Launch Your Search

The CFA Society Chicago Professional Development Advisory Group hosted the Launch Your Search program over the course of 4 weekly sessions in September and October. Over thirty participants gathered to develop or enhance the skills necessary to successfully navigate a job search, lessen the associated stress, boost confidence and stand above the competition to get hired faster. The program was conducted by Megan Walls who is a certified executive and career coach who provides professional guidance for all phases of your career: entry, advancement, and change.

Week 1 kicked off with participants learning How to Talk Confidently in an Interview. Individuals reviewed their personal strengths that were determined by taking the GALLUP Clifton StrengthsFinder 2.0 Assessment. Years of research suggest that the most effective people are those who understand their strengths and behaviors. A review of the knowledge and skills you have acquired can provide a basic sense of your abilities, but an awareness and understanding of your natural talents will provide true insights into the core reasons behind your consistent successes.

Each participant’s report listed his or her most dominant strengths from 34 themes that were measured. The strength themes include a broad range from Achiever, Communicator, Developer and Includer, to Learner Maximizer, Relator, and Strategist. Many participants agreed that they have difficulty talking confidently in an interview for various reasons – they’re modest, they feel like they’re bragging, or they don’t think their accomplishments are unique. But, we learned that leveraging these strengths into stories makes it much easier to talk about yourself and articulate your value proposition.

We spent time individually to develop Strength Success Stories based on our Top 5 Themes.The process includes listing a strength and providing an example of how you’ve used it in a business situation.Then a CAR (challenge, action, result) story is crafted on that strength. Having these stories polished and at the ready relieves anxiety, increases confidence and makes you stand out as self-aware in an interview.

An example CAR story:

CHALLENGE: There was no recording keeping system for the sales/orders that came in from the sales representatives.

ACTION: I developed an electronic submission form and organized a two-step process for the sales representatives to use on future orders.

RESULT: Company orders were processed 40% faster.

Week 2 focused on Crafting Your Personal Brand Statement. This one to two sentence statement conveys your uniqueness and competitive advantage to your target audience. It should be easily understood, memorable and benefit driven.  Your statement should answer 3 questions: 1) what value do you provide (describe your expertise); 2) what sets you apart from the competition (your unique attributes – use your strengths learned in the first session), and 3) who is your target audience or what is the position you are seeking? This statement will be the foundation for your marketing material and distinguish you from others in the same industry by creating differentiation in the minds of networking contacts and interviewers. Additionally, it establishes a consistent (versus broad) message, highlights your credibility/expertise and tells an organization why they need you.

Example Personal Brand Statements:

I use my passionate, emphatic approach to build key relationships with customers (sets you apart) that evolve into multi-year contracts (value) for high tech companies selling enterprise software (target audience).

I help small to medium size businesses (target audience) grow strong brands and boost organic growth up to 27% (value) by creating marketing programs that speak to customer needs (sets you apart).

Modernizing Your Resume was the focus during week 3. The group discussed many aspects of resumes, including the differences in today’s resumes, as well as the best ways to get your resume noticed. It’s important to make the best of your resume and grab the attention of your potential employer quickly. Typically, a recruiter or employer will only spend six seconds looking over your resume. With this being the case, the top third of your resume is most important. This section should include the highlights of your strengths, achievements, and value you will bring to an organization. Walls provided this example:

Corporate Finance Executive | Senior Finance Management Professional

Dynamic and resourceful problem solver who mitigate risk and addresses opportunities for profitable growth

Strategic about cost-savings: Eliminated, averted or saved $3M during tenure at XYZ Corp.

Adaptable to fast-paced changing environments: Partnered with cross-functional team to create financial model to calculate weekly one-year cash liquidity positions during financial crisis.

Extensive finance and management skills: Eliminated key man risk in department by creating cross coverage task list and initiating cross training of staff, allowing continuous workflow during absences.

Analytical approach to achieve results: Led development of database to consolidate disparate data sources so bankers could have accurate real-time picture of expenses, saving time and money.

Further, with job applications being submitted online, it’s imperative to have your resume make it past the ATS (applicant tracking system) so your resume makes it to a human being in HR, or better yet, the hiring manager. (In addition to applying online, you should always network into the organization to have someone at the company present you personally.) To pass the screening of an ATS your resume must contain keywords specific to the job! Scour job descriptions in your industry to gather those that best suit the position you’re looking for and incorporate them into your resume.

In addition to keywords, it’s important to use statements that are accomplishment driven. Beyond explaining what you were required to do in your role, you should expand on your successes. Your past experiences should enlighten prospective employers on what value you bring to the organization. Your CAR stories will be helpful in penning your achievements. To make your achievements pop, use powerful verbs in describing how you were effective.

The Powerful Verbs below will be helpful if for example, you:

Saved the Company Time or Money – conserved, consolidated, decreased deducted, diagnosed, lessened, reconciled, reduced

Led a Project – chaired, controlled, coordinated, executed, headed, operated, orchestrated, oversaw, planned, produced, programmed

Supported Customers – advised advocated, arbitrated, coached consulted, educated, fielded, informed, resolved

The final week’s topic was Structure your Job Search Plan, Set Goals & Take Action. In order to jump-start and conduct a successful search you need to be mindful of many factors and be honest about where stand personally in each area. To help you focus your time and effort in the right areas, rank each of the following components on a scale of 1-10:

  • Structured Plan & Goals
  • Time Commitment
  • Networking
  • Resume & Marketing
  • Mindset & Attitude
  • Personal Brand
  • Interview Prep & Skills
  • Self-Awareness

With an understanding of where you need to dedicate time, you can start setting goals for a systematic job search. Think about the strategies you will pursue to move toward this goal and establish specific action items.  Be aware that obstacles will arise along the way so think about how you can best overcome them.  Often times you will require support in various forms so don’t hesitate to ask for help – many people have been through this process and are willing to be of assistance.

Participants gained invaluable job search insights and left armed with many tools to help them throughout the process. Additionally, new networking contacts were made and all benefited from the ideas/support from others in the group.

Should you desire career coaching or help with your job search, you can find information about Megan Wall’s services from her website www.WallsCareerCoach.com, and she can be reached at megan@wallscareercoach.com or 847.490.5776.

Moving Beyond LinkedIn 101

Many within the business field have heard of LinkedIn as the professional business social media platform that business users use to connect with one another. After all, Microsoft’s $26.2 billion acquisition in June of 2016 made for quite the headline and further solidified LinkedIn as the premier business social media platform. But how many users are active on the site? How many professionals use the site to its fullest potential? Even if we are not job searching, a thorough update of one’s profile can be beneficial for everyone’s professional careers.On November 20th, CFA Society Chicago’s Professional Development Advisory Group brought in Kim Stapleton, founder of “The Network Effect”, to provide a crash course in how to get your LinkedIn up to par. Stapleton provided the following tips and tricks for maximizing your LinkedIn efficiency.

Keep your information up to date and remain active.

  • Keep your profile information up-to-date to foster dialog with future potential employers, industry contacts, and prospective clients.
  • Check LinkedIn at least weekly to see who you may have connected with that week and what people in your industry are saying through the LinkedIn NewsFeed.
  • Be active:  Add links to relevant videos and presentations users in your industry would find interesting and relevant.
  • Build your network: Connect with current colleagues, prospects, clients, referral sources, friends and alumni.  Personalizing your connection request helps the user remember how you’ve met.
  • Utilize “shared connections” to find ways to get introductions.  Users will be connected to each other in more ways than you think whether it be alumni connections or employment histories.

Optimize your profile.

  • Add your Full Contact Information.  It’s useful for users trying to make contact with you.  Phone number and email (work or personal) are helpful for connections trying to reach out.  Customize your URL: “linkedin.com/in/[firstnamelastname]”.  Your contact information is only shared with users you have accepted a connection with—cold calls from non-connections should be limited.
  • Adding your Professional Photo makes you 14x more likely to be found and 36x more likely to receive a message.
  • Add your Volunteer Experience—its helps to show employers and clients you are a well-rounded individual and which topics you are passionate about.
  • Listing “Skills” in your profile makes you 13x more likely to be viewed and 17x more likely if you have 5 or more skills.  Skills increases your google and LinkedIn search engine optimization.
  • Adding Videos and Presentations help turn your profile in a sales opportunity by enhancing your profile visually and adding relevant content for your clients.
  • Join “Groups” that are relevant to either the industry that you are in or the industry you want to be in.  Groups helps you connect with people directly in the industry.
  • Follow “Clients and Prospects”.  Follow industry leaders–both individuals and reputable companies.  Often industry leaders with millions of followers post relevant industry topics.
  • If you’re job hunting, enable “Job Alerts”. You can set job alerts specific to your target career path such as “equity research” or “accountant”.

Q&A session.

  • Users are not notified when you “un-connect” with someone.  Try to keep your connections to people you know to keep your rolodex of connections clean.
  • Export connection information into Excel. It is helpful to have a rolodex of you contacts all in E  It can be easier to search through your contacts in Excel versus on the web interface or phone.
  • Try Premium for 30 days for free. However, it is likely only recruiters or very active business development users will find the Premium version worth the monthly fee.

The largest takeaway from the event was that even if you are not job searching, it is important to remain active and keep your profile up to date on LinkedIn for networking purposes.  You never know when a connection may be relevant for a potential introduction, business lead, or new job opportunity and LinkedIn is a great way to stay relevant in the professional business world.

Private Equity: Should You Invest and How?

The challenges of investing in private equity were addressed at a recent event held at 300 N. Wacker and hosted by CFA Society Chicago’s Education Advisory Group. There are numerous issues that arise when making the decision to invest in the asset class. One of the biggest is regarding transparency. Investors typically do not have information on which companies they will be investing in but rather must put their faith in a fund that follows a certain strategy.

The basic characteristics of an investment in private equity are certainly more complex than an investment in the public market. The typical investor becomes a limited partner in an investment fund with a fixed term. A private equity firm will usually manage a series of distinct funds and will solicit new money as previous funds become fully invested. Funds can be capitalized by equity or debt; highly leveraged funds are LBO funds. Liquidity is limited compared to the public markets and investors that unexpectedly need cash may need to search for a buyer of their investment.

The event was organized into two panels on which six (6) investment professionals participated.  The panelists were divided between asset managers, intermediaries and asset owners.

Panelists for Fund Managers and Intermediaries:

Tobias True, CFA – True is a partner on the Investment Strategy and Risk Management team at Adams Street Partners. He is responsible for portfolio construction and risk management as it applies to portfolios including commingled and separately managed accounts.

Josh Westerholm – Westerholm is partner in the Investment Funds Group of Kirk & Ellis. He is an attorney involved in forming and structuring private funds and advises clients with respect to regulatory exams and inquiries.

Panelists for Asset Owners:     

Brad Beatty, CFA – Beatty is the chief investment officer at Sirius Partners LP. He is responsible for developing and implementing the firm’s investment strategy and oversees the firm’s investment in private equity.

Michael Belsley –Belsley is one of the country’s leading attorneys in the field of secondaries. His practice includes formation and governance of private equity funds (including primary interests in and secondary markets sales of private equity fund interests). He counsels buyers and sellers in their secondary market activities.

Harisha Koneru Haigh, CFA – Haigh manages the Private Investments and Real Asset portfolios for Northwestern University’s $11 billion endowment. Prior to joining Northwestern, she was a private equity manager at PPM America Capital Partners, LLC.

Moderator:

Bill Obenshain – Obenshain is chairman of the Advisory Board of the Center for Financial Services at DePaul University. Before joining DePaul, Obenshain spent 38 years in the financial services industry with Continental Bank and Bank of America.  He is a member of the Economic Club of Chicago and the Chairman’s Circle of the Chicago Council on Global Affairs.

Each panelist gave a brief presentation and then answered questions from the moderator and the audience. The first panel featured fund managers and intermediaries and covered the following points:

What type of due diligence is performed on fund managers?

  • Knowledge of historical performance is critical, as there is evidence that top quartile performance may be a good predictor of future performance.
  • What were the drivers of past performance, what type of risks were taken?
  • What were the sources of return?
  • New investors need to know what type of valuation methods the fund uses. Most funds use a multiple of EBITDA to value potential investments.

What qualitative methods are used to evaluate funds?

  • Does the fund have the infrastructure and back-office personnel to sustain itself across any cycle?
  • What is the quality of the investment professionals making decisions for the fund and how are they compensated?

What are the challenges of creating a portfolio?

  • A portfolio of funds can be diversified by geography, sector and fund size. Over time, different sectors fall in and out of favor. Investment dollars that are paid out over different time periods will aid in the diversification of return.
  • Each investor will have a certain number of funds that they are comfortable investing in.

What is the risk of private equity with respect to other asset classes?

  • Public equity influences private equity; however there is a much different risk profile. Limited liquidity, blind pool risk and higher fees demand that private equity returns be superior to public equity.
  • Investments are made at intervals throughout the life of the fund; the timing will affect the IRR realized by the fund.

In the early days of PE, 25% to 30% returns were common; returns have dropped to the high teens.  How does this change the risk assessment?

  • Over the past 20-25 years there has been 10% annual growth in new dollars committed, this has compressed returns.
  • There is a wide range of returns among funds and access to funds and managers who outperform can be constrained.
  • Private equity funds must show performance at 300-500 bps better than public markets, LBO funds must demonstrate the highest performance premium.

What is a forever fund?

  • A typical private equity fund may have a 10-year life, at which time capital is returned to the investor.
  • There is very high interest from certain types of investors for longer terms from private equity funds. This is a better fit for institutional endowments and family offices needing investments for future generations.

What has been the trend in regulation?

  • With the passage of Dodd-Frank in 2012, private equity is no longer the “Wild West”.
  • Mandated registration has led to more oversight and enforcement actions are climbing.
  • PE firms face more questions from regulators; there is a focus on marketing materials being truthful.
  • More compliance personnel have been added, this is a positive for investors.

In the audience Q&A, the issue of risk was again addressed by the panel. True argued that risk can be defined by 1. Volatility (will it be lower?), 2. Fund Outcome (will return realized in 10-years be adequate?) and 3. Liquidity/cash flow (institutions have cash flow constraints that must be balanced with fund liabilities).

There was some audience Q&A with respect to the loosening of debt covenants and fee structure.  Higher leveraged funds will be riskier and require a higher return. Historically, the fee structure has been 1%-2% of assets managed and a 20% share of profits at the back-end. The limited partnership agreement must be specific when enumerating fees (list it or lose it).

After a short break the second panel was convened. This panel was comprised of asset owners who were able to provide some additional perspective on the issues.

What kind of due diligence is done before investing?

  • Haigh stated that 22% of Northwestern’s portfolio is in private equity. These are in co-investment’s with manager with which they have the highest conviction.
  • Investors are under pressure to commit money to managers within a relatively tight-time frame as funds are closed to new investors quickly
  • Staff resources are dedicated to getting to know the managers, those with a history of success are favored.

Now that all sectors are fair game for PE, how has the risk profile changed?

  • The benefit has been the ability to diversify within this asset class. Different managers may specialize in different sectors.
  • The challenge becomes “Which managers have the expertise for which sector?”
  • PE firms with specialty funds in out of favor sectors still have to do deals; given the time-frame can they attract investment dollars?
  • This trend reflects the maturation of the sector.

Given that the current part of this cycle has led to high valuations, what defensive measures do you take?

  • Patience is needed, however when top quartile funds are raising cash, you need to invest if you have dollars to put to work.
  • Investing consistently is important; timing the market is a mistake.
  • Take advantage of secondary sales if possible.

In the audience Q&A there were several questions concerning currently inflated valuations among private companies and the paucity of investment opportunities because of over-valuation. Investors take comfort in PE firms who have followed companies for 3-4 years and use consistent valuation methods. The computation for EBITDA can vary among managers, the biggest error can be overpaying for an asset.

Distinguished Speaker Series: James Grant, Grant’s Interest Rate Observer

James Grant has a resume. Navy man. Journalist. Founder and editor of Grant’s Interest Rate Observer. Author of books that range from the Great Depression, financial histories, a presidential biography, a forthcoming biography about Walter Bagehot, and appearances on numerous financial programs. Grant was the featured guest speaker at CFA Society Chicago’s Distinguished Speaker Series on November 14, 2018. Over lunch at the JW Marriot, Grant gave his views on topics ranging from interest rates to asset valuations and finished with questions from the audience.

Grant started with a U.S. economic review of the past 10 years concentrating on the progress and consequences of the monetary / fiscal policies applied over this period. Grant noted in 2007/08, the largest banks were leveraged around 29/1. The same group of banks are now levered approximately 13/1. While the risk these banks pose to the financial system has been reduced by de-levering over the past ten years, the leverage ratio of the Federal Reserve Bank has moved in an opposite direction, now standing at all-time highs. Fed policies have created a risky and perhaps fragile economic situation. Although the Fed has the ultimate backing of the U.S. government, at some point the investing public could say “enough” as ultimately the term “risk-free asset” will come into question. Grant then compared debt loads to GDP, asking rhetorically what is the level of debt that inhibits a country from issuing new debt at any price? Japan’s ratio of public debt to GDP is around 228%, Italy’s is 130%, while the U.S. stands at 105%. None of these countries currently have a problem issuing or servicing their debt. However, Grant explained that the level of debt is not the key, but how a country is viewed in the eyes of the world markets. For example, in 1978 the U.S. was in the midst of a funding crisis and the debt/GDP ratio was at only 26%. While finances and balance sheets matter, it is the cycles of interest rates that dominate a countries ability to raise debt and the world economies appetite for it. An alarming fact is the level of U.S debt issuance (in terms of percentage of GDP) is at its highest point since 1945. Grant pointed out the incongruity of the U.S. bond market activity and the overall economy. The economy by any measure has exhibited steady and reasonable growth in the past 10 years. Yet the U.S. government continues to issue more debt and increase the overall deficit in the face of increasing GDP.

Next, Grant addressed the value of risk-based assets. The past ten years of near zero term rates has created a perversely low cost of capital. By holding interest rates to artificially low levels, asset prices have inflated abnormally. Companies have exhibited a vicious cycle of issuing debt and using the proceeds to buy back their stock thereby propping up valuations. Fed policy is the main reason why there are a number of mega-sized companies that have recently gone or are about to go public. The commonality among these companies is that they typically make no money, have remarkably high valuations, and have easy access to cheap capital. Think Uber – it has never been profitable, year-over-year growth is decelerating, and it continues to lose market share. Despite this documented financial condition Uber has been recently valued at an enterprise value over $70 billion.

To underscore his points, Grant cited the works of two other authors. The first was Ed McQuarrie, Professor Emeritus at the Leavey School of Business, Santa Clara University. McQuarrie is a part-time market historian who takes particular issue with the views popularized by Jeremy Siegel of a 6-7% average return in the stock market over time. McQuarrie’s position is that for decade long periods the stock market has had negative returns and there is not necessarily a reversion to the mean. Grant strongly advised the audience to read Dr. McQuarrie’s paper Stock Market Charts You Never Saw.

When Grant finished his prepared remarks he fielded questions from the audience.

Q – Given your outlook on interest rates and asset valuations, is the pricing of private equity realistic?

A – Grant answered with a quick “No”, and pointed to a recent disagreement between Palantir Technologies and Morgan Staley which has a stake in the company. Palantir has been valued in the $30B – $40B range and is looking to launch its IPO in 2019. Morgan Stanley has lowered the valuation of the company to a fraction of its private market $30-$40B valuation. What does it say to the current state of private equity valuations if the very banks that are to take a company public cannot agree with the company on valuation?

Q – In the current market environment where would you put capital?

A – As bond yields go up (a certainty in Grants eyes), gold will also go up. When the public losses confidence in a country’s fiscal management, there will be a flight from that currency.

Q – Given the state of the U.S. finances, what is the answer – raise taxes, lower spending?

A – The first step to fixing our financial crisis is something akin to a person dependent on drugs. Admit there is a problem. Setting aside the lawmaker (or the out of power political party) that calls for fiscal responsibility, the U.S. government as a whole must tackle the problem. It is more likely that there will be monetary disorder before the problem is addressed. If this is the most likely scenario, then investors should consider gold as hedge.

CFA Society Chicago 32nd Annual Dinner

The CFA Society Chicago Annual Dinner was an event devoted to honoring the 148 new CFA charterholders and the recipient of the Hortense Friedman, CFA, Award for Excellence.  The evening also featured Heather Brilliant, CFA, past chairman of CFA Society Chicago and Keynote Speaker Richard H. Thaler, 2017 Recipient of the Nobel Memorial Prize in Economic Sciences and the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business.

The newest charterholders were congratulated for passing all three levels of the CFA exam, and having the required four years of relevant work experience required to qualify for the charter.  Honoring their commitment to completing the program, a crowd of 1,050 attendees gave them a standing ovation. It is estimated that preparation for the exams requires nearly 1,000 hours of study. The newest charterholders now hold a professional designation that is recognized worldwide as a symbol of excellence in their profession and a commitment to uphold the highest ethical standards.

Heather Brilliant, CFA is currently vice-chair of the CFA Institute Board of Governors and a managing director at First State Investments.  She addressed the “State of Disruption” in the financial services industry.  Brilliant identified two disruptors: the rise of passive investing and the increasing influence of technology.  She viewed both as positive developments that will in the long-term serve client interests.

The changes these disruptors cause will need to be harnessed by CFA’s.  Active managers will face more consolidation and robo-advice will be more prevalent.  However, it is difficult for machines to empathize with clients.  Brilliant stated that the CFA Institute will offer more continuing educations support and continue to advocate for fiduciary duty.

Brian Singer, CFA was honored as recipient of the Hortense Friedman, CFA, Award for Excellence.  The award honors a member of the Chicago-area investment community who has demonstrated initiative, leadership and a commitment to professional excellence. Singer is the head of William Blair’s Dynamic Allocation Strategies team, as well as its lead portfolio manager.  In expressing his thanks for the reward, Singer spoke of the great experiences he had earlier in his career in working with Gary Brinson and Gilbert Beebower.  They collaborated on a seminal article published in 1991 entitled: Determinants of Portfolio Performance II: An Update.

The keynote speech took the form of a question and answer session between Richard Thaler and Thomas Digenan, CFA, chairman of CFA Society Chicago. The questions from Dinegan covered a wide variety of topics and took advantage of Professor Thaler’s expertise in decision theory.  The Q & A unfolded as follows:

Guess a Number between 0 and 100
The number guessed must be the closest to two-thirds of the average guess of people attending this meeting. After some calculations, you arrive at a mean of 25.4, two-thirds of that mean is 16.93. Professor Thaler made an initial guess of 17 without having to go through the calculations. He was hopeful that charterholders would arrive at a number close to the correct answer.

Outlook for the Chicago Bears
Professor Thaler states the due to the NFL salary cap; successful team must have players that perform at a level greater than their salary. This favors teams with good draft picks and teams that find good players that other teams don’t want. The Bears were forced to pay defensive lineman Khalil Mack a market value salary for the next four years. This acquisition does not bode well for the Chicago Bears as Mr. Mack must be highly compensated.

Lottery Ticket Purchase?
Given the $1.6 billion payout, Professor Thaler would have purchased a ticket. He called it a “smart dream”. Interestingly, of 14 people asked to sell their machine number generated $2 ticket for $4, 11 would not do so. Once you have something, you don’t want to give it up.

Health Care Options for Employees and the Role of “Nudge”
Employees routinely make bad decisions with respect to which health care plan is best for them. These decisions include paying $2,800 for reducing your deductible by only $2,000. Professor Thaler characterized the desire to go to a smaller deductible as a “negative nudge”. He co-authored the global best-seller “Nudge” in 2008.

During open enrollment, there is no action required if you want to keep the same plan as the year before, however if you want to change you are forced start over (go to zero). This leads to what he termed “status quo bias”. Few employees understand their health care options, which can be a bigger decision than what type of 401K you have.

An Example of “Sludge”
People who sell things need to nudge. Bernie Madoff nudged, however he nudged people for evil. It must always be our intention to “nudge for good”.
When trying to access a review in a British journal, Professor Thaler ran into a paywall. The paywall asked for only one pound of payment to access the article; however he was required to give them his credit card. After an initial period you were automatically renewed at the market rate. To stop the subscription, you were required to give 2-weeks’ notice via telephone. This is a prime example of what Professor Thaler views as “Sludge” (making it difficult to get out)

What is Life Like after Winning a Nobel Prize?
Professor Thaler has noted that he has encountered more “Sludge”. He is the third recipient of the Nobel Prize on the floor he works on at the University of Chicago, so after about a week everything returned to normal.

Thoughts on “Surge Pricing”?
Professor Thaler warned that surge pricing can be a huge blunder. This is especially true when it becomes too prevalent. Most customers are resentful when a hardware store raises the price of snow shovels during a snowstorm. During a snow storm in New York, Uber commenced surge pricing. He noted that Home Depot does not raise the price of plywood after a hurricane. Home Depot, by not implementing surge pricing, is promoting a long-term relationship with their customers.

How do you guard against over-confidence?
It is important to eliminate hindsight bias. You must distinguish between bad decisions and bad outcomes. In a football analogy, Professor Thaler stated that attempting to score a touchdown on fourth down with one yard to go for a touchdown early in a football game is a smart decision. If you are not successful, you give the ball over with no points scored. However this is not a case of overconfidence by the head coach. This is an example of good decision with a bad outcome. It is difficult to do, however it is better to evaluate the decision, not the outcome.

In his concluding remarks, Professor Thaler criticized point forecasts by analysts and advocated confidence limits. A $2.34 point forecast can be contained in $2.15-$2.50 confidence limit. It is also critical to be able to look back at forecasts to track errors. Forecasting is an important part of what people do and the more feedback you have the more you will learn.

 

CFA Society Chicago would like to thank the following organizations for helping to make the 2018 Annual Dinner a success!

PREMIER SPONSORS
Northern Trust
UBS Asset Management
William Blair

PLATINUM SPONSORS
First Trust Portfolios, L.P.
Mesirow Financial
Nuveen

Thank you to all our Gold, Silver and Bronze sponsors as well!

Vault Series: John Wightkin, CFA, TradeInformatics

On November 8, 2018, John Wightkin, CFA, a senior trade consultant at TradeInformatics, spoke at the Vault Series of the CFA Society Chicago about how the process of examining trading costs can help preserve portfolio alpha.

According  to John, “trading costs can represent close to half of active returns” and the process of analyzing and examining trading costs can help claw back those costs that preserve alpha. The dispersion of average trading costs can be between 3 and 48 basis points per the presentation. The process John outlined to combat these high costs has three basic steps:

  1.  Alpha profiling, which is the analysis of the firm’s linkage and relationship between the portfolio manager, trader, broker and analyst. The “alpha profile” tries to identify the unique DNA of portfolio ideas and then link the process to return preservation and implementation.
  2. Return preservation, which means looking across different participation rates and liquidity buckets for opportunities which might not be apparent. The participation rate refers to identifying active vs passive relative to market flow and the liquidity buckets are determining what order size is relative to average daily volume.
  3. Implementation is the last step to be considered and ought to be low-cost and transparent. The client firm will learn how to take control of trade execution on a specific platform to prevent information leakage, but also use the platform as a way to receive information about market flow and trade reception.

A case study was provided where TradeInformatics examined a hedge fund with 30 traders but no central trading desk. When the trades were working in the desk’s favor, there was an average of 12 minutes between trades, but when trades were working against the desk, or positions were losing, the average time between trades lengthened to 40 minutes. The conclusion drawn was that actual returns were 5.9% lower than “expected return” based on the actual trading patterns.

Using a healthy lifestyle analogy, TradeInformatics concluded that to reduce trading costs, the trading desks should “lose weight and eat a balanced diet” which translates into slowing their trading down and doing it more consistently over both sides of the market, i.e. whether the trades are winning or losing.

Summary / conclusion: The takeaway from John Wightmkin’s slide presentation was to slow down and be more consistent with a firm’s trading practices. The time differential between winning and losing trades was antithetical to the traditional practice within investing of “cutting your losses and letting your winners run”. Trade Informatics often found that the opposite was the case.

Trade Informatics can provide more discipline around the trading / execution process, for which the goal is to ultimately lower trading costs and preserve portfolio alpha.

Distinguished Speaker Series: Rick Waddell, Chairman of Northern Trust

Who better to teach management during a crisis than a former bank CEO who began his job in the midst of the 2008 recession? Rick Waddell has one of the most extensive resumes you’ll find in banking and dedicated his career to growing Northern Trust from a sleepy custody and wealth management firm into the technology-driven asset management and banking leader it is today. Waddell was CFA Society Chicago’s guest speaker on October 10th for its Distinguished Speaker Series luncheon.

He noted proudly that he saw many former and current Northern Trust employees in the audience. “The CFA Society is really important to us at Northern Trust,” he said. Waddell said that he was told not to make his speech a commercial for his bank, and joked that “this eliminates about 95% of my content” and made him ponder what would be a good topic for him to address, ultimately deciding on “5 Things I Learned From the Global Financial Crisis of 2008”.

In Waddell’s mind, the following five key features made the difference between success and failure during the financial crisis.

Capital matters. For any organization with a balance sheet, both the quantity and quality of its capital during ’08 were incredibly important. He noted that capital ratios had been too low in Europe, but generally were roughly OK in the US. He still sees problems with bank capital transparency in Europe today.

Liquidity matters. Again, both the quality and the amount of liquidity are important. Waddell said that he believed that the fall of Lehman Brothers was not due to lack of capital, but to lack of liquidity. The Fed was much more focused on capital during the global financial crisis than liquidity, but the latter was just as important. One of the earliest warning signs Waddell saw that all was not right in the financial world was when HSBC wrote down $11 billion worth of subprime mortgages in March of 2007. Waddell wanted to know if any part of Northern Trust had exposure to subprime lending and found that, while they didn’t make the loans themselves, they still had subprime-related instruments in some of their investment pools. Another warning sign came in August 2007 when Waddell learned that a securities lending collateral pool was facing losses when a number of banks withdrew from the niche Auction Rate Securities (ARS) market and banks holding the formerly liquid instruments suddenly faced losses.

Leadership and management during a crisis matter. Waddell said that during a tumultuous period, “the good and the not so good in all of us comes out.” With his background focused on commercial banking, he had to learn a lot of things quickly during the crisis as a new CEO leading a diversified financial firm. At the same time, Waddell had consultants and executives coming to him asking who he was going to fire in order to shed costs. Firing people immediately after the bank’s best year on record (2007) didn’t make sense to Waddell. He didn’t want to go down that route, and it turned out that staying the course and not making widespread headcount reductions was the right decision.

Culture matters. “At Northern Trust, our values are service, expertise and integrity,” said Waddell. Having that culture in place before a crisis hit was extraordinarily important. While Waddell admitted that Northern Trust has its share of problems like any firm, and its culture needs to evolve while holding employees more accountable, having a set of values that the team buys into was one of the main reasons the firm navigated the crisis so well. “Culture is more important than strategy,” Waddell said, echoing management consulting pioneer Peter Drucker. Despite the bank’s commitment to its partners and Waddell’s desire to avoid mass layoffs, its ROE fell to 8.2% in 2011, below its cost of capital, so the bank went on a mission to cut costs while still avoiding large layoffs that could have demoralized staff.

Strategy matters. Waddell said that having skin in the game was important during the recession. He found that the trend of banks securitizing assets and immediately getting them off their balance sheet led to a lack of skin in the game with financial institutions, and this made the crisis even worse.

Waddell continued on at length about his experience during the financial crisis. In 2009, large US banks were forced to accept a capital injection as part of TARP. Northern Trust was well-capitalized and didn’t need the money, but regulators hinted that they needed to comply or there could be consequences. Waddell said that the TARP program was in theory a good idea that could act as a stimulus, but the problem was that there weren’t enough borrowers demanding capital for it to have much of an impact. What was originally termed the “healthy bank program” soon became “the bailout” in the public’s eyes, which led to protest movements such as Occupy Wall Street, some of which were held immediately outside Northern Trust’s headquarters at LaSalle and Monroe. This populist take on the government bailing out fat cat bankers hurt the perception of Northern Trust, despite the firm’s insistence that it didn’t need capital and its desire to quickly repay the money. Waddell said that the terms of the loan Northern Trust was forced to take netted taxpayers a 15.5% return, and TARP overall was one of the most successful investments for taxpayers in recent history and very profitable for the government.

Blame for the crisis is difficult to assess, but Waddell said that the Fed was responsible for missing some of the warning signs, banks were also responsible to an extent for lax standards, and consumers were also responsible by borrowing far more money than they were able to repay. Waddell said that eventually there will be a recession in the US but the banking system will be in a much better position to not only withstand it, but even be a positive force for stability. One thing that remains unresolved is the issue of “too big to fail”, but bank capital and credit quality have greatly improved overall. While he noticed some clues that markets were starting to crack back in 2007, Waddell sees few red flags on the horizon today. He said that usually problems will manifest early on in the mortgage market, but that the industry appears to be functioning fairly normally now. There could be some issues with Brexit next year, and Northern Trust continues to monitor that situation closely, as well as the Chinese economy and issues around cybersecurity. In his Q&A, Waddell said that young professionals considering a career in banking will still find opportunities in the future, as the practice of safeguarding assets and allocating capital will be around for a long time. He was slightly less upbeat about the prospects for the asset management industry in light of the disruptions faced by robo advisers, low (and sometimes free, in the case of Fidelity) account fees, and the trend towards passive investing.

True to Northern Trust’s values, Waddell finished his speech by encouraging the audience to get involved in a philanthropic endeavor that aligns with their interest, saying “to much is given, much is expected”. Lastly, he noted the firm’s long history of collaborating with United Way and said that there’s still much work to be done.

Distinguished Speaker Series: James Bullard, President and CEO of the St. Louis Federal Reserve Bank

On September 12th, CFA Society Chicago welcomed James Bullard, president and CEO of the St. Louis Federal Reserve Bank. Members and guests heard Bullard’s remarks over breakfast at The University Club.

The focus of the discussion explored a possible strategy to extend the U.S. economic expansion. Bullard noted that historical signals used by monetary policy makers have broken down, specifically the empirical Phillips curve relationship. As a result Bullard suggested putting more weight on financial market signals, such as the slope of the yield curve and market -based inflation expectations. Handled properly, these signals could help the Federal Open Market Committee (FOMC) better identify the neutral policy rate and possibly extend the U.S. economic expansion.

Following are excerpts from Bullard’s presentation “What Is the Best Strategy for Extending the U.S. Economy’s Expansion?

The Disappearing Phillips Curve

Prior to 1995 inflation expectations were not well anchored. Around 1995, the U.S. inflation rate reached 2 percent, and U.S inflation expectations stabilized near that value. Bullard interpreted this as the U.S. having an implicit inflation target of 2 percent after 1995, calling it the inflation-targeting era. The FOMC named an explicit inflation target of 2 percent in January 2012, but Bullard said he believes that the Committee behaved as if it had a 2 percent target well before that date. The post 1995 period in the U.S. coincided with a global movement among central banks toward inflation targeting beginning in the early 1990s. During this period, the 2 percent inflation target became an international standard.

Once inflation expectations stabilized around this international standard, the empirical relationship between inflation and unemployment– the so called “Phillips curve”–began to disappear. Bullard provided a chart showing the slope of the Phillips curve has been drifting toward zero since the 1990’s and has been close to zero for the past several years.

Current monetary policy strategy

The conventional wisdom in current U.S. monetary policy is based on the Phillips curve and suggests that the policy rate should continue to rise in order to contain any increase in inflationary pressures. However, in the current era of inflation targeting, neither low unemployment nor faster real GDP growth gives a reliable signal of inflationary pressure because those empirical relationships have broken down. Continuing to raise the policy rate in such an environment could cause the FOMC to go too far, raising recession risk unnecessarily.

Given that, Bullard suggested using financial market signals such as the yield curve as an alternative to the Phillips curve. The slope of the yield curve is considered a good predictor of future real economic activity in the U.S. This is true both in empirical academic research and in more casual assessments. Generally speaking, financial market information suggests that current monetary policy is neutral or even somewhat restrictive today. Specifically, the yield curve is quite flat, and market based inflation expectations, adjusted to a personal consumption expenditures basis, remain somewhat below the FOMC’s 2 percent target. Financial market information also suggests the policy rate path in the June 2018 summary of Economic Projections (SEP) is too hawkish for the current macroeconomic environment.

A forward-looking strategy

More directly emphasizing financial market information naturally constitutes a forward looking monetary policy strategy. One of the great strengths of financial market information is that markets are forward looking and have taken into account all available information when determining prices. Thus, markets have made a judgment on the effects of the fiscal package in the U.S., ongoing trade discussions, developments in emerging markets, and a myriad of other factors in determining current prices.

Financial markets and the Fed

Financial markets price in future Fed policy, which creates some feedback to actual Fed policy if policymakers are taking signals from financial markets. This has to be handled carefully. Ideally, there would be a fixed point between Fed communications and market based expectations of future Fed policy, i.e., the two would be close to each other. Bullard said that generally speaking, markets have currently priced in a more dovish policy than indicated by the FOMC’s SEP – they expect the Committee to be more dovish than announced but still not enough to achieve the inflation target.

Caveats on financial market signals

Financial market information is not infallible, and markets can only do so much in attempting to predict future macroeconomic performance. The empirical evidence on yield curve inversion in the U.S. is relatively strong, and TIPS -based inflation expectations have generally been correct in predicting subdued inflationary pressures in recent years. Therefore, both policymakers and market professionals need to take these financial market signals seriously.

Risks 

Bullard suggested that yield curve inversion would likely increase the vulnerability of the economy to recession. An inflation outbreak is possible but seems unlikely at this point. By closely monitoring market based inflation expectations, the FOMC can keep inflationary pressure under close surveillance. In addition, financial stability risk is generally considered moderate at this juncture. Arguably, these are being addressed through Dodd-Frank and related initiatives, including stress testing.

Opportunities

The current expansion dating from the 2007-2009 recession has been long and subdued on average. The slow pace of growth suggests the expansion could have much further to go. The strong performance of current labor markets could entice marginally attached workers back to work, increasing skills and enhancing resiliency before the next downturn.

Uncertainty

Another long standing issue in macroeconomics is how to think about parameter uncertainty, or more broadly, model uncertainty. Bullard pointed to two studies: Brainard (1967) suggested that when model parameters are in doubt, policy should be more cautious than otherwise and, Hansen and Sargent (2008) suggested that, in some cases, policymakers might want to be more aggressive than otherwise. This is an unresolved issue, but how to handle parameter uncertainty has been a concern for the FOMC for years.

Conclusion

Bullard re-iterated his position stressing that U.S. monetary policymakers should put more weight than usual on financial market signals in the current macroeconomic environment due to the breakdown of the empirical Phillips curve. Handled properly, current financial market information can provide the basis for a better forward-looking monetary policy strategy. The flattening yield curve and subdued market-based inflation expectations suggest that the current monetary policy stance is already neutral or possibly somewhat restrictive.

Vault Series: James D. Shilling, DePaul Department of Real Estate

The Evolution of Modern Real Estate and its Role in a Multi-Asset Portfolio

CFA Society Chicago gathered in the Vault at 33 North LaSalle to hear Professor James Shilling from the DePaul Department of Real Estate discuss the evolution of commercial real estate and its increasing role in a diversified portfolio. Shilling was the James A. Grasskamp Professor of Real Estate and Urban Land Economics at the University of Wisconsin and currently holds the George L. Ruff Endowed Chair in the Real Estate Center at DePaul University.

Professor Shilling began his presentation by showing that the value of diversification has been recognized since the days of King Solomon (circa 970 BC). He then goes on to discuss how Nobel Laureates Harry M. Markowitz (1952) and Robert C. Merton (1973) quantified the concept of diversification for the portfolio.

Harry M. Markowitz is known as the Father of Modern Portfolio Theory. His work set the stage for the Capital Asset Pricing Model (CAPM) and a two-fund theorem. This theorem holds that for diversification purposes investors should hold a combination of the risk-free asset and a market portfolio of risky assets.

Robert C. Merton extended the Markowitz framework by allowing for multiple sources of uncertainty. In this framework commercial real estate can now assume a critical role as investors require another “hedge” against risk. However, real estate was slow to enter portfolios as there were only a few indices that could track performance. Beginning in the late 1970’s and early 1980’s the development of appraisal-based commercial real estate indices ameliorated this problem.

Professor Shilling pointed out that during prolonged periods of low economic growth and low interest rates the inclusion of commercial real estate is of great benefit to any investment portfolio. He argued that the current US economy continues to reflect this “secular stagnation”. The persistence of low interest rates has incented portfolio managers to leave fixed income and increase their investments in real estate. Current pension portfolios average around a 10% exposure to commercial real estate. If recent trends continue, this exposure will only increase.

The present state of the US commercial real estate market reflects the continuance of a slow growth economy. With portfolio managers searching for yield, the vehicle of choice has in many instances been commercial real estate. Professor Shilling argues that this influx of money has continued to compress cap rates, which for some properties approach 3%.

Professor Shilling pointed out that during prolonged periods of low economic growth and low interest rates the inclusion of commercial real estate is of great benefit to any investment portfolio.

Increasing correlation between asset classes due to lower interest rates and the trend towards a flat yield curve has produced a scenario for portfolio managers where there is “nowhere to hide”.   It is increasingly difficult to achieve diversification using only developed market assets. He argues that more effective diversification can be achieved through investments in emerging markets assets.

QE Postmortem

A review of the Quantitative Easing (QE) programs conducted by central banks around the world since the financial crisis of 2008-09 was the topic of a panel discussion before a full house at the Hotel Allegro on September 13th. Dr. Dejanir Silva, professor of Business at the Gies School of Business at the University of Illinois served as moderator. Dr. Dejanir focuses his research on unconventional monetary policy, financial regulation, and entrepreneurial risk-taking. His panelists included:

  • Roberto Perli, from Cornerstone Macro in Washington, D.C. where he heads global monetary policy research. Prior to moving to the private sector in 2010, Dr. Perli worked at the Federal Reserve Board, assisting with the formulation of monetary policy.
  • Nomi Prins, journalist and author with experience in international investment banking.
  • Brett Ryan, senior economist at Deutsche Bank responsible for high-frequency data forecasting for North America.

Dr. Dejanir kicked-off the event with preliminary comments starting with a quote from the former President of the Federal Reserve Board, Ben Bernanke:

“The problem with quantitative easing is it works in practice, but it doesn’t work in theory.”

More specifically, Dr. Dejanir explained that although empirical tests have shown positive effects of QE, we don’t have a clear understanding of the channel by which it works: the how and why of QE. This condition makes QE programs difficult to plan, execute, and, most importantly, evaluate after the fact.

The panelists then gave their general observations on QE as conducted by the Federal Reserve (Fed), European Central Bank (ECB), and the Bank of Japan (BOJ). Prins pointed out the huge size of the programs—the equivalent of $22 trillion. Even though the Fed has begun (slowly) to unwind its QE program, the ECB and BOJ are still accumulating securities. Prins called this an “artificial subsidy” which has encouraged investors of all types to take more risk than they otherwise would (or should) have. Perversely, this could end up having a destabilizing impact.

Ryan complimented the central banks for conducting QE claiming it helped avoid a long, global depression, and he added, they had learned a lot about how to use the tool in the future. He admitted surprise that the term premium in financial markets hadn’t returned to pre-crisis levels, and wondered what this might imply for the performance of risk assets in the future.

Perli, pointed out that, because the QE programs at the ECB and BOJ are still underway, conducting a postmortem is premature. Indeed, the ensuing discussion failed to reach many insightful conclusions about QE.

Dr. Dejanir then asked the panelists if central banks should conduct QE at all, in light of the risks it poses for them (by investing in asset classes beyond sovereign debt) and for investors (by reaching out on the risk spectrum further than usual). Ryan thought the risks were lower for the U.S. than for other countries because the dollar is the world’s reserve currency. That effectively removes a limit on QE for the Fed. He added that the increases in required bank capital enacted during the crisis counteracted the QE programs by requiring banks to operate at lower leverage ratios. This has led to the idea of flexible capital regulations allowing for their application counter-cyclically. The Fed is conducting research into this concept.

Perli, said that in a time of extreme crisis, central banks must take actions that go beyond standard policy, and the recent experience fits the bill. However, he questioned the separate nature of the various QE programs, and suggested a coordinated effort could be more effective in the future.

Prins, acknowledged the inherent riskiness of QE. She contended that a lot of the liquidity has found its way into equity markets, either from end investors, or corporate buybacks. She feared that future rounds might require further investments into equity markets by the central banks to be effective. She also noted that the lack of a clear exit strategy added to the uncertainty, if not the outright risk, of QE programs.

The next question put to the panelists was whether or not the central banks should (or would) seek to reduce their balance sheets to pre-crisis levels. All three were skeptical that they would. With specific regard to U.S. MBS, Ryan doubted the Fed could reduce its holdings significantly without a material impact on the market, which it would be reluctant to do. Banks invest heavily in agency MBS because of their low-risk weighting in determining capital requirements. Prins pointed out the Fed would be careful not to upset the MBS market and generate a knock-on negative impact on bank capital. Perli expected all central banks to continue with greatly expanded balance sheets for the foreseeable future. He also expects a slow transition to transactions-based policy rates rather than administered ones. Ryan seconded this opinion and endorsed SOFR (Secured Overnight Financing Rate)–essentially the overnight treasury repo rate–as an alternative to Fed Funds.

The discussion moved on to the topic of the increase in indebtedness since the crisis. Prins presented figures highlighting recent changes. Total household debt has barely budged since 2007, rising just $100 billion to $9.4 trillion. However, this masks a shift of over $1 trillion from mortgage debt to other types of consumer debt. Non-financial corporate debt has nearly doubled to $3 trillion (Ryan noted that ratios of corporate indebtedness have reached levels usually characteristic of recessions). Student loans have risen dramatically, in relative terms, from $500 billion to $1.4 trillion. When sovereigns are included, total global debt has risen from about $97 trillion to $247 trillion, mainly because debt remains very cheap for borrowers almost everywhere in the world. All panelists acknowledged, however, that emerging market countries, having to borrow in developed markets, will struggle to service their debt denominated in foreign currencies.

The debt question eventually led into the final topic of the event: inequality. Ryan noted that inequality has been rising since 1980 but has only become an issue more recently. Dr. Dejanir asked if central banks should take inequality into consideration in conducting QE in the future.  Ryan responded that central banks lacked tools to address the issue. Perli agreed, saying that in times of crisis, central banks had to act to help economies quickly, without consideration of side issues like inequality. In any case, inequality is a macro policy issue, not a monetary policy one. Prins thought inequality should be addressed with regulations all the time, not just during crises.

In the end the panel had no concrete conclusions on QE, but agreed on some broader points:

  • Despite uncertainty over the size, timing, and ending of their programs, the central banks in the largest global economies needed to act beyond monetary policy, to help their economies recover from the great recession.
  • Experience has shown that these programs entail risks that could prove to be larger problems in the future.
  • Central banks should learn from their experience with recent QE programs, share that knowledge, and plan now for more coordinated programs when they are needed next.