In pole position

If there is one character trait common to those who set benchmarks of excellence in any profession it is the willingness to continually look for new and better ways of doing things. Kofi Erskine Aduku has just that kind of outlook. In this article, he tells us how he came to be managing the financial risks for one of the Middle East’s largest investment and development companies and why in treasury, just like in the motorsport which he devotedly follows, one can never be complacent in the pursuit of efficiency.

One evening in Abu Dhabi last November, while the fastest racing drivers in the world were hurling their vehicles around the corners of the beautifully futuristic Yas Marina Circuit, one UAE-based treasury professional, watching nearby, was considering the qualities needed to succeed both at the top of his profession and race competitively in a Grand Prix.

While Lewis Hamilton claimed all the glory that day by winning the race and securing his second world championship title, those who know the sport will tell you this was far more than just one man’s achievement. “If you follow the sport closely you see that it is 100% about teamwork,” says Kofi Erskine Aduku, Senior Vice President, Group Treasury at Mubadala Development Company, an investment and development company owned by the Government of Abu Dhabi, and headquartered a short 20 minute drive from the Yas Marina circuit. Group Treasury forms part of the Corporate Finance & Treasury Unit that oversees Mubadala’s Treasury, Structured Finance & Capital Markets and Mergers & Acquisitions practices, optimising capital structures for Mubadala and Mubadala Group and supporting mergers and acquisitions across the group. The treasury team is responsible for the management of financial risks such as liquidity, interest rate, foreign exchange, equity, commodity and counterparty risks.

We all work hand-in-hand. We have a very collaborative approach to delivering the best outcome for the organisation.

Winning in Formula One, he explains, largely comes down to the ability of teams to pull together individual talents for the advancement of the team. Then there is that relentless pursuit of efficiency. Take the lightning-fast ballet that is the F1 pit stop. For every stop, there will be one mechanic whose sole job it is to pull away a particular tyre, another to make slight wing adjustments, and someone else to hold the lollipop, and so on. “Each crew member will keep practicing and practicing their particular routine so that when the time comes they know exactly what to do,” Kofi explains. “They never get complacent about the job in hand and they are always trying to find new efficiencies that will make the car go that fraction of a second quicker.”

It is an example of seamless collaboration that Kofi believes is equally applicable in the world of treasury. When it comes to implementing a particular risk management strategy, Kofi and his team operate in a similar fashion: each individual has their own technical task to perform which when pooled together in the right way delivers the best result for the organisation. Together at the corporate level of the organisation, Kofi and his team will strive to identify and analyse all the risks they are exposed to across the asset classes, before making recommendations for mitigative actions to the Financial Risk Group (a body of the finance family that is chaired by the Group CFO) and then to the Investment Committee. Once the optimal course of action has been collectively decided, Kofi and the team will then put together a transaction and execute it. Each time the process requires every professional from across the finance function to be at the top of their game, working as quickly and efficiently as possible. “We all work hand-in-hand,” he says. “We have a very collaborative approach to delivering the best outcome for the organisation.”

But just like it is for any top F1 racing team, continually delivering the best outcome demands an ongoing focus on improvement. Over the course of a world championship season, a team that doesn’t constantly look for ways to optimise its performance and strategies to changing circumstances won’t stay at the front of the grid for very long. Likewise for corporates, a treasury that does not adapt quickly to new economic realities as they develop will soon encounter all sorts of problems, particularly when it comes to risk management. An ability – and willingness – to devise new, creative approaches to get the best outcome in the conditions one is faced with is therefore essential. Never is there any room for complacency.

Broader horizons

Developing innovative solutions to address complex financial problems is in fact something Kofi has been doing right from the onset of his career. After finishing a degree in mathematics at Brunel University, he determined that the best way to put his quantitative problem solving skills to work was in the field of finance. His first break came when he took on a role to review and develop retail finance models. But ever keen to broaden his horizons he enrolled, just a few years later, at the Cass Business School to study for a Master’s Degree in Mathematical Trading and Finance. The thesis he would write on the subject of credit derivatives ultimately laid the foundations for his next career step: working as an analyst in a specialist unit of the Barclays audit function looking at risk models.

Back in the early years of the new millennium, the financial products Kofi had begun to specialise in were still relatively new and unusual. “I was looking at risk modelling of Collateralised Debt Obligations (CDOs) and basket Credit Default Swaps (CDSs) which at that time was a very exotic thing to be doing.” It was an interesting avenue of financial derivatives, he recalls, but also incredibly challenging given the infamous opaqueness of the products he was modelling.

Kofi remained in the field of finance and financial modelling for seven years during which he increased his understanding of financial markets and market risk across a range of roles, gaining broader experience at financial institutions including Markit and Standard Bank. Then, finding himself once again keen for a new experience he resolved to make the leap over to the other side, spending a year and a half first as a Market Risk Manager at Emirates NBD in Dubai before joining in 2010. By now he had accumulated a broad set of experiences in different areas of finance and familiarity with a range of products across asset classes, something which, as we will explore later, is in his opinion a crucial ingredient to be successful in his profession.

Mounting volatility

A good example of Kofi and his team’s readiness to adapt his approach when circumstances change can be seen in how he and his team have reacted to current trends in foreign exchange markets. Recent signs of a strengthening recovery in the US have helped to trigger something of a bloodbath in emerging market (EM) currencies in recent months, particularly those in the ‘Fragile Five’ group, a quintet of EM currencies thought to be especially vulnerable to rising benchmark yields in the US. Naturally, hedging can be a challenging activity in these markets. The transfer of some currencies might be restricted by regulation; others hedges might entail a large negative carry (where the derivatives needed become prohibitively expensive). Some thinking outside of the box is usually required. “These challenges mean one has to think about alternative and smarter ways of managing exposures,” says Kofi. After all, the last thing any risk manager wants to do in the current environment is compromise on hedging just because a market in which they operate has a challenging currency curve.

Volatility in any currency pair, particularly when there is an EM currency involved, is never helpful from a treasury perspective. Yet Kofi’s biggest risk concern relates not to any EM economy. Instead, the current trend that troubles him the most is the material decline recently witnessed in the euro. Having read a multitude of economic forecasts on the subject, he finds it difficult to imagine there being any rally in the currency over the near-term. “If you believe the US recovery story then you have, on the one hand an economy that is getting stronger and could see a rate hike at some point, and on the other, an economy that is going through quantitative easing. To me that is a concern. It has an impact on the market in terms of imports and exports, but also in terms of global growth.”

You have to draw on many different sides of your experience to be successful in a field like this. If I had always been looking at interest rate risk, I would be struggling right now. If I only had experience relating to FX risk then it would be the same.

How are financial risk managers like Kofi and his team adjusting their approach in light of recent events? Something which has become increasingly apparent of late, he explains, is that corporates can no longer depend upon the derivatives market alone to mitigate exposures. Natural hedges, if they can be found, always make a lot of sense, but particularly in the current environment. One method that is becoming more popular amongst treasurers involves the greater use of local liabilities, he says. “If I’m going to fund a business in an EM, instead of delivering the financing through my dollar funds, it often makes more sense to raise debt in that EM currency to fund the investment, thereby providing a huge degree of natural offset in terms of assets and liabilities to help mitigate that risk.”

There has also been a discernible shift away from the traditional, although in his view simplistic, approach to hedging in which exposures are mitigated almost exclusively using Foreign Exchange (FX) forwards. “If you look at the statistical analyses published on the effectiveness of FX forwards you will see that with EM currencies the instruments do not work very well,” he says. The problem is that, on average, EM currencies do not depreciate by as much as the forward risk premium implies. Consequently, any risk manager who is using forwards all the time ends up paying a lot for their hedging. “That has been proven time and again,” he says.

Other instruments, FX options, for instance, may be a more effective instrument for certain exposures. However, when there is a particularly steep forward curve, these instruments often become prohibitively expensive for the corporate. As such, there is no one single strategy that can be applied across the board. “You need to look closely at each currency pair you are exposed to and base your decision on that. This is an issue a number of banks are conducting research into, and we are working with a number of them to find smarter ways of managing the risks, such as looking at each currency pair and then deciding what instrument works best.”

The value of experience

In finding the right answers to such questions it is evidently beneficial for Kofi and the team that they can draw upon such varied risk management experience. As we have seen, Kofi has, during his career to date, made the transition from a retail finance role, to a derivatives models specialist at a bank, to an analyst at a derivatives house, to managing financial market risks. And since joining the Mubadala Group he has been able to expand his remit even further, growing from a quantitative and financial risk professional into a much broader treasury role.

Without that breadth of experience, he says, it would be very difficult to do the job he is doing today as effectively as he is. “You have to draw on many different sides of your experience to be successful in a field like this,” he says. “For example, if I had always been looking at interest rate risk, I would be struggling right now. If I only had experience relating to FX risk then it would be the same.”

But is Kofi content enough to cease in expanding his experience now? Not in the slightest. On the contrary, over the coming years he hopes that his role will allow him to take on responsibilities in new areas of corporate finance. Mubadala’s portfolio continues to grow, after all, so there is no shortage of opportunities to add to his experience by gaining insight into the risk management of other types of assets. Another option, he adds, would be to take on a broader finance role at one of the companies within the Mubadala Group.

A tenacious appetite to broaden one’s experience is something Kofi believes to be a crucial ingredient for success in any finance role. That many young finance professionals today tend to become pigeon-holed in one or several small niches can from his perspective be problematic, both in terms of the individual’s career development as well as for companies when it comes to recruitment.

“Ideally, when recruiting you want someone with a rounded treasury and risk background. But very often you will have candidates who have a specialist focus on cash management or FX.” What these candidates will often find, however, is that the skills developed in one particular role are transferable, if one has the right attitude. “If you have been doing Asset and Liability Management and you are a lateral thinker, you should be able to apply some of those techniques to other areas,” he says. “Making that transition can be a challenge, but if you want to succeed in this space it is absolutely imperative that you have an appreciation for all the various risk types.”

A parallel might be drawn once again with Kofi’s favourite motor sport. These days F1 teams can access an enormous range of telemetric data to assist them in setting up the car. But teams cannot rely on telemetry alone. The driver and his mechanics also need to draw on their own personal experiences to identify potential problems and generally support the decision making process. In the same way in treasury, the data rolling down the screen of Kofi’s treasury terminal is meaningless without there being people with the correct knowledge and expertise to interpret it. When there is a wealth of diverse experience to draw upon that is usually when treasuries – and F1 teams – are able to achieve the best results.