8% for the
Japanese group.
Utilities is another sector where the valuation disparity is stark.
Korea’s largest electricity producer currently trades at a P/B
ratio of 0.4x despite three stellar years of strong operating
margin and prudent capital discipline. By comparison, the
Japanese utility sector currently trades at P/B ratio of 1.0x with
the Tokyo regional electricity producer trading at a P/B ratio of
0.6x despite ¥10 trillion of possible unreserved liabilities
stemming from a 2011 nuclear disaster. Finally, Korean banks
are currently trading at a P/B ratio of 0.8x, which compares
favorably to Japan’s 1.0x and Italy’s 0.9x. It is estimated that the
loan portfolios of the Korean banks have improved in recent
years as evidenced by improving ROE. In the most recent fiscal
year, Korean banks generated ROE of 7.7%, outperforming
Japan’s 7.5% and Italy’s 6.7%.
These discrepancies in valuation have just started to close with
the new president and the formation of his cabinet, but Korean
market multiples have the potential to converge closer to global
levels with a successful execution of corporate reform. We are
not advocating that the new government implement heavyhanded
methods to incite change among the chaebols. Instead,
we believe that working with the chaebols in enhancing
governance, minimizing cross holdings, creating board
independence and minority shareholder protection, would be
well received by global investors and mostly rewarding to
chaebol valuations. For a further look at corporate governance
in South Korea, please see the following article by Dr. Mariela
Vargova. •
GLOBAL FORESIGHT THIRD QUARTER 2017 13
MARIELA M. VARGOVA, PH.D.
The Promise of Governance
Reform—South Korea
Senior Vice President,
Senior Sustainability
and Impact Analyst
212.549.5236
mvargova@rockco.com
I
n his inauguration speech on May 10th, the newly elected
South Korean President Moon Jae-In vowed to put chaebol
reform at the forefront of his political and economic agenda.
“Under the Moon Jae-In administration,” he asserted, “the
collusive link between politics and business will completely
disappear.” 1 The promise of meaningful governance reform
comes in the wake of the biggest political corruption scandal in
Korea that saw the impeachment and the arrest of democratically
elected President Park Geun-Hye on charges of “collecting or
demanding $52 million in bribes” 2 from Samsung, one of
Korea’s largest family-owned conglomerates, known as chaebol.
The presidential scandal in Korea also led to the latest highprofile
corporate arrest in the country. In February, Jay Y. Lee,
vice chairman and acting leader of Samsung’s conglomerate
empire, was arrested on accusations of bribery to former
President Park and her inner circle in exchange for securing a
controversial merger of Samsung Construction and Trading
Corporation and Cheil Industries. While the image of a
handcuffed Lee sent shockwaves across the business world, his
arrest was not unprecedented. In the past, his father Lee Kun-
Hee, current chairman of Samsung, was convicted twice of
corruption and pardoned. Similarly, in 2007, Hyundai’s
Chairman Chung Mon-Koo was found guilty of fraud and
pardoned. And in 2013, SK’s Chairman Chey Tae-Won was
convicted of embezzlement and later pardoned. 3 The familyowned
conglomerates have long dominated the economic life
of modern Korean society, accounting for roughly 50% of the
total share of the Korean stock market. Their close ties with the
government and state bureaucracy have fueled growing public
distrust and frustration with the nation’s leadership and has led
to increased shareholder discontent.
Korea’s Governance Practices
The collusion of politics and business in Korea highlights the
poor practices of corporate governance and business ethics.
Corporate governance studies on Asia consistently rate Korea as
lagging in governance behind leaders in the region. 4 Korea
underperforms its peers in the areas of board independence,
ethics and transparency in corporate governance.
Korea, however, has not always been viewed as the laggard in
Asia’s governance landscape. Right after the Asian Financial
Crisis of 1997-1998, the country underwent important
governance reforms that sought to quickly and significantly
increase corporate board independence and the overall
governance of publicly-traded Korean companies. For instance,
the proportion of listed firms with at least one outside director
grew from 34% in 1999, to 62.3% in 2000, to reach 94% in 2007. 5
In 2001 and 2003, the country’s Security Exchange Acts required
large listed companies (those with about $2 billion in market
capitalization) on the Korea Exchange and KOSDAQ to have at
least three outside directors and for one half of their boards to
be independent. In 2004, the board independence requirements
were further strengthened with the stipulation that there be a
majority of independent board directors for large companies.
This is on par with leading international best practices in
corporate governance. The Korean Commercial Code also
stipulates that outside or independent directors must not be
related to management while acting as fiduciaries. 6 This
resonated with the impetus towards greater board independence
to mitigate the role of corporate insiders and create new
independent auditing structures within Korean corporations.
In 2012, the Korean Commercial Code was revised to further
enhance the board’s fiduciary duties. It required the approval of
two-thirds of directors for all internal transactions and for new
business dealings with third parties. If transactions or deals
benefit founding families or management at the expense of
minority shareholders, the approving directors will be personally
liable for the losses. 7
Notwithstanding these developments towards good governance,
ethics controversies involving Korean chaebols surged over the
past several years. A prime example is the notorious Hyundai
Motor land bid in 2014 for which the company paid the excessive
price of $10 billion, three times the land’s market value of $3
billion, angering investors and hurting shareholder value.
According to reports, while the boards of directors of Hyundai
consortium companies voted to unanimously approve the deal,
the company’s outside directors were kept in the dark about the
price as it was considered by management to be a confidential
matter. All these instances point to a serious lapse in the
14
GLOBAL FORESIGHT THIRD QUARTER 2017
enforceability of existing corporate governance rules and a lack
of accountability. They call into question the true independence
of the boards of Korean conglomerates and the ability of outside
directors to effectively oversee management and protect all
shareholders’ interests.
Recent research on Korean-listed companies shows strong
social ties between independent directors and management of
Korean conglomerates. While 87% of boards are in theory
independent, only 62% are when one considers social ties. 8 The
composition of Korean boards also poses concern as the
percentage of directors with business or management
backgrounds has decreased from 45.2% in 2004 to 28.4% in
2011. 9 This, while the number of former public officials has
sharply increased from 2.7% in 2004 to 8.9% in 2011.
Interestingly, in Korea’s boardrooms, the inclusion of professors
and lawyers as independent directors has become common. The
need for stronger
independent oversight
and monitoring of
management is especially
important for Korean
chaebols as they
concentrate the
managerial power into
the board’s chairman, a
member of the founding
family. The chairman’s
control over all
subsidiaries of the
conglomerate through
the management council and appointment of management of
all affiliated firms has been a serious concern for minority
shareholders seeking more accountability and managerial
transparency.
Protecting Shareholder Interests
At the core of Korea’s governance challenges lies a structural
problem at the chaebol: the complex system of crossshareholdings.
On average, the founding family of Korean
conglomerates owns about 10% of the parent company’s shares,
while other listed subsidiaries own more than 30%. 10 The
founding family is a shareholder in the other chaebol
subsidiaries, and the subsidiaries reciprocate by owning shares
in the other companies. The circular ownership structure has
been of investor concern as it provides a framework for related
party transactions and potential conflict between family
shareholders and external shareholders. For many, these
concerns have been factored into what has been called for over
a decade the “Korean discount.”
With the promise of sweeping governance reform by the new
President Moon Jae-In, foreign investors are looking today for
better protection of minority shareholder rights and stronger
constraints on chaebol businesses. On the politico-economic
reform agenda are topics such as: 1) reforming the Korean
Commercial Code by mandating separate elections for audit
committee members, 2) allowing shareholders of parent
companies to sue directors of subsidiary firms, 3) lowering
eligibility thresholds for filing representative lawsuits, 4)
regulating compensation for controlling shareholders and
management, as well as 5) introducing mandatory electronic
and cumulative voting. 11
One of the most ambitious goals includes proposed amendments
to Korea’s Monopoly Regulation and Fair Trade Act, introducing
constraints on chaebol businesses and banning all existing
circular ownership structures of chaebols within three years. 12
The calls for big governance reform in Korea were first publicly
voiced by chaebols’ shareholders themselves. In 2015, at
Hyundai Motor’s annual general meeting, shareholders openly
confronted management about the controversial land deal and
proposed a new governance committee to strengthen oversight
and accountability. In an unprecedented fashion, their
shareholder action
prompted the company
to set up a separate
Corporate Governance
and Communication
Committee consisting
of four independent
directors, and to engage
in shareholder outreach.
In 2016, Hyundai Motor
officially announced its
new “Corporate
Governance Charter” in
an effort to enhance
transparent business management and to promote shareholder
rights. 13 Similarly, in November 2016, Samsung announced a
“Comprehensive Roadmap to Enhance Long-term Shareholder
Value Creation,” committing to improve governance by
increasing its board’s independence, as well as the diversity and
breadth of experience of its directors.
“With the adoption of a Stewardship Code,
our expectations are that shareholders in
Korean equities, and especially in chaebols,
will use their voice more actively to
promote positive governance change and
long-term shareholder value creation.“
Changing Korea’s Business Culture
The expected governance reform in Korea is an opportunity not
only to disentangle politics from business, but also to create
better institutional protection for all shareholders. It also serves
as an opportunity to change the culture of investing in the
country.
In February, Korea’s Financial Services Commission introduced
the country’s first Stewardship Code, encouraging big investors
like pension plans and asset managers to actively engage with
investee companies and to monitor their management decisions.
This trend towards investor stewardship and active ownership
echoes the progress already made in other Asian markets such
as Japan, Hong Kong, Malaysia, the Philippines, Singapore, and
Thailand. With the adoption of a Stewardship Code, our
expectations are that shareholders in Korean equities, and
especially in chaebols, will use their voice more actively to
promote positive governance change and long-term shareholder
value creation. •
GLOBAL FORESIGHT THIRD QUARTER 2017 15
insights@rockco.com
New York, NY
10 Rockefeller Plaza
3rd Floor
New York, NY 10020
212-549-5100
Washington, DC
900 17th Street NW
Suite 603
Washington, DC 20006
202-719-3000
Boston, MA
99 High Street
17th floor
Boston, MA 02110
617-375-3300
Rockefeller Trust Company, N.A.
10 Rockefeller Plaza
3rd Floor
New York, NY 10020
212-549-5100
The Rockefeller
Trust Company (Delaware)
1201 N Market Street
Suite 1401
Wilmington, DE 19801
302-498-6000
1
http://www.koreatimes.co.kr/www/nation/2017/05/356_229150.html
2
https://www.nytimes.com/2017/03/04/business/south-korea-samsung- bribery-lee.html
3
https://www.nytimes.com/2017/03/04/business/south-korea-samsung- bribery-lee.html
4
http://www.acga-asia.org/upload/files/research_preview/20161014021202_3.pdf
5
http://www.eastasiaforum.org/2011/07/08/corporate-governance-reform-in-korea/
6
“Reform of Corporate Governance,” in Economic Crisis and Corporate Restructuring, Cambridge University Press, 2003, p. 303.
7
http://www.acga-asia.org/upload/files/CG%20Watch%202012.pdf
8
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1195313
9
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2824303
10
“Reform of Corporate Governance,” in Economic Crisis and Corporate Restructuring, Cambridge
11
“Asian Corporate Governance” Asia Pacific GS Sustain, April 11, 2017.
12
“Asian Corporate Governance” Asia Pacific GS Sustain, April 11, 2017. University Press, 2003, p. 287. “Asian Corporate Governance” Asia Pacific GS Sustain,
April 11, 2017.
Cover image: Getty Images
Certain information contained in this document may constitute “forward-looking statements.” No representations or warranties are made as to the
accuracy or completeness of such statements, and actual events or results may differ materially from those reflected or contemplated. This document is
provided for informational purposes only and is not intended, and should not be construed, as investment, tax or legal advice. This document does not
purport to be a complete statement of approaches, which may vary due to individual factors and circumstances. Company references are provided for
illustrative purposes only and should not be construed as investment advice or a recommendation to purchase, sell or hold any security. Although the
information provided is carefully reviewed, Rockefeller & Co., Inc. cannot be held responsible for any direct or incidental loss resulting from applying any
of the information provided. Past performance is no guarantee of future results and no investment or financial planning strategy can guarantee profit or
protection against losses. These materials may not be reproduced or distributed without Rockefeller & Co., Inc.’s prior written consent.
Copyright 2017 © Rockefeller & Co., Inc. All Rights Reserved. Products and services may be provided by various subsidiaries of Rockefeller & Co., Inc.
16
GLOBAL FORESIGHT THIRD QUARTER 2017
N o v e m b e r 1 , 2 0 1 7
A “Vixing” Puzzle
Market’s unusual lack of volatility;
Be fearful when others are greedy
O
I
ctober has historically been a spooky month in
which some of the biggest market declines took
place – the crash of 1929, 1987’s Black Monday,
the financial crisis of 2008, etc. This October, however,
there were only treats and no tricks – the biggest one-day
movement for the S&P 500 Index during the month was a
0.81% gain, and the biggest down day had a mere 0.47%
drop. That said, there was quite a bit of turbulence among
individual stocks. The Information Technology sector had
a huge month, with the so-called FANG stocks (Facebook,
Amazon, Netflix, Google) leading the way up, while some
old economy bellwethers and the much beleaguered brick
and mortar retailers took a beating. The rising hope of
U.S. tax reform and the continued strength of the global
economic expansion lifted U.S. Treasury yields as well as
commodity prices from oil to copper. The U.S. reflation
expectation also boosted the greenback. European
sovereign bond yields and the euro declined after ECB
President Draghi announced a reduction in monthly asset
purchases starting in 2018, but promised a longer
duration of QE. China completed its quinquennial
leadership transition at the conclusion of the 19 th Party
Congress, which should usher in a new era with more
focus on the quality of growth over the quantity. President
Xi now awaits President Trump’s State visit to Beijing on
November 8 th . Investors will likely be focused on issues
ranging from trade to North Korea, though major
breakthroughs appear unlikely. Lastly, there is still one
unresolved sleeper issue that may come back to roil the
market – will a new bipartisan deal be reached in time to
fund the U.S. government beyond December 8 th , when the
current continuing resolution expires?
Equity Markets Indices 1
9/30/2017
Price
10/31/2017
Price
MTD
Change
YTD
Change
MSCI All Country World 487 497 2.0% 17.7%
S&P 500 2519 2575 2.2% 15.0%
MSCI EAFE 1974 2003 1.5% 18.9%
Russell 2000 ®2 1491 1503 0.8% 10.7%
NASDAQ 6496 6728 3.6% 25.0%
TOPIX 1675 1766 5.4% 16.3%
KOSPI 2394 2523 5.4% 24.5%
Emerging Markets 1082 1119 3.5% 29.8%
Fixed Income
2-Year US Treasury Note 1.49% 1.60% 12 41
10-Year US Treasury Note 2.33% 2.38% 5 -7
BarCap US Agg Corp Sprd 1.01% 0.95% -6 -28
BarCap US Corp HY Sprd 3.47% 3.38% -9 -71
Currencies
Australian (AUD/$) 1.28 1.31 -2.3% 6.3%
Brazil Real (Real/$) 3.16 3.27 -3.3% -0.5%
British Pound ($/GBP) 1.34 1.33 -0.9% 7.6%
Euro ($/Euro) 1.18 1.16 -1.4% 10.7%
Japanese Yen (Yen/$) 113 114 -1.0% 2.9%
Korean Won (KRW/$) 1145 1120 2.2% 7.6%
US Dollar Index (DXY) 93.08 94.55 -1.6% 8.1%
Commodities
Gold 1280 1271 -0.7% 10.3%
Oil 51.7 54.4 5.2% 1.2%
Natural Gas, Henry Hub 2.89 2.80 -3.0% -24.0%
Copper (cents/lb) 296 310 4.9% 23.8%
CRB Index 183 188 2.4% -2.6%
Baltic Dry Index 1356 1534 13.1% 59.6%
SOURCE: BLOOMBERG
JIMMY CHANG, CFA
Chief Investment Strategist
212-549-5218
jchang@rockco.com
M O N T H L Y M A R K E T R E V I E W N O V E M B E R 2017 1
The Original Big Short
The Amsterdam Stock Exchange, founded by the Dutch
East India Company in 1602, is recognized as the world’s
oldest stock exchange. It facilitated a secondary market to
trade stocks and gave rise to trading clubs during the mid-
17 th century where speculators would congregate.
Messengers would rush to and from the exchange to
update pricing to customers.
In 1867, the invention of the stockticker
machine, also known as the
ticker tape, obviated the need for
messengers. Stock transaction data
was transmitted by telegraph to a
ticker tape that would continuously
print out abbreviated company
names (ticker symbols) followed by the price and volume
data. Thomas Edison later upgraded the system to reach
a printing speed of one character per second. Ticker tape
eliminated the need for messengers and allowed people to
trade in “real time” from long distance.
In 1900, 14 year-old Jesse Lauriston Livermore started
working as a quotation board boy in the Boston office of
Paine Webber. His job was to update the board with
information coming off the ticker tape. He became
interested in the behavior of stock prices and began
recording price movements that enabled him to spot
patterns prior to sizeable advances and declines. A fellow
office boy later talked him into speculating on a stock on
margin at a bucket shop. Two days later, Jesse sold the
position with a $3.12 profit. He soon quit his job and
started trading for a living.
Jesse made his first $1,000 (around $27,600 in today’s
dollars) at the age of 15. He was later banned by most
bucket shops in Boston as he had outfoxed many of the
shady operators. By the age of 20, he had accumulated
$10,000. Then came the big payday – the Panic of 1907 –
during which Jesse shorted the market and made $1
million ($25 million in today’s dollars). He would top this
feat and live up to the reputation as “The Great Bear of
Wall Street” by shorting the market in 1929 for an
astounding $100 million profit ($1.43 billion in 2017!),
making him one of the richest men in the world.
The combination of elevated
investor complacency and a
tightening Fed makes the
market vulnerable to a pullback.
Unfortunately, the concept of diversification probably
never crossed Jesse’s mind. He somehow managed to lose
all his money and was bankrupt by 1934. The bankruptcy
resulted in an automatic suspension of his membership
on the Chicago Board of Trade. In 1940, the legendary
trader, suffering from depression, shot himself in the
cloak room of Manhattan’s Sherry-Netherland Hotel.
Rise of the Machines
How things have changed from
those simpler days when humans
were doing the trading. Today,
with the advent of technology,
market activity is dominated by
passive and various quantitative
strategies. It is estimated that
fundamental discretionary investors now account for only
10% of the trading volume. Big inflow into major ETFs
prompted buying across the board regardless of company
specific issues and valuations. Big data and machine
learning are the new buzz words. Forbes recently featured
a quant fund run by three twenty-somethings. Their
assets under management was in the low tens of millions
of dollars, yet they averaged $1 billion in transactions, or
10,000 to 40,000 trades each day. Since there are only
86,400 seconds in a day, this fund would generate a trade
every 2.16 to 8.64 seconds if it worked around the clock.
Much of the decision making and trade execution, of
course, has been taken over by software algorithms. These
whiz kids employed statistical arbitrage trading strategies
in stocks and currencies, and closed out all trading
positions at the end of each day.
The allure of sophisticated computer models trouncing
their human competitors has continued to attract inflow
to quant funds. It is estimated that quantitative hedge
funds now manage more than $1 trillion, about one-third
of the $3 trillion hedge fund industry. While there are
indeed brilliant quant managers who have delivered
strong returns over a long period of time, the sheer size of
the industry means there are likely more pretenders than
contenders. Given that many funds employ similar
strategies (e.g., trend following), a reversal in trend could
create disruptive market movements, not to mention the
threat of rogue algorithms wreaking havoc on the market.
M O N T H L Y M A R K E T R E V I E W N O V E M B E R 2017 2
A “Vixing” Puzzle
Equity volatility has been unusually low for much of 2017.
The Volatility Index (VIX), which measures the implied
volatility of S&P 500 Index options and has been viewed
as a barometer of equity market volatility, has drifted to
all-time lows. Over a span of more than 7,000 sessions
going back to the start of 1990, the VIX Index’s average
and median closing values have come out to 19.4 and 17.6,
respectively. It was a rare occurrence for the VIX to
collapse below 10 – there were only 9 such occasions out
of 6,802 trading sessions prior to 2017, or 0.13% of the
times. Year-to-date in 2017, however, there were already
35 sessions with the VIX closing below 10.
Another way to look at the lack of volatility is to tally the
number of trading sessions when the S&P 500 Index had
a daily change of more than 1% in either direction. There
were only 8 such sessions so far in 2017, compared to 48
and 72 such occasions in 2016 and 2015, respectively.
It seems ironic that the market should be this steady with
arguably the most mercurial and unconventional
president in modern history at the helm atop the free
world. Perhaps investors have grown numb to all the
chaos and controversies. It is as if Washington’s
dysfunction and a divided America were just fodder for
the hyperventilating media, and markets were behaving
as if all will be fine when the Republicans pass the tax
reform to prime the pump for the 2018 mid-term
elections. Time will tell if this period of eerie calm is
prescient or misguided.
Unintended Consequences
The decline in market volatility has made shorting against
the VIX futures and various VIX ETPs (exchange-traded
products) quite popular and profitable in recent years.
The net short position on VIX futures has progressively
climbed to new highs over the last couple of years.
Another phenomenon was the rise of “volatility control”
investment strategies, supposedly favored by many hedge
funds and insurance companies. These strategies in
essence adjust a portfolio’s allocation between equity and
cash to maintain a targeted level of volatility at the
portfolio level. In an environment of declining volatility,
more assets would be allocated to equities – the equity
allocation would even exceed 100% when the market’s
realized volatility is below the targeted volatility. On the
other hand, as volatility ticks up, the equity allocation
would be scaled back.
While these strategies have enjoyed strong returns during
this stretch of progressively lower equity volatility, they
may be planting the seeds of a market correction. Market
makers and dealers on the other side of the growing short
VIX trades would need to employ various S&P 500 option
strategies to hedge their long VIX positions. There is the
concern that a decline in the S&P 500 Index could trigger
adjustments to these hedging positions that would
exacerbate the market decline. Similarly, should volatility
suddenly spike up, the aforementioned volatility control
strategies would be cutting equity exposures
concurrently, which could amplify the market decline
similar to the downward selling pressure that the socalled
portfolio insurance products generated during the
crash of 1987. We wonder if any investors and regulators
truly appreciate how these strategies, in concert with
various rapid fire trades generated by machine-learning
based algorithms, could impact market movement and
liquidity should there be an exogenous shock. Only time
will tell.
Fear vs. Greed
There is an adage that one should be fearful when others
are greedy and greedy when others are fearful. Judging by
the depressed levels of the VIX Index, the enthusiastic
speculation over bitcoin as well as other variants of
cryptocurrencies, and surveys that indicated strong
investment sentiment, it is clear that greed has been on
the rise. Can this euphoria continue for a while longer? Of
course. However, in our opinion, the combination of
elevated investor complacency and a tightening Fed
makes the market vulnerable to a pullback, though the
timing of it is hard to predict. The aforementioned issues
with various trading strategies could further add fuel to
fire in the event of a market decline. That said, with the
macro and earnings backdrop remaining positive, we
would view potential selloffs as a buying opportunity
rather than the start of a protracted market downturn. •
M O N T H L Y M A R K E T R E V I E W N O V E M B E R 2017 3
For More Information on Rockefeller & Co:
insights@rockco.co
New York, NY
10 Rockefeller Plaza
3rd Floor
New York, NY 10020
212-549-5100
Washington, DC
900 17th Street NW
Suite 603
Washington, DC
20006
202-719-3000
Boston, MA
99 High Street
17th Floor
Boston, MA
02110
617-375-3300
Rockefeller Trust Company, N.A.
10 Rockefeller Plaza
3rd Floor
New York, NY 10020
212-549-5100
The Rockefeller
Trust Company (Delaware)
1201 N Market Street
Suite 1401
Wilmington, DE 19801
302-498-6000
This paper is provided for informational purposes only. The views expressed by Rockefeller & Co.’s Chief Investment Strategist
are as of a particular point in time and are subject to change without notice. The information and opinions presented herein have
been obtained from, or are based on, sources believed by Rockefeller & Co. to be reliable, but Rockefeller & Co. makes no
representation as to their accuracy or completeness. Actual events or results may differ materially from those reflected or
contemplated herein. Although the information provided is carefully reviewed, Rockefeller & Co. cannot be held responsible for
any direct or incidental loss resulting from applying any of the information provided. Company references are provided for
illustrative purposes only and should not be construed as investment advice or a recommendation to purchase, sell or hold any
security. Past performance is no guarantee of future results and no investment strategy can guarantee profit or protection against
losses. These materials may not be reproduced or distributed without Rockefeller & Co.’s prior written consent.
1
Index pricing information does not reflect dividend income, withholding taxes, commissions, or fees that would be incurred by an
investor pursuing the index return.
2
The Russell 2000 ® Index is a registered trademark of the Russell Investment Group. Russell Investment Group is the owner of
the copyright relating to this index and is the source of its performance value.
Copyright 2017 © Rockefeller & Co., Inc. All Rights Reserved.
M O N T H L Y M A R K E T R E V I E W N O V E M B E R 2017 4
11/14/2017 An Inside Look at Rockefeller & Co. - Barron's
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BARRON'S PENTA
Rock of Ages
Family-wealth advisor Rockefeller & Co. was hit by both the financial crisis and the death of its CEO. Not only did it survive, it thrived.
Email Print 0 Comments Order Reprints
By RICHARD C. MORAIS
September 15, 2012
>
John D. Rockefeller's family office, Rockefeller & Co., was founded in 1882. It began
selling its expertise to other families in 1980, and by mid-2008 it had $28 billion of
clients' assets under its hood. Then came a tragic event that could have brought the
firm to its knees. In September 2009, as the financial crisis raged, Rockefeller's chief
executive, James S. McDonald, shot himself behind a car dealership in Dartmouth,
Mass.
While world markets continued their downward spiral, it took a year for the Rockefeller
Family Trust, which owns 100% of the multifamily office's voting rights, to get
McDonald's successor in place.
It's hard to imagine a more dangerous situation for a financial-services firm to be in.
Destabilized from within and without, most wealth managers in such circumstances
would have been unable to contain the stampede of clients heading out the door. And
yet, Rockefeller's assets under advisement and administration actually rose 52%, to
$35 billion, in the three years through this past June. Client retention since the 2008
recession has been 97%, 1% higher than in the entire past decade.
"Despite the turbulence of the period when I stepped in, it was a remarkably strong
franchise and business," says Reuben Jeffery III, Rockefeller's CEO for the past two
years. "It was a real testament to what had been created by generations long before
me, including most of the people who are still here today."
Penta's rare peak inside Rockefeller reveals that, for all the outward signs of serenity,
the firm is hardly on autopilot. Jeffery, looking every bit the Wall Street incarnation of
Cary Grant, is a former Goldman Sachs partner who in 2007 went to work as George
Bush's undersecretary of state for economic, energy, and agricultural affairs, after first
serving as the president's post-9/11 special advisor for Lower Manhattan development.
In June 2008, Société Générale Private Banking closed on its purchase of a 37%
economic share in Rockefeller & Co. Needing to strengthen its balance sheet during the
recent euro crisis, the French bank has been under pressure to shed noncore assets.
Therein lay an opportunity. This summer Jeffery quietly midwifed the sale of Société
Générale's stake to Lord Jacob Rothschild's RIT Capital Partners. That closed-end fund
is the investment vehicle for the London branch of the Rothschild family, and has 1.9
billion pounds ($3 billion) under management. The deal is expected to close at the end
of this month. It's a union that should provide some valuable marketing opportunities. In
these unsettled times, it's easy to imagine rattled new wealth wanting to tap the joint
expertise of these experienced families that have managed to keep their heads down
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11/14/2017 An Inside Look at Rockefeller & Co. - Barron's
Reuben Jeffery III, Rockefeller
Financial's CEO Evan Kafka for
Barron's
and their assets intact over several
generations and right through the
upheavals of history.
Any new clients will be dealing with
Rockefeller Financial Services, the trade
name of Rockefeller & Co. Some $7 billion
of Rockefeller Financial's $35 billion pile
are "assets under management"; the rest
are assets under advisement or
administration. Rockefeller provides its
298 clients either financial, trust, and tax
advice, and the like, or service through its
portfolio-tracking product for wealthy
families, Rockit Solutions.
Rockefeller offers financial products from
other firms but still believes in running its
own funds in 10 core areas, such as
global equities and fixed income. David
Harris, Rockefeller's chief investment
officer, says large multinationals with their
triple-A ratings and mountains of cash
need to be viewed as "the new sovereigns" during a period when government finances
are deteriorating. The firm claims that its global funds are stars, but it keeps a lid on
details. Prodded by Penta, Rockefeller reluctantly produced a "confidential"
performance sheet on its 10 core funds but barred us from publishing the results. We
can confirm that out of 10 offerings, seven global-equity and small-cap funds have
consistently outperformed indexes over long periods of time.
One area of Rockefeller & Co. know-how has been built out of the Rockefeller family's
50-year record of integrating environmental, social, and governance concerns into its
portfolio and investment decisions. Last fall, for example, Rockefeller hooked up with
the Ocean Foundation, a nonprofit focused on marine conservation, to find "profitable
investment opportunities that restore and support the health and sustainability of the
world's oceans."
Through such distinctive offerings, Jeffery hopes to reel in new money, both family and
institutional. "We're talking to sovereign entities," he says. "They have pools of capital
that need to be deployed, and they need to find competent, trustworthy managers in
[relevant] areas of investment activity."
Fees for managed assets invested in house funds typically run from 1% (for up to $25
million in assets) to 0.5% (over $50 million). Rockefeller targets families with $30
million; new clients are generally subject to a minimum $100,000 annual fee. Pure
investment advice on a $50 million to $100 million portfolio typically costs 40 to 60 basis
points, says the firm's president, Austin V. Shapard. Rockefeller has priced its services,
he says, for "a fair profit margin, not a crazy one."
Portfolio-tracking service Rockit deftly handles exotics like intrafamily loans and the
fluctuating price of ranch cattle. Its 23 clients typically pay 3 to 7 basis points on the $13
billion that runs through the Rockit platform. This, too, is a hidden asset that Jeffery is
leveraging into a boutique powerhouse.
E-mail: editors@barrons.com
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