April 20, 2018

Funds need to wake up to the trade finance opportunity

Technology has finally caught up on banks’ desire to distribute trade assets - and it has never been easier for investors to get involved.

The trade finance sector has been trying to raise awareness on the relevance of investing in trade assets for years. In fact, the International Chamber of Commerce (ICC) Banking Commission releases an annual report analysing the default risk presented by these assets, which has repeatedly confirmed their low risk profile.

This year, the Trade Register found that default rates for trade finance products from 2008 to 2016 ranged between 0.05% and 0.24% depending on the type of product and region - lower than most other asset classes. Additionally, time to recovery in cases of default was much shorter for trade finance (61 to 184 days) than for other products (at least 400 days).

Funds that have been investing in trade assets (think Federated Investors) have seen monthly returns of up to 1.2%, and an annualised Sharpe ratio (a measure that uses the US Treasury's one-month constant maturity yield to calculate risk-adjusted returns) of over 3%, which is considered excellent. Over the 60-month period between April 2010 and March 2015, Federated Investors’ trade finance portfolio had 53 months of positive returns and only seven months of negative returns.

These pioneers invested not only their money but also an incredible amount of time to understand the trade finance sector and the various risks surrounding deals in different jurisdictions and industries. They organised meetings with individual financial institutions to identify and cherry-pick investment opportunities, and the strategy has proven fruitful.

But nowadays, advances in technology are making the process significantly easier - and trade assets are more accessible than ever. Imagine a global platform where trade financiers, bank and non-bank originators, investment managers and corporates can connect and transact, and where AI can be used to deliver advanced credit analytics and reporting, making trade finance asset investment both transparent and scalable.

Investors can use this technology to make sound credit, diversification and pooling decisions, with a rules-based workflow that ensures eligibility criteria and portfolio guidelines are met - without the need for weeks of research about each deal.

Transparency and compliance to credit and environmental regulations are crucial to investors - and lack of visibility on these has traditionally been one of the obstacles hindering their involvement in trade finance assets. But a global web-based platform is best positioned to collect accurate data about the nature and credit risk of each transaction, and present it in a language understood by the investment community.

Trade finance has been a sound investment option for decades, but only now has technology reached the right level to make these assets easily investable. Institutional investors no longer have any excuse not to get involved.