Asset Managers Are Eyeing Trade Finance


Asset Managers Are Eyeing Trade Finance
Despite the challenges involved in acquiring the asset class, investor demand is high

February 2019, London. Trade finance is a promising arena for asset managers, but there are hurdles to be cleared, according to the latest The Cerulli Edge―Global Edition.

Cerulli Associates, a global research and consulting firm, says demand for trade finance is growing, but the number of vehicles delivering the asset class in a usable form is limited.

“With unmet demand for trade finance from businesses globally running into billions of dollars, asset managers are starting to look more closely at the investment potential of products such as supply chain finance,” says André Schnurrenberger, managing director, Europe at Cerulli.

He says it is difficult to originate core products and supply is limited. “Almost all trade finance assets are originated by banks and they like to hold them or distribute them only on terms that are relatively unattractive to other investors.”

Risk appetite and originate-to-distribute policies (whether the lender makes loans with the intention to sell them to other institutions and investors or to hold the loans to maturity) are two factors determining whether a bank distributes trade finance assets to external investors.

However, ICC Banking Commission data shows that trade finance assets are low risk, with a high level of recovery in the few cases of default. Cerulli’s analysis of default rates for trade finance investments indicates that fewer than 0.1% of letters of credit are defaulted.

The low correlation to long-term interest rates and other fixed-income strategies and the consistent risk-adjusted return profile of trade finance investments mesh well with institutions’ current investment strategies. However, Cerulli’s research suggests that many institutional investors have a limited understanding of the asset class. Nevertheless, Cerulli believes that the financing gap that exists for businesses all over the world will motivate and attract new players. It expects future growth to be driven by newcomers as real new lenders rather than only buying portion of portfolios.

Justina Deveikyte, associate director, European institutional research at Cerulli, says, “Trade finance is a growing
asset class with a widening gap between supply and demand. For example, demand for commodities such as cocoa
and coffee is increasing just as traditional lenders such as banks are exiting the market. All banks are capacity restrained, especially in areas such as yields originating in developing economies.”

The growing importance to institutions of environmental, social, and governance investing is likely to fuel demand. Trade finance can offer a way to support sustainable business practices through prudent lending.

“Trade finance can serve as a short-duration yield enhancer within secured finance portfolios, multi-credit
investment mandates, and absolute-return strategies,” says Deveikyte. “Investors have shown a growing interest
in trade assets in recent years and it is likely that, in the coming years, non-banks will become key partners in this sector.”

Other Findings:

• Product rationalization at broker/dealer firms in the U.S. has reduced opportunities for asset managers to distribute products to mass-market retail investors. Cerulli says that in response, managers are exploring new
channels of distribution, including registered investment advisors and direct-to-consumer firms. Managers are also working more closely with distributors to ascertain what products they need prior to collaborating with product managers to deliver solutions.

• Asia’s various fund passporting initiatives are being refined in order to achieve their goals, says Cerulli. It believes that for a pan-Asia framework to work effectively, harmony in regulations, disclosure practices, and fees is essential. However, it notes, accomplishing this is easier said than done in Asia’s fragmented markets.

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