Looking at Trade Finance in my Trustee role

Posted by Kevin Walker on May 1, 2015

Another busy few weeks have passed and the last week has been especially interesting which has spurred me to update my blog.

At work, in my role as Trustee, last week we had an investment committee meeting where among other things we reviewed the investment portfolio for my company. My investment knowledge isn’t completely up to scratch, but I found the review and structure of the portfolio very interesting.

There are a whole host of different asset classes that the company is invested in and our investment consultant has advised that we should further diversify the portfolio to in order to optimise the performance of the portfolio whilst still managing risk.

It appears that there are a whole host of niche or alternative asset classes available that offer different benefits. One such example which has been presented to my company is Trade Finance, which is one of the world’s oldest and largest financial activities, helping to support and facilitate an estimated $18 trillion dollars worth of global exports of merchandise and services annually.

Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade.

Typically Trade finance has historically been a stable, profitable and robust business for banks, with minimal realised loss ratios and low correlation to either the real economy or other banking activities. Recently, a couple of investment managers have launched innovative trade finance strategies for non-bank investors, such as pension funds, insurers, Local Authorities and family offices.

One particular example is Markham Rae where their trade finance strategy offers an 8% per annum return – which in today’s low yield environment is pretty impressive. Their strategy provides the full benefits of the superior risk adjusted returns of trade finance but without the connected operational and scalability problem. The stand out value add for pension schemes is that returns are paid in the form of a quarterly payment and are therefore a valuable and predictable source of income for pension funds which need income. With now being the optimum time to invest due to increasing regulation for banks being introduced in the next few years – this is an investment we need to act quickly on.