A Revolutionary Rating System for a Turbulent Economy
Science, not Opinions
July 2016
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Statement of Confidentiality
The information contained in this document is proprietary to Universal Ratings.
Universal Ratings submits this document with the express understanding that the concepts, information and
ideas conveyed herein will not be reverse-engineered in any form.
Copyright  2016, Universal Ratings Pte. Ltd. All Rights Reserved.
2
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Introduction and Background
In a complex and turbulent economy:
•
•
•
•
•
•
•
•
•
•
•
There is no such thing as equilibrium
Crises, bubbles and shocks will become more intense and more frequent
Conventional linear and Gaussian thinking is dangerously outdated
Sustainability is more important than sheer performance
Systemic risks are of paramount importance
Excessive complexity becomes a formidable source of fragility (exposure)
„Too Big To Fail‟ is one thing but „Too Complex To Survive‟ is another
The concept of “probability of default” becomes less relevant
Resistance to Shocks (RtS) becomes a new key indicator of business health
Science is more important than opinions, intuition or expert opinion – too much is at stake
Ratings much be objective and trustworthy – too much is at stake
3
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Introduction and Background
•
Until today, rating has not been a science. In fact, rating agencies themselves claim that
ratings are opinions. UR‟s ratings are:
– Science, not opinions
– Personalized and fully automatic
– Fast – to capture the dynamics of the economy
•
In a turbulent economy, resistance to shocks is the new key reflection
of the sustainability of a corporation or an investment portfolio.
At UR we:
– Go beyond the concept of Probability of Default (PoD)
– Provide a Resistance to Shocks Rating (RtS): ability to absorb shocks and volatility.
4
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Introduction and Background
•
Universal Ratings provides a modern on-demand rating system that is:
– Independent: we are not controlled by banks or funds
– Transparent: the rating engine is available to everyone
– Objective: the system is automatic, with no human-in-the-loop
•
Our ratings are engineered specifically for a complex economy
•
Our goal is to help global and institutional investors seek sustainability and preserve
wealth in a highly turbulent and uncertain context
5
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rationale
UR‟s ratings are based on two key metrics:
•
Business Complexity
A new and powerful indicator that quantifies intricacy and governability of a business or
investment and which impacts its sustainability. In the presence of high complexity
exposure increases and it is more difficult to make performance forecasts.
•
Resistance To Shocks
Sometimes known as resilience, it measures is the capacity to absorb shocks or
destabilizing events, such as financial contagion, stock market collapses, market bubbles,
natural disasters or geopolitical events. Resistance to shocks measures how stable a
portfolio or company is and how it will react in the presence of the said events. It ranges
from 0% (high fragility) to 100% (high resilience).
6
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rationale
•
•
•
•
•
The conventional PoD rating can be applied to a single listed company or to a country.
However, a PoD rating cannot be issued, for example, for an ETF, the system of all
corporate clients of a retail bank or for a commodity.
Our goal has been to develop a rating that is universal, that may be issued for the entire
galaxy of traded products, for corporations and countries.
Such a common rating concept exists and is based on the Resistance to Shocks.
Being resistant to shocks means to survive:
– Turbulence
– Volatility
– Uncertainty
– Instability
– Shocks
– Crises
– … complexity in other words.
7
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
What we Rate
Our ratings are offered for:
•
•
•
•
•
•
•
•
•
•
Corporations (public and private)
Systems of corporations
Systems of banks
Stocks, ETFs, funds, bonds, futures, options, etc.
Portfolios
Systems of portfolios, funds
Stock markets, systems of markets
Stock market indices
National economies, macro-regions
The global financial system
For each of the above UR provides a measure of complexity and/or Resistance to Shocks.
8
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
How it Works
•
UR offers its ratings via a web-service, on-demand B2B basis. Our clients send us
streams of data (Bloomberg, Thomson Reuters, etc.) we process it and return the
corresponding ratings and complexity measures. In real-time.
•
In order to guarantee confidentiality, data is submitted without naming any of its
constituents or specifying dates. Secure transmission is offered via hardware or softwarebased data encryption.
•
In alternative, our rating engine can be installed directly on our client‟s servers.
Data (stocks, ETFs, portfolios, funds, …)
Ratings
9
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Our Resistance-to-Shocks Ratings
… examples
10
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Complexity of Stocks, ETFs, Bonds, Funds and Futures
•
•
•
Ranking various financial products based on complexity is useful for traders, brokers, AM
companies, investors.
As a general rule, inexperienced investors should avoid highly complex products.
The complexity of a product is not based on the difficulty of constructing it (e.g.
derivatives) but based on its behavior on the market.
Complexity distribution of 5000+ securities
11
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Stocks
The complexity measures/levels indicated in the tables below are not static properties. Due to
market turbulence they change in a dynamic fashion.
Example of complexity values and
levels of stock prices (April, 2016).
12
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Bonds
Treasury bonds exhibit dynamics that is generally less complex.
Example of complexity values and
levels of bond prices (April, 2016).
13
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
ETF’s
The complexity of ETFs can range from very low to very high.
Example of complexity values and levels
of ETF prices (April, 2016).
14
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Futures
The complexity of futures may range from low to high.
Example of complexity values and levels of
fund prices (April, 2016).
15
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Funds
Like in the case of ETFs or stocks, the dynamics of funds may be characterised by high
complexity.
Example of complexity values and
levels of fund prices (April, 2016).
16
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating Market Indices
Universal Ratings provides resilience measures of market indices. Most indices have values
of resilience which range from 60% to over 70% reflecting a high degree of interdependency
of the global economy.
Example of resilience measures and
corresponding ratings of selected market
indices (April, 2016).
17
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating Portfolios
Example of high-resilience portfolio. Implications: low volatility, simple dynamics,
potentially higher returns.
5% 2%
9%
35%
19%
30%
18
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating Portfolios
Example of average-resilience portfolio. Implications: high volatility, intricate dynamics,
potentially lower returns.
6% 3%
11%
38%
13%
29%
19
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating The Global Financial System
The Global Financial Complexity Index™ is a meta-index which measures the complexity of
the global financial system. The GFCI™ combines 50+ stock market indices and is computed
on a daily basis. Essential to the global investor, the GFCI™ measures the „temperature‟ of the
entire international financial system based on the interaction of its component indices.
GFCI, June 2013 – June 2016
20
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating The Global Financial System
The GFCI anticipates the drops of the indices which compose it. In the example below,
it is shown how the GFCI precedes significant drops of the DJI.
21
•
Resilient and less complex corporations are not only better prepared to face the volatility
and turbulence of markets, they are also more governable, more efficient and generally
more profitable and sustainable.
Comparing conventional PoD rating with UR‟s RtS ratings delivers new insights and can
help pinpoint potentially dangerous situations, particularly when both ratings „disagree‟.
100%
•
0%
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating Corporations
Distribution of RtS ratings of 4100+
companies listed on Wall Street. The
distribution is highly skewed.
22
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating Corporations
Ranking of Balance Sheet entries impact on Resistance-to-Shocks rating of a listed company
In addition to a measure of a company‟s Resistance-to-Shocks, UR provides a ranking of
business KPIs in terms of their impact on the rating. This turns RtS ratings into a strategic
tool for managers.
23
Rating Countries
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
•
Resilience country ratings are based on World Development Indicators as provided by the
World Bank. The ratings are holistic, taking into account such facets of a country such as:
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Economy, GDP structure
Energy production/consumption
Transportation
Education
Healthcare
Unemployment
Infrastructures
Agriculture
Environment
Pollution
Telecommunications
Finance
Military expenses
Crime
Population
24
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating Countries
The distribution of RtS ratings of countries is highly skewed – the majority of countries
have ratings below 75%. High ratings generally correspond to very small countries.
Italy
Japan
France
Singapore
Colombia
Monaco
25
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating Systems
•
Systemic ratings are analyses whereby the components of a system, for example
corporations or banks, are analysed by taking into account their interactions.
•
These interactions, or inter-dependencies, are determined based on information such as
Balance Sheet, Cash Flow, Income Statement, Ratios, or transactions.
•
Examples of systemic rating analyses:
– All companies listed on Wall Street (over 4100)
– All corporate clients of a retail bank (thousands)
– European banks
– All products of an Asset Management company
– A system of countries (e.g. Eurozone)
•
The rating of a system generally differs from that
of its components.
26
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Rating Systems
Example: resilience and complexity analysis of the metal mining sector (126 companies). The
plot below reports the complexity and resilience of each company as well as the resilience of
the entire sector, which is approximately 70% (way below average resilience).
Resilience vs. complexity of 126
metal mining corporations.
Horizontal line indicates
resilience of the sector, 70%.
Updated: Q4, 2014.
RtS Ratings of various industry
sectors. Analyses based on
Balance Sheet information.
Updated: Q4, 2014.
27
Copyright 2016 Universal Ratings. All rights reserved. No part of this document may be reproduced without the written consent of UR
Contact information
Universal Ratings Pte Ltd.
190 Middle Road #13-01
Singapore 188979
universal-ratings.com
28