CFA Society Chicago Book Club:

How to Measure Anything: Finding the Value of Intangibles in Business by Douglas W. Hubbard

how-to-measure-anythingPath dependence is the phenomenon often used to explain why people sometimes persist with practices that are no longer optimal or economically rational. Statistics is another area where path dependence has struck. The statistical techniques that students learn in school, the ones that practitioners apply in industry, and the ones researchers use in journal publications often aren’t the best or the most appropriate ones but rather the ones that continue to be used because they’ve always been used.  Douglas Hubbard’s How to Measure Anything (2010) attempts to update some of those techniques for the 21st century.  In addition, he offers some refreshing perspectives on behavioral finance and the biases that adversely affect decision makers, even the so-called professional decision makers at the executive level in industry and government. Finally, he offers a unifying framework for decomposing complex problems into individual variables, assessing the value of reducing the uncertainty for each of those variables, measuring those variables, and finally determining probabilities through Monte Carlo simulations and Bayesian statistics.

Starting with antiquated statistical techniques, every former stats 101 student probably remembers going through some type of hypothesis testing exercise such as testing if a coin is fair, a drug works, voters prefer a candidate, etc. Those tests take a null hypothesis, such as assuming that a coin is fair, flipping it multiple times, and then determining the probability of observing a series of outcomes if the coin were fair. If the probability of observing a series of outcomes on a supposedly fair coin is less than some arbitrary threshold, usually five percent, the experimenter rejects the null hypothesis and concludes that the coin is not fair.  For example, the probability of observing five heads out of five flips on a fair coin is 3.13%, which would cause an experimenter using the five percent threshold to reject the null hypothesis that the coin is fair. The five percent shibboleth comes from the statistician Sir Ronald Fisher’s 1925 paper “Statistical Methods for Research Workers.” He wrote a year later in “The Arrangement of Field Experiments” (1926) that the threshold was arbitrary and that other thresholds may be used; however, the damage had been done and the five percent threshold remains as a venerated relic.

The whole process is a convoluted way to approximate the more useful question: What’s the probability of getting a heads on a given coin? The Bayesian approach to statistics, in contrast to the frequentist approach previously described, seeks to do just that. Mr. Hubbard notes that the term “Bayesian” was first used by Fischer himself as a derogatory reference to adherents of the approach named after Rev. Thomas Bayes. Rev. Bayes is credited with developing the first formulation of how new evidence can be used to update prior beliefs.  In the case of Bayesian statistics, new evidence is used to update prior assumptions about probabilities.

Once the distribution of the relevant variables or drivers is better known, Mr. Hubbard postulates a relationship between the variables and generates a hypothetical distribution of the phenomenon that one is trying to predict using Monte Carlo simulations. First developed to solve intractable problems in nuclear physics, modern computing power has made the technique accessible to anyone with a personal computer and an Excel spreadsheet. Instead of trying to compute the probability of a phenomenon such as rolling a two with a pair of dice (“snake eyes”), Monte Carlo simulations flip the problem by simulating thousand or perhaps millions of rolls and then determining what percentage of the rolls were twos. With an Excel spreadsheet, Mr. Hubbard shows how to calculate distributions and expected values for complex phenomenon after estimating the distribution of the underlying variables and their relationships. Monte Carlo simulations are seldom taught in introductory statistics courses. The topic is usually reserved for advanced classes and special topics classes even though the basics of the technique are no more complicated than regression modeling and several other topics that are covered in introductory classes.

With new statistical tools in tow, Mr. Hubbard then sets forth on finding what to measure.  Here Mr. Hubbard again notes a pernicious tendency among decision makers to either measure what’s easy to measure or what they’re already familiar with. The solution, Mr. Hubbard argues, is to triage variable before trying to reduce uncertainty about them by introducing metrics to quantify the costs and benefits of acquiring additional information about each variable. He starts with the Expected Value of Perfect Information (EVPI): What would it be worth to know a presently unknown quantity with complete certainty? He then works backwards to determine the incremental Expected Cost of Information (ECI) and the incremental Expected Value of Information (EVI). Finally, he adds a time component, noting that for some decisions the value of information is perishable. Mr. Hubbard notes that adding the time component can prevent what pioneering decision theorist Howard Raiffa called, “Solving the right problem too late.”

In addition to the tendency to measure the wrong things and measure in the wrong amounts, Mr. Hubbard notes several other behavioral and cognitive biases, such as expectancy bias and overconfidence. Instead of just rehashing problems that already have been noted extensively in the behavioral finance literature, Mr. Hubbard goes further and offers solutions, especially to the problem of overconfidence and quantifying uncertainty. When asked to calculate a 90% confidence interval for an unknown quantity, such as the wingspan of a Boeing 747 aircraft, most people choose too narrow a range. Mr. Hubbard shows that with training the average person can estimate ranges for unknown quantities such that on average the true value falls within their estimated range 90% of the time. The training, called “calibration training,” is simple to conduct and has a tremendous success rate.  Organizations should probably spend more time training their executives to become better decision makers given how much time and money as they spend sending them to conferences, hiring executive coaches, and giving them physical and psychological assessments.

When the CFA Society Chicago’s Book Club met to discuss Mr. Hubbard’s book in April 2017, most of the participants welcomed his fresh approach to quantitative and empirical problem solving. If there were any misgivings about the book, they were that it didn’t fully live up to its title: “Finding the Value of Intangibles in Business.” The participants would have welcomed more examples of how the techniques described could be used to value business units or firms that make intensive use of intangibles such as brand identity, intellectual property, or perhaps others.

Hopefully, this won’t be the last time that Mr. Hubbard crosses paths with the Society and we’ll get to fulfill that promise.

 

Building Investor Trust Through GIPS

On May 9th, CFA Society Chicago members gathered to hear a panel of experts address the merits of adopting the Global Investment Performance Standards (GIPS) in the Vault Room at 33 N. LaSalle. The eminent panel comprised a service provider, a regulator, and an asset manager user and included:

  • Daniel Brinks, compliance examiner with the Securities and Exchange Commission (SEC) with a focus on investment advisors,
  • Richard Kemmling, CPA, CIPM, CGMA, President of Ashland Partners & Company LLC, a specialty CPA firm that was a pioneer in the GIPS verification business, and serves over 700 client firms in that area.
  • Matthew Lyberg, CFA, CIPM, Senior Vice President and Director of Performance Attribution with Acadian Asset Management.

DSC_3715Anju Grover, CIPM, senior GIPS analyst with the Investment Performance Standards Policy Group of the CFA Institute (CFAI) served as moderator. In her opening remarks she pointed out that 2017 marks the 30th anniversary of GIPS which she described as one of the CFA Institute’s most successful products. Despite the fact that adopting GIPS is completely voluntary, they are widely recognized as a best practice for reporting investment performance by asset managers, asset owners, and consultants all around the world.

The first question Ms. Grove put to the panel was why GIPS would be important to retail investors. Brinks responded that retail investors are just as demanding of a performance standard as are institutional investors, and GIPS fills the bill. Lyberg noted that the line separating retail and institutional investors is blurring. The decline in the popularity of pension plans in favor of defined contribution plans is a primary example. Retail investors are the end users of DC plans and are responsible for investment choices, but the plans are designed, managed, and overseen by investment professionals. So they serve both retail and institutional masters. GIPS also adds a layer of due diligence to a plan, a theme the panelists repeated throughout the event. Kemmling pointed out that GIPS compliance is a common requirement for listing products on the investment platforms that advisors (he specifically mentioned Morgan Stanley and Merrill Lynch) use for their retail clients.

As to challenges firms encounter in adopting GIPS, the panelists listed:

  • Lack of adequate data, or records; difficulty in handling unique accounts,
  • Changes in operating systems that occur during implementation,
  • Incomplete buy-in from all parts of a firm (marketing, accounting, compliance, etc.), and
  • Full support from senior management. The latter point is particularly critical to assure firms commit adequate resources to attain compliance.

Why should firms bear the cost of GIPS compliance? Kemmling answered that they provide a “best practices” process for client reporting and that the verification process provides insight into industry practices. Brinks stated that while GIPS compliance is not required by law or regulation, he considers it in the category of “nice to see” when he examines an asset manager. The verification process is a second pair of eyes –outside eyes–on results reporting. He added that he observes fewer serious problems in general when he examines firms that follow GIPS. The CFA Institute has been training SEC examiners on GIPS so they can understand what the standards mean to adopting firms and apply that knowledge during examinations.

In response to questions from the audience regarding difficulties in complying with GIPS, the panel noted challenges in applying them to more complicated strategies such as currency overlays and alternatives. They suggested that this be a focus of the next revision to the standards which is already underway and targeted for 2020. This revision should also make the standards easier to apply to fund vehicles and for internal reporting to management. The current standards are most easily applied to reporting composite returns to clients, which was their original intent.

Regarding the breadth of acceptance of GIPS, Grover said the CFAI is still gathering data but counts 1,600 firms around the world that claim compliance for at least a portion of their assets. This includes 85 of the 100 largest asset managers who account for 60% of total industry assets under management. Lyberg noted that investment consultants are expanding the adoption of GIPS by using compliance as a screen for including firms in management searches.

When asked how a firm should begin to adopt GIPS, Lyberg suggested starting out modestly by writing high level policies and procedures and making them more detailed over time with experience. He recommended attending the CFAI’s annual GIPS conference to build knowledge and to make contact with other firms that have already adopted the standards. Challenges a firm may encounter include clients who demand using a different performance benchmark than what the firms uses for a strategy, tension between various stakeholders at a firm (e.g., between marketing and compliance), and resistance from legal counsel which often advises against bold statements of compliance that might seem to be guarantees.

As to the benefits to the public from using GIPS, Brinks stated that increased comparability leads to better informed investment decisions and more efficient markets. He noted the decline in fraud tied to inflated claims about performance since the introduction of GIPS thirty years ago. Kemmling noted that measuring the positive impact of GIPS is difficult but they were created for the benefit of investors and are an indication of asset managers’ commitment of resources in support of investors. Grover stated that adopting GIPS for greater transparency and comparability was simply “the right thing to do”.

For final takeaways the panelists offered the following:

  • Lyberg said GIPS levels the playing field among managers, adding that compliant managers couldn’t compete with fraudulent firms such as Bernie Madoff’s.
  • Kemmling, acknowledged that while compliance is not easy, it isn’t expensive and is certainly achievable. Most of the 700 firms his company verifies have less than $1 billion in AUM, indicating the success of small firms at complying with GIPS.
  • Brinks recommended that adopting firms think very carefully about how to apply the standards, looking to the future when writing their policies and procedures to avoid any potential conflicts between them and their capabilities.

Volunteer of the Month: May 2017

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Brad Adams, CFA

Longtime member (22 years to be exact!), Brad Adams, CFA, has served on five advisory groups since 2012. In 2014 he also chaired what was previously the Finance Advisory Group. Currently, he is a member of both the Communications and Professional Development Advisory Groups.

Today Brad is being recognized for his efforts on the Communications Advisory Group. Regularly attending meetings and volunteering to be a reporter at the Society’s events, Brad has made a strong contribution to the Communications Committee.

Brad has published seven CFA Society Chicago Blog articles since the launch of the online publication and is scheduled for more. Help us in thanking Brad for attending Society events and keeping members informed!

Job well done! We appreciate all you do for the Society.

CFA Society Chicago Book Club:

Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World by Don Tapscott and Alex Tapscott

BlockchainRevolution-674x1024Blockchains are simultaneously feared as a disruptive threat and lauded as a technological panacea, often with little understanding of how they actually work and often with little practical consideration of how they might be implemented. Don Tapscott and Alex Tapscott (father and son, respectively) assist the layperson in understanding how blockchains work and how they could be used in Blockchain Revolution (2016). The authors also, unfortunately, further delude the technological utopians by proposing seemly endless possible uses of blockchain technology while failing to address some of the practical considerations of implementation.

Starting with the positive, Blockchain Revolution is one of the first resources to both explain blockchain technology and to fully explore its potential uses beyond the now somewhat familiar bitcoin. Bitcoin is the digital currency created by “Satoshi Nakamoto” in 2009. Satoshi Nakamoto was the name that was used in internet chat rooms and the like by a person or group of persons who claimed credit for creating the cryptocurrency. Soon after creating bitcoin, Satoshi Nakamoto disappeared and the identity or identities behind the name never have been revealed. Replete with a dubious creation story, bitcoin maintains a religious, cult-like following despite scant uptake and usage. The history of bitcoin has been told elsewhere, including in Paul Vigna’s and Michael J. Casey’s The Age of Cryptocurrency (2016), which was the book of the month for the CFA Society of Chicago’s Book Club in February 2016.

What hasn’t been told widely until now are the other possible applications of the technology underlying bitcoin, the blockchain. A blockchain is nothing more than a ledger for recording transactions. The double-entry bookkeeping system that forms the foundation of modern accounting is widely attributed to Luca Pacioli, a Franciscan Monk and mathematician who lived in the 14th and 15th centuries. There are earlier claims to the discovery, which probably have some merit. There are probably undiscovered cave scribbles that merchant cavepeople used to record exchanges of spears and mastodon parts. As long as there’s been commerce, there’s been the need to record exchanges, and ledgers in some hasty form have probably served the part from time immemorial. The difference between blockchains and most previous ledgers is that previous ledgers resided with a trusted central party to the transaction, whereas blockchain ledgers are distributed, meaning that every member of a network retains a copy of the ledger. When there is a new transaction in the blockchain, members of the network that maintain the ledger verify the authenticity of the new transaction, append it to the chain of all previous transactions, and transmit the updated chain to the network.

That distributed feature is what poses the disruptive threat to numerous businesses that are based on intermediating markets. For example, the Uber business model is based on a central party that sits between drivers and passengers, links the two, and takes a slice of the profits in transaction fees. Similarly, Airbnb disrupted the hotel industry by intermediating the market for lodging by linking people who have spare capacity in their homes with travelers looking for a place to stay. Blockchains could further disrupt the disruptors by allowing those parties to transact directly and take out the middleman.  The Tapscotts mention several other less obvious areas where blockchains could be used to intermediate markets or keep records, such a land and property deeds, personal medical and financial information, stock and bond offerings, contracts, and wills. The authors even argue that intellectual property such as music and other artwork could benefit from blockchains by allowing artists to control access to their works and charge a royalty fee directly to end users when they access them.

The oldest and largest business based on intermediation is, of course, banks. The primary function of banks always has been to intermediate the market of lenders and borrowers. Without banks, potential borrowers could find themselves having to go door-to-door, pleading for loans and negotiating the amount and the terms of the loans with each potential borrower. Banks have always done that legwork primarily by taking deposits and issuing those deposited funds as loans. Add credit and debit cards, foreign exchange, settlement, custody, and clearing to the mix and banks make considerable profits just by sitting between market participants, recording transactions, and taking fees. The Tapscotts and other blockchain utopians contend that all such businesses based on market intermediation will become unnecessary and disappear due to blockchain technology.

The CFA Society Chicago Book Club members who met to discuss Blockchain Revolution during their March 2017 meeting agreed that the range of possible blockchain uses was enlightening but found the tone of the book overly optimistic and found the treatment of implementation challenges lax. Take contracts, for example. The Authors seem to presume that blockchains will obviate the need for traditional contracts and courts to enforce them. A hypothetical blockchain contract might look as follows: A stadium owner engages a vendor to fix the plumbing in his stadium. When a credible party who has access to verify that the work has been completed confirms successful completion of the work in the blockchain, payment is automatically distributed. But what if the stadium owner contests the quality of the work? Was the vendor merely to fix the plumbing so that it didn’t leak or was the vendor supposed to restore the plumbing to like-new status? What if the stadium owner was relying on the repairs being completed by a certain time so that he could host a concert? If the vendor doesn’t complete the repairs, is it liable for the foregone revenue due to the stadium owner’s inability to host the concert? These are not far-flung hypotheticals. Contract law deals with those issues constantly. It’s not clear how blockchain-based contracts will be any better than paper-and-pencil contracts in terms of interpretation and adjudication.

Safety and security of blockchains is given similarly little treatment. Assuming for the sake of argument that the double key encryption technology that blockchains use makes them impenetrable to hackers, they could always just access blockchains using stolen passwords. And unlike when someone fraudulently uses a credit card, there is no legal department at bitcoin to contest the fraudulent transaction or IT department to reset the password.

Blockchain usage will undoubtedly increase. Even without blockchains, market intermediation for a variety of products and services has become increasingly automated and that trend will continue whether by blockchains or by other means. The consequence of that for banks and financial institutions is that they won’t be able to rely as much on the simple act of intermdiation for revenue and will instead have to increasingly compete on knowledge and customer service. Even now customers no longer need banks to purchase a variety of financial products and services, but retail and commercial customers still come to banks and financial institutions for sound advice and financial planning—and to reset their passwords.

Despite its shortcomings, Blockchain Revolution is an important contribution to understanding rapidly evolving blockchain technology, and hopefully others will step up to fill in the missing parts of the puzzle concerning how blockchains will be implemented and administered.

Distinguished Speaker Series: T. Bondurant “Bon” French, CFA, Adams Street Partners

DSC_3661T. Bondurant “Bon” French, CFA, executive chairman of Adams Street Partners addressed a large gathering of CFA Society Chicago members on the topic of private market investments on April 5th at the University Club. Adams Street Partners is a Chicago-based manager of private market investments with over 40 years of history and $29 billion in current assets under management.

French began with a review of historical returns for private equity markets using industry data. Both categories he focused on, venture capital and buyouts, showed superior long term performance (ten years or longer) compared to public equity markets, but weaker relative performance for periods shorter than five years. He doesn’t consider the shorter term underperformance to be significant as success in private market investing requires a very long investment horizon, a feature deriving from the reduced liquidity relative to public markets.

French went on to provide a summary of recent market conditions and performance for both buyout and venture capital pools. His statistics showed that fundraising for buyouts rose sharply from 2005-2008 and then fell just as sharply during the financial crisis. Although there has been a rebounded since 2010, the $368 billion gathered in 2016 still hasn’t topped the pre-crisis amounts. The volume of buyout transactions has recovered much less so since 2009 leaving managers with considerable “dry powder” seeking attractive new investments. This is also reflected in data for buyout fund cash flows. From 2000 through 2009 calls for funding from borrowers regularly exceeded distributions out to investors. However, since 2010, distributions have far exceeded calls. Investors (and their managers) have been especially wary toward new investments since the crisis, a condition exacerbated by the high level of multiples on buyout transactions (similar to the situation in public markets). At more than 10 times enterprise value/EBITDA, these have passed the pre-crisis highs to levels not seen since before 2000.  This situation has driven Adams Street to focus on deals in the middle market which is less efficient, and consequently priced at lower multiples.

DSC_3654Also reflecting caution (and the effects of Dodd-Frank regulations), buyout deal leverage remains below pre-crisis levels (5.5 times in 2016 vs 6.1 times in 2007). However, terms of credit have eased as reflected in the market for covenant-lite debt. This has far exceeded the levels common in 2007 both in terms of absolute amount and share of the new issue market. DSC_3659This has helped the borrowing firms survive economic challenges and also allowed them an opportunity to remain independent for longer.

In the venture capital market (much older but smaller than the buyout market) new fund raising peaked in 2000 during the “tech bubble” and fell sharply when the bubble burst. The subsequent recovery was fairly muted, so the financial crisis had less of an impact on fundraising activity than in the buyout market. The $83 billion raised in 2016, while the highest since 2000, is consistent with the longer trend.  Cash flow in the venture market hasn’t been as persistently strong as in the buyout market because companies are choosing to stay private longer than in the past. Liquidity events, measured by number of deals and total value, peaked in 2014 for both initial public offerings (IPOs) and mergers and acquisitions (M&A). M&A, the larger of the two by far, has shown a smaller decline from the peak than has IPOs, and has held at levels consistent with longer term trend.

French concluded with a brief look at the secondary market for private investments (trades between private market investors as opposed to investors being taken out by IPOs or M&A). This market dates to 1986, but is showing healthy signs of maturing recently. Although the market hit a recent peak in volume in 2014 the decline in the following two years was slight—holding well above the prior trend.  Pricing, as a percent of net asset value, has also been rising. Transactions in 2016 were evenly distributed by the type of investor (pension funds, endowments, financial institutions, etc.) supporting liquidity. In 2016, transactions were more concentrated in newer funds because older funds (created before 2008) are shrinking from their natural positive cash flows, and have less need to trade.

CFA Society Chicago Candidate Mix & Mingle

stress-391659_1920With every passing day the CFA exam gets near and candidate stress levels rise. What could help? A free event with an open bar, appetizers and pizza! CFA Society Chicago organized an event on March 29th at Hotel Allegro where candidates poured in to relax and network with their peers. They discussed what was and what was not working for them (in hopes to hear similar stories for affirmation that they are not alone!).

Kaplan Schweser, co-host of the event, sponsored a raffle prize of their Review Workshop to a candidate which was awarded to Kevin Anderson. Bijesh Toila, Lecturer at Kaplan Schweser, was sharing his wisdom helping out candidates with any concerns they had and getting feedback on study materials. He views his organization’s partnership with CFA Society Chicago to be a success and looks forward to strengthening it. The Society’s organizing committee members and executives joined the event for moral support of candidates.

We wish all the candidates best of luck on their upcoming exam and wish them success on the path to obtaining their charter!

Executive Presence and Leadership Principles

Did you know it takes only four seconds to form an initial impression and 30 seconds to completely form a first impression? More shocking, 70% of workers are actively disengaged or not engaged per a 2012 Gallup survey. These statistics are not encouraging. On March 28th, after networking and snacks, Patricia Cook offered ideas on how to create better impressions and how to be in that 30% of truly engaged workers during CFA Society Chicago’s  Executive Presence and Leadership Principles event held inside the Vault at 33 N. LaSalle.

We know good leaders when we see them but what qualities should a good leader have? Attendees collectively offered Cook over 30 words and phrases. Building on that, we focused on six qualities and how we can individually build those out.

Great leaders:

  1. DSC_3647Have executive presence. People need to like you, trust you and want to be led by you. A leader with executive presence has charisma. The largest part of charisma is being present, self-aware and staying in the moment. Power poses increase confidence and charisma can be learned with practice.
  1. Leverage strengths and talents. Discover your strengths and the strengths of those around you. Develop and play these strengths. Your actual strengths may be different from your perceptions. A strength finder tool can help you separate perception from reality.
  1. Motivate others. Employees are most motivated by public appreciation and recognition of their accomplishments. Give employees a voice, make introductions for them, and let them know how their work impacts the bottom line.
  1. Communicate effectively. Ask “why” when working and problem solving. Also ask how you and your team can add more meaning to the work.
  1. Seek strategic opportunities. Make low points high points. Motivate and mentor. Reflecting is a key part of seeking strategic opportunities. Good leaders cannot be strategic without it.
  1. Drive for results. Set priorities and leverage relationships and teamwork. Ask for help with projects and tasks that are not your strengths. Focus on follow-through and ask for feedback.

This list may seem like common sense but may prove harder to implement in the hustle and bustle of our daily work lives. Remember, whether you are a junior staffer or the CEO, these leadership techniques can make you shine. In closing, Patricia noted that 85% of job success comes from people skills and the other 15% from technical skills.

Volunteer of the Month: April 2017

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A Feltovich

Andy Feltovich, CFA

Since joining CFA Society Chicago in 2012, Andy Feltovich, CFA, didn’t hesitate when it came to answer the call for volunteers. Andy has generously given his time and talents by serving on the Education and Professional Development Advisory Groups.

Andy is currently the Co-Chair for the Professional Development Advisory Group but today’s kudos come from his work on the Education Advisory Group. Andy led a subcommittee that planned, “Investing for the Long-Term” event with top financial leaders including Robert Gordon, Deirdre Nansen McCloskey, Bob Browne, CFA, Rick Rieder, and Francisco Torralba, CFA. The event was moderated by Michele Gambera, CFA, and drew nearly 200 attendees!

Thank you Andy! We appreciate all you do for the Society.

Investing for the Long-term: Productivity of Capital Markets Expectations, and Portfolio Management

DSC_3571CFA Society Chicago presented a two-part symposium on Investing for the Long-term on March 7th at the Standard Club. Approximately 150 members and guests attended to hear Robert Gordon, Professor of Economics at Northwestern University and Deirdre Nansen McCloskey, Emerita Professor at the University of Illinois Chicago present their perspectives on productivity trends. Francisco Torralba, CFA, Senior Economist, Morningstar, Robert Browne, CFA, Northern Trust Bank, and Rick Rieder, CIO Global Fixed Income, BlackRock, then presented their outlooks for the capital markets.

Gordon highlighted the sharp slowdown in US GDP growth from 3.12% from the 1974 to 2004 to 1.56% from 2004 to 2015. He said that this slowdown resulted from a reduction in productivity growth and the labor force participation rate. He noted the Kalman Trend Annualized Growth in Total Economic Productivity, which rose to 2.5% in the 1990s because of the technology revolution, but has recently fallen to near 0.5%. The labor force participation rate has been affected by an aging population, fewer 18 to 25-year-old people in the work force, and passing the peak rate of growth for women in the labor force.

DSC_3590Gordon noted that growth and productivity are probably under estimated, but have always been under stated. He sees no indications that the distortions are worse today. He expects that both lower productivity growth and labor force growth will produce slower economic growth over the next decade.

McCloskey acknowledged that the current level of productivity growth has fallen. She observed that “falling sky” DSC_3579forecasts always follow events like the 2008 financial crisis and noted the perils of trying to predict future enhancements in productivity. She also stated that global economic growth will be positively impacted by developments in countries like China and India.

DSC_3587McCloskey highlighted her work on the role a change in attitude toward capitalism in the 1700s that augmented the 1st Industrial Revolution. She noted the evolution in literature from Shakespeare to Jane Austin in the portrayal of capitalist and the return on capital that they earn. Changes in attitude toward capitalism could drive growth in emerging economies.

An area of agreement between Gordon and McCloskey is the role of minimum wage laws and other restrictions on the labor market that prevent economic growth in areas like the west side of Chicago. They also support efforts to stop the “war on drugs” and support a negative income tax for low income people.

Outlook for Investors

DSC_3591Rick Rieder, CIO Global Fixed Income, BlackRock, noted the aging population and its demand for income and the role of technology pressing down inflation. He believes that the US economy is exiting an investment & goods recession. He also believes that September 2016 marked a turning point away from expansionary global monetary policy. He sees better economic growth leading to higher interest rates, and the potential for higher stock prices because of sales growth.

Francisco Torralba, CFA, Senior Economist, Morningstar, supports McCloskey view that trends in productivity cannot be predicted. He also foresees a pickup in economic growth and cited a Financial Analyst Journal article that links the payout growth rate to the GDP growth rate. A higher level of economic growth could be a positive development for equity investors through higher dividends.

Robert Browne, CFA, Northern Trust Bank, suggested that forecasters begin with “what’s easier to forecast.” He believes that identifying what is cheap is easier that what is expensive. In contrast, much of the forecast has been centered on the expensive, low yield bond market. He also noted that anticipating a range over the short-term is easier. Here, he believes that the election of President Trump may pull forward economic growth, which would be a positive for equity investors.

The consensus outlook seemed to be that long-term real returns for equities would be in the 4% to 5% range. These analysts generally favor US equities, US high yield bonds, natural resources, and emerging markets debt.

CFA Society Chicago Chairman’s Letter to Membership

img_1799Dear Fellow Charterholders and CFA Society Chicago Members:

Thank you all for your support throughout the first half of the 2016 – 2017 fiscal year.

During the first six months, the CFA Society Chicago Executive Committee traveled to multiple CFA Institute meetings and conferences to show our support, share best practices and network with other societies and CFA Institute peers. It is clear that CFA Society Chicago is an integral part of the global success of CFA Institute (CFAI). Our counsel is highly sought after on governance, event management and community engagement. We will continue to strive to be a global leader and aid our industry as we face the challenges ahead.

The 2016 Annual Dinner was a success and the feedback from the survey indicates that the attendees enjoyed the event. Our keynote speaker, Cliff Asness, PhD., provided an in-depth discussion on current markets and the challenges of today’s hedge fund industry. We are grateful for his time and informative insights. We would like to thank our staff for all their hard work as they organized another great event! Furthermore, thank you to our 60+ sponsors whose generosity provides invaluable financial support and signifies the value the Annual Dinner brings to our investment community. Thank you!

On March 7th the Education Advisory Group welcomed Robert Gordon, PhD., Northwestern University, and Deidre McCloskey, PhD., University of Illinois Chicago, at the Society’s Investing for the Long Term: Productivity, Capital Markets Expectations and Portfolio Management event. The speakers and panelists discussed how technology will affect the future of our economy and the investment implications.

Our local financial literacy efforts continue to gain strong momentum. Between October 2016 and January 2017, the program had 42 members respond to the initial call for volunteers with 22 members attending school visits at ten high schools. Our members also contributed to On the Money, an entrepreneurship, finance and business journal created by teens for teens, by assisting with the writing process, sharing perspectives, discussing financial concepts and serving as a sounding board. Our partnership with the Economic Awareness Council is thriving and we continue to receive positive feedback from the members attending these school visits. The Society also led an information session at the City of Chicago Treasurer’s Office in February 2017. A special thank you to all our volunteers, the Membership Engagement Advisory Group and Co-Chairs Maura Murrihy, CFA, and Aaron Taylor, CFA!

We were proud to again sponsor the CFA Institute Gender Diversity Conference held in Boston last fall. The conference provided a detailed argument for increasing success through diversity. We encourage all our employers to embrace diversity and we are happy to supply literature created by the Institute to support this effort. The third annual Alpha and Gender Diversity Conference will be held at the Westin Harbour Castle in Toronto, Canada September 18 – 19, 2017.

Other Society highlights for the first half include:

  • Oversubscribed demand for CFA Institute Scholarships: 49 applicants for 35 local scholarships.
  • Research Challenge started with 11 teams focused on McDonald’s. Illinois Institute of Technology won the contest and will represent the Society at the Regional contest in Seattle in April 2017. Congratulations and Good luck!
  • The Professional Development Advisory Group has rolled out its redesigned mentoring program featuring ten mentorships for a six month evaluation. Special thanks to Shai Dobrusin, CFA, Jay Bullie, CFA, and Umed Saidov, CFA, for their efforts in redesigning the program.

The 2nd Annual Financial Compensation Survey results are now available on our website in the Career Management section. The report compiles compensation practices in the Chicago area conducted in mid-2016. The survey requested data on numerous aspects of compensation. In addition to covering base salary and total compensation, the survey addressed the respondent’s CFA charterholder status, level of education, and occupation. Information on the type and size of the firm as well as the amount of assets under management was included in the survey. The survey captured annual salary change data and the respondent’s view on the adequacy of compensation and the desire to explore other job opportunities. We hope you all find this information useful.

We are very excited about the remainder of our fiscal year. To aid in professional development we will be hosting our Annual Career Fair on March 24th, and a presentation on Executive Presence and Leadership Principles by Patricia Cook from Patricia Cook & Associates on March 28th. The Distinguished Speaker Series will welcome T. Bondurant French, CFA, Executive Chairman from Adams Street Partners, who will provide an update on the Private Equity Industry on April 5th. There are also multiple chances for networking at social events throughout the year. All our events can be viewed on our website in the event section. Please join us!

Lastly, on Tuesday, June 13, 2017, we will be having The Active vs. Passive Debate: Trends, Insights, and Case Studies event. This event will address Trends and Insights into ETFs as well as reviewing Case Studies in the application of ETFs in portfolios. The keynote for the event will be Nobel Prize Winner Eugene Fama, PhD. He will be interviewed by Robert Litterman, Senior Partner at Kepos Capital. Mr. Litterman retired in 2009 from Goldman Sachs previously serving as Head of Quantitative Investment Strategies. This session is a reprisal of their interview five years ago from the CFA Global Conference held in Chicago. A special thank you to the Education Advisory Group Planning Committee: Garrett Glawe, CFA, Ben Johnson, CFA, and Cindy Tsai, CFA. This should be a thought provoking event as our industry continues to evolve rapidly.

These programs do not happen without the valuable time and efforts of our members. All of our programming is designed by volunteers sharing ideas on what is important to our industry, community and future. It is a great opportunity to meet fellow charterholders and build your personal network. Please consider joining one of our Advisory Groups and help deliver value added programming and services while helping to promote the charter in our community. For additional information and to learn more about volunteer opportunities please visit our website at www.CFAChicago.org.

 

Best Regards,

Douglas Jackman, CFA
Chairman, CFA Society Chicago