Navigating safe passage
Certain risk factors simply cannot be managed - that's why it's especially important to control those that you can.
IF THE EVENTS of September 2001 taught us one thing, it is that the world can change quickly - and these changes can have many repercussions, including economic turmoil and business failures.
Borderline companies and institutions that can stay afloat during times of economic strength and political stability are among the first to succumb in times of uncertainty. At the same time, catastrophic events can have lasting effects on some of the strongest companies.
While events like these are beyond our control, there are many steps you can take to manage other risks. For example, diversifying is an effective way to protect your portfolio from a downturn in any single investment. Here are four other strategies to help keep your assets safe.
Choose a reputable jurisdiction
In terms of risk management, where you hold your assets may be as important as what you hold.
Not all countries are subject to the same laws and customs. Foreign governments have been known to impose taxes, expropriate private businesses, change the rights of nonresident investors, or institute currency controls that make it impossible to move money out of the country.
For example, in September 1998, the government of Malaysia imposed currency controls without warning, making the Malaysian ringgit non-legal tender outside the country. Foreigners and locals needed the central bank's approval to convert ringgit into foreign currencies. While this was an attempt to shield the ringgit against global instability and speculators, the restrictions had an impact on all investors and custodians with a financial interest in that country.
When choosing a location in which to hold your assets, think about the political and economic environment of that jurisdiction. Ask yourself if it is politically stable and whether there is a strong, well-regulated banking sector.
Select your partners carefully
Investors with sophisticated wealth management needs rely
on many different financial partners to help manage their
affairs. These professionals can include brokers, asset managers,
bankers, trustees, custodians, lawyers, and tax advisors.
Choosing conscientious, knowledgeable financial partners can greatly reduce your wealth management risk.
"When I recommend a firm to manage a client's portfolio, I always look at quality first, and price second," says Ian Morris, C.A., B.C.L., LL.B., a partner at the law firm Morris, Morris and Klein LLP. "In the end, I think you get what you pay for. For instance, for asset
management, I want to see a strong credit rating, good capital
reserves, and a broad base of experienced professionals throughout the organisation."
While it may be more cost-effective in the short term to work with second-tier advisors and financial institutions, in the long term this may prove to be a false economy. Wealth
management can be a complex undertaking, especially when
financial issues cross many jurisdictions. If you rely on an inexperienced financial partner, or on one who fails to perform proper due diligence on a transaction, you could suffer missed opportunities or financial losses.
Diversify across currencies
Currency movements are notoriously unpredictable. The fortunes of countries and their currencies can rise and fall dramatically over the course of a lifetime - and world events can quickly change the economic and monetary stability of a region.
Predicting what the strongest currency will be in several years' time is practically impossible. A more effective strategy is to diversify. Holding investments denominated in a variety of currencies will greatly reduce the impact on your portfolio of any one currency's decline.
Secure your estate
Of course, protecting your investments has little point unless you can preserve those assets for future generations - hence the importance of estate planning in an effective risk-management programme. Too often, estate
planning is left too late, or a plan is put in place and
left untouched for years without review. Estate planning
is a dynamic process. It should begin as early as possible
and be updated as your life circumstances, applicable legislation,
and future plans change. While it could be many years before
your estate is settled, this is the time to take action on estate issues.
Planning can take on even greater importance when more than one jurisdiction is involved. The laws that apply to assets held abroad may be different from the laws in your country of residence. Cross-jurisdictional issues can arise even if you don't own foreign assets - for example, if your children or other beneficiaries live abroad.
There are a number of structures and strategies that can help protect the legacy you pass on to others. These include the creation of a second will to deal specifically with foreign assets, transferring property to create the joint ownership of assets with an intended beneficiary, and the use of international trusts and holding companies.
We can help you manage the potential risks facing your portfolio. To learn how, please talk to your relationship
manager or complete and return the enclosed Fax Back form.
Managing Your Wealth
How private and secure are my financial records at Global Private Banking?
Security is a key priority at Royal Bank of Canada Financial Group.
With our Online banking service, several layers of firewalls ensure the confidentiality of your personal data. State-of-the-art encryption technology scrambles any information you send to us when using our online banking services. This will help ensure that only you are able to access your accounts. We also recommend that you protect your password, choose a password that cannot be easily guessed by a third party, and change your password regularly.
Any information you provide to us is handled in accordance with our commitment to client privacy. The Royal Bank of Canada Global Private Banking network and its employees are committed to respecting confidentiality of clients' personal, business, and financial information. We gather and use such information only to provide you with the financial services you have requested, or to offer additional products and services that we believe might be of benefit to you.
For more information on how your personal and financial data are protected, visit the Royal Bank of Canada Global Private Banking Web site at www.rbcprivatebanking.com/privacy.html
Three pictures of post-September potential
As the world recovers from the events of September 2001, some sectors are bouncing back more quickly than others.
Financial services capitalise on strengths
By Heather Pierce,
RBC Global Investment Management Inc.
September 11 hit the financial services sector hard. The Standard & Poor's (S&P) Financial Sub-Index in the U.S. fell more than 12% in the week following the attacks.
The day's events brought about the biggest insurance loss in history. Estimates range from US$30 billion to US$60 billion. As a result, the gap between well-capitalised insurance and reinsurance companies is likely to widen. At the same time, the historically wide spread between U.S. Treasuries and high-yield corporate bonds makes financing more expensive for higher-risk companies.
Companies with strong balance sheets and management, however, stand to gain substantial market share.
September 11 increased the demand for property and casualty insurance policies. It also brought an end to the irrational pricing of policies, including underpricing because of competition. This move should benefit insurance companies in the long term.
Banks have adopted more conservative lending policies and boosted their loan-loss provisions in North America and Europe, which will help weed out weaker credit in the short term. Recent cost-cutting in the capital markets divisions of leading global investment banks means they are positioned to be highly profitable once the economy picks up later in 2002.
Mining and resources show their mettle
By Christine Poole,
RBC Global Investment Management Inc.
In September of last year, the S&P Basic Materials Sub-Index fell by 11%, as the economic slump reduced demand and drove up inventories.
The price of commodities in the mining and resources sector, such as nickel, aluminium, copper, and zinc, declined to levels where 25% to 50% of producers were not able to make money. In fact, in early 2001, it was actually more profitable for some companies to sell their electricity than use it to keep their mines in production.
Since then, however, the stock prices of commodity producers have held up well. For example, the Sub-Index rose 2.9% in October.
Some commodities have experienced a flurry of merger activity recently, such as Alcan Inc.'s US$5.6- billion acquisition of Alusuisse Group Ltd. in 2000 and the US$5.8-billion takeover of Reynolds Metal by Alcoa Inc. that same year.
These newly consolidated producers have cut back production and shut down unprofitable companies, which should help restore the balance of supply and demand and stabilise prices. In addition, there's been a substantial drop in input costs for producers, especially electricity.
The outlook for 2002 is favourable, although not overwhelmingly so. Mining and resources typically lead an economic recovery, and the recent round of consolidations leaves key producers well-positioned to be profitable should the expected mid-2002 economic recovery take place. If the recovery doesn't occur, there's a risk the stocks of the commodity producers will weaken.
Appetite for food manufacturing grows
By Paul Johnson,
RBC Global Investment Management Inc.
Companies that manufacture and distribute packaged foods are not particularly sensitive to the economy. People always have to buy food. As a result, these stocks become especially attractive during a market downturn.
The current environment illustrates this concept. Since March 2000, the food manufacturing sector has rallied strongly as investors sold off New Economy holdings and sought greater security. While the Morgan Stanley Capital International (MSCI) Consumer Staples Index was down more than 10% in the year to November 8, its decline was only about half that of the MSCI World Index.
The outlook for the short term is not as positive. An economic recovery could prompt investors to move out of these defensive stocks and into more economically sensitive sectors with greater growth potential.
Over the longer term, the sector is likely to see continued merger and acquisition activity. Already, some of the large global food manufacturing companies are selling off some divisions to other manufacturers in order to focus on core holdings. The US$10.4-billion sale of Pillsbury to General Mills by Diageo plc in October is a recent example.
The euro comes of age
JANUARY 1, 2002 marked an historic occasion - the day that most of Europe converted to a single currency. Twelve of the 15 members of the European Union (EU) have adopted the euro: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland, and Greece.
It has also been adopted by some non-EU jurisdictions, including Monaco, San Marino, and Vatican City. Three members of the EU - the United Kingdom, Denmark, and Sweden - are keeping their own currencies, as are non-EU countries.
If you have connections in Europe or will be travelling there in the near future, you'll want to be aware of the following:
The benefits. For travellers in Europe, dealing with money is easier. Your currency need be exchanged only once, since the same coins and bills are used in all 12 countries. Although prices will still vary from country to country, comparison shop-ping will be easier since all prices will be posted in euros(€).
Availability. Euros have been available from bank machines (ATMs), banks, and currency-exchange bureaus since January 1, 2002. Exchange fees apply to trav-ellers' cheques and foreign currency, so shop around for the best rates.
Transition deadlines. In most jurisdictions that adopted the euro, you'll be able to spend old currency until March 1. Three exceptions are: the Netherlands, which had a cutoff date of January 28; Ireland, where the punt can be used for purchases until February 9; and France, where you can use the franc until February 17. Retailers have their cash registers stocked with the new coins and bills, so expect that change will be given in euros.
Turning in old currency. Until the end of 2002, branches of European central banks will exchange old cur-rency for euros at no charge. Com-mercial banks and private exchange bureaus will charge fees.
After the end of 2002, old curren-cies can be exchanged at Euroland national banks for varying periods. If you have currency left over from a previous trip to Europe, it's best to exchange it as soon as possible.
For more information, see the European Central Bank's Web site, www.euro.ecb.int; or the European Travel Commission's site, www.visiteurope.com/euro.htm.
Beware of charitable scams
The outpouring of financial support in response to the terrorist attacks in the U.S. showed the generosity of people around the world. Unfor-tunately, it also provided fraud artists with new opportunities to prey on the public's desire to help.
Charitable scam artists have branched out from phone to e-mail solicitations. While many legitimate charitable organisations do maintain Web sites through which donations can be made, they seldom use e-mail to seek contributions.
No matter how worthwhile the cause, you should think before you provide credit card or personal information over the phone or in response to an unsolicited e-mail. Ask the caller or e-mail sender to forward written information about the charity before you make a con-tribution decision.
You may want to call the charity directly or visit their Web site to confirm the information provided and to determine the most appro-priate way to donate.
To arrange for regular donations to a charity, please contact your relationship manager. Alternatively, if you use our Online banking service, you can input these at your convenience.
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