Don Wilson, DRW Founder, on Why Cryptocurrencies Will Change

Over 200 professionals joined CFA Society Chicago for the February Distinguished Speaker Series luncheon at the W in Downtown Chicago to hear Don Wilson opine on one of the most popular topics in the financial industry today—the $450 billion cryptocurrency marketplace. The mood was focused and inquisitive, as Wilson, the founder of DRW Trading, doesn’t make public appearances often and rarely talks about the relatively new financial asset class of cryptocurrencies. Wilson’s vast knowledge in the relatively lesser known field can be attributable to researching the marketplace since early 2012 and eventually forming Cumberland in 2014, a subsidiary of DRW Trading, to provide market making services as well as hold principal positions in crypto coins and tokens. Today, Cumberland is one of the largest OTC liquidity providers in the cryptocurrency market.  I believe it is safe to say that Mr. Wilson was one of the earliest to have a vision of what a world of cryptocurrencies could look like, which makes his view on the future of this space very interesting.

Wilson echoed that in 2017, an inflection point was reached in the cryptocurrency market.  Bitcoin rose from $963 at the beginning of 2017 to close the year at $14,679—a roughly 1,500% increase that largely took off in the final quarter of 2017. In September of 2017, the CBOE and CME launched futures contracts for Bitcoin giving the asset a much larger and more sophisticated institutional audience. Even the most novice cryptocurrency investors – including those family members talking about it over the holidays —were talking about the price of bitcoin and the hottest new cryptocurrency they got wind of. Although we should pay close attention to the price of bitcoin because it was the first pioneering technology and currently is the largest coin by market cap, Wilson argued that by only doing so we would be missing the bigger picture of cryptocurrencies. The marketplace would also agree with his point.  For reference, in 2013, bitcoin made up 95% of the overall market cap of the cryptocurrency market. Today that number is closer to 40% of total crypto assets.

The technology behind Bitcoin known as the blockchain is predicated upon a framework that enables the transferring of value to anyone in the world without having to go through a centralized agent, today, most commonly known as a bank. Cryptocurrencies instead operate on a decentralized and/or a distributed platform. Benefits of switching form a centralized environment to a decentralized/distributed environment is it removes the need to trust a single organization to both hold your assets and control transfers in and out of your account. The decentralized system creates a much more resilient network that could operate even if one node of the structure went dormant. In a centralized system, if for example a bank is hacked or loses data, the entire system falls apart. In a decentralized/distributed system, there are thousands of independent “verifiers of the truth”, also called “bitcoin miners” who validate transactions for the price of small transaction fees.

Beyond bitcoin, there are other types of cryptocurrencies called utility tokens that are the result of ICO’s (Initial Coin Offerings) which raise money with a particular purpose or intent. Wilson believes it is the utility tokens that will have the most meaningful impact on the world going forward. Some examples he noted were Iota (MIOTA) and Civic (CVC). Iota is controversial because the underlying technology of the blockchain is different from Bitcoin. The Iota token was created in an attempt to solve the problem of how machines connected to the internet communicate to one another. For example, your household appliances will eventually all have the functionality internet connection and Iota embarks on how these appliances can communicate to one another in one language. The Civic (CVC) token is another example that in intended to facilitate identity validation. For example, Civic sets out to validate the presence of someone who lives in a remote country that may not have a birth certificate let alone a bank account, but they potentially have an internet connection that can confirm identity and allow for a financial transaction to occur.

There was ample time left for questions and as expected, most questions were in regard to what we should expect for the future. Wilson said we will continue to see great institutionalization of not only Bitcoin but all utility tokens. Investors are finally coming to the realization that the blockchain technology is here to stay and can be beneficial to societies in meaningful ways. When asked if we’ll be handing in our greenbacks for electro crypto tokens, the answer was that we probably shouldn’t expect that anytime soon as they are “unlikely” to replace standard government-issued currencies. Further, we can expect greater regulatory overview going forward which may have initial negative price implications in the very near term but should be positive longer term to strengthen the element of trust in the market place. Greater regulation, further institutionalization, and a nice near-term pull back might be all I need to buy my first (or likely only partial) bitcoin.

How to Improve your Quarterly Investor Newsletters

Do you ever feel stressed out when it’s time to work on your investor newsletter or other client communications? Do you wonder if investors understand the key points and theses you want to drive home?  If you answered “yes” to one or both of these questions, you are not alone.

Read on to learn about techniques and tips that will tighten up your investor communications while giving you confidence and peace of mind.

Why versus How

Many of us are technical writers and are used to expressing large amounts of details that investors can use to help inform a buy or sell decision. In his second writing event offered by CFA Society Chicago, Scott Wentworth, Founder and Head Financial Writer of Wentworth Financial Communications, offered a new framework to use when creating investor communications. He encouraged us to always think of the “why” versus the “how”. Thinking about why you are putting out your letter or communications and using this as an opportunity to demonstrate your understanding of your investors and the markets can create a big win. What are the three key things we should focus on?

Three Focus Areas

One useful tip Scott offered was on engaging the reader by providing your conclusion first. This is different than the typical legal opinion approach of citing the facts first then following up with a conclusion.

There are three key areas to focus on when developing investor communications.

  • Telling a compelling story
  • Providing content that is easy to consume visually
  • Streamlining the process for creating investor communications

Final Tips for Stress-free Execution

During the question and answer session, we learned how to refine our communications. Below are some final tips.

  • Use questions to engage readers but be consistent with section headers. Make all the headers questions or not.
  • If you use infographics, make sure they help tell the story and are understandable.
  • Analogies are good but be consistent and don’t take them too far. They should be used to get attention and create branding.
  • Make your main thoughts actionable.
  • Keep it fresh. Look around the industry and garner ideas from communications you like.
  • Have a section highlighting a different perspective or a section you can change in each quarterly communication.

Finally, reading non-fiction and fiction can help you become a better writer.

Related Events: How CFA Charterholders Can Become Investment-Grade Writers





Distinguished Speaker Series: Jeremy Grantham, GMO


Few encapsulate the time-honored principles of value investing as Jeremy Grantham, co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo (GMO). On January 23, close to 400 attendees gathered at the Standard Club for CFA Society Chicago’s January Distinguished Speaker Series luncheon where Grantham gave CFA charterholders and guests alike the tools needed to spot bubbles before they burst, as well as some food for thought on the environment and renewable energy. Several hundred others watched the presentation via webcast.

“I put this talk together on Halloween which is very suitable for this topic,” Grantham said before going through some ways to determine if the market has reached a stage of irrational exuberance. He thinks that the market is racing towards a near term melt up. But first, Grantham wanted to talk about cryptocurrencies.

In a talk in 2017, he said that he expected Bitcoin to crash before the real crash of equities prices. Since then, Bitcoin has retreated from a high of nearly $20,000 down to just over $10,000, giving the first part of Grantham’s prediction some credibility. “I know nothing about Bitcoin, I just look at it as a historian would look at it,” admitted Grantham.

The question “Are we near a melt up?” kicked off Grantham’s presentation. The expression “melt up” is becoming a frequently searched term on Google, which is another sign Grantham identified as a possible sign of a bubble. The term refers to a sudden flow of cash that drives stock prices higher, often related more closely to momentum and sentiment than underlying market fundamentals. Melt ups tend to lead to their dreaded cousin, the meltdown, and are a key concern for allocators such as Grantham’s firm GMO.

Some other classic bubbles from history include the South Sea Stock bubble, the 1929 S&P 500 bubble and the Dotcom bubble of the late 90s. The 2007 housing bubble was “the best looking bubble I’ve seen,” said Grantham, admiring the chart’s perfect conical shape.

Comparing today’s price chart with prior bubbles gives Grantham some relief. Right now, the S&P 500 doesn’t resemble a classic bubble. Prices would need to accelerate by 60% in the final bull phase over 21 months for it to rank in the same league as some of history’s more noteworthy bubbles.

While markets appear to be frothy yet not quite a true bubble, it’s important to watch out for clues that can help identify a bubbly market. First we can look at the advance/decline ratio. As the ratio declines, that can be seen as an early warning sign for the broader market, with fewer stocks carrying the market higher.

Valuation is another clue investors often look at to determine if we’re in a bubble. Grantham agrees that markets are very expensive. Looking at a modified Shiller CAPE ratio, there was only one time in history where equities were this pricey. That year was 1929, and it led to a precipitous fall and the largest stock market decline in history. While expensive, looking at price-to-earnings ratios tells you very little about the likelihood and timing of a bubble bursting, opined Grantham. He gave the example of exploding PE ratios in 1990s Japan as one example where a very high ratio led to an even higher ratio.

So if looking at valuation doesn’t work for spotting bubbles, what does? Grantham said that using indicators of market participants’ euphoria is a much better route. Margin buying of equities and outperformance of quality stocks vs high beta stocks are a couple items to explore. The US housing market also is showing some signs of bubbliness. Nobody is talking about housing looking like a bubble right now but there are definitely some signs, according to Grantham.

One absolute requirement for a bursting bubble is a Republican Presidency, Grantham said, pointing to Hoover, Nixon and G.W. Bush as some Republicans who’ve presided over bursting bubbles. Grantham said that he believes that there is a greater than 50% chance of a melt up that would bring the S&P 500 to 3200 – 3800. If so, then he thinks that there will be a 90% probability of a meltdown from there.

Climate change and renewable energy was Grantham’s second topic. “The good news is that technology is accelerating along with the damage [being done to the environment],” said Grantham. Wind and solar power are quickly becoming cheaper than coal and nuclear power. Those developments are forcing investors to consider how they are positioning their portfolios in light of climate change. Alternative energy represents “the biggest transformation since the introduction of oil”.

Oil consumption is set to peak in 2020. With many shale companies remaining unprofitable, Grantham thinks that capital will flow towards renewable energy. His firm GMO has a climate change fund that offers opportunities in this space as do a number of other investment managers. “We live in a world where chemical poisons are deeply penetrating everything, “Grantham said, highlighting reduced sperm count among men, deep declines in flying insect populations and reduced grain production as some of the many troubling signs he sees with the environment today.

Right now GMO favors Emerging Markets and EAFE stocks over US stocks and has positioned its portfolio for foreign outperformance over the next few years. Capitalism has produced its benefits, but fails to account for the tragedy of the commons, with pollution, rampant use of fossil fuels and marketing of opioids still taking place despite the harm caused to human life.

Grantham’s talk was indeed as spooky as advertised, and gave attendees plenty to mull over while considering how to position their portfolios against the backdrop of high asset prices and troubling environmental issues.


Distinguished Speaker Series – Jeremy Grantham, GMO

Recorded January 23, 2018





Volunteer of the Month: February 2018


This month’s Volunteer of the Month is recognized for her efforts on both the Communications and Education Seminars Advisory Groups. Rida Iqbal is a Level III Candidate in the CFA Program. She holds a bachelor’s degree in applied accounting from Oxford Brooks University and is an analyst, consultant, and auditor for firms including Big 4 member Ernst & Young.

Rida is a longtime volunteer and contributor to the Education Advisory Group (EAG). She has served the advisory group by taking meeting minutes and offering assistance with several of the group’s programs. Most notably, she served as research assistant and helped with the Practitioner Demand Driven Academic Research Initiative (PDDARI). Rida also has a commitment to keeping CFA Society Chicago members informed by serving as an event reporter. She has written several articles for the CFA Society Chicago Blog.

Thank you Rida for everything that you do!

Vault Series: Philip Bartow, RiverNorth Capital Management


The new asset class of marketplace lending (MPL) was the topic of discussion at CFA Society Chicago’s Vault Series presentation on January 11, 2018. Presenting was Philip Bartow, lead portfolio manager for MPL at RiverNorth Capital Management. What was once a peer-to-peer market for consumer and small business loans has blossomed into a new institutional asset class totaling $27 billion as of 2016.  RiverNorth is a Chicago-based investment manager founded in 2000 with $3.8 billion under management. The firm specializes in opportunistic strategies with a focus on niche markets that offer opportunities to exploit valuation inefficiencies. Marketplace lending is the firm’s newest strategy.

The Environment for Marketplace Lending

Bartow began with a review of market and economic conditions that support the case for investing in MPL, starting with the interest rate environment. Although the Federal Reserve’s Open Market Committee forecasts three increases in short term rates in 2018, projections from the Fed Funds futures market are less aggressive. The market is saying “lower for longer” still rules the day. In addition, past increases in the Fed Funds rate have caused the yield curve to flatten, making shorter duration instruments relatively more attractive compared to longer investments.

Consumer financial health has improved greatly since the crisis of 2008-09. After a lengthy down trend, the unemployment rate has reached a level consistent with full employment, consumer sentiment gauges are at high levels and are moving in an upward trend. Growth rates of GDP and average hourly wages are finally showing some acceleration. Loan losses on consumer lending (residential mortgages and credit card loans) have fallen from crisis highs to, or below, long term averages.  In addition, corporate credit metrics are strong. Default rates on high yield bonds and leveraged loans have been running below long term averages for several years, and corporate earnings (based on the S&P 500 Index) are strong and expected to rise higher. The household debt service ratio, at just under 10%, sits at a 30 year low, and household debt/GDP at 80%, is at a level not seen since long before the last crisis. In short, the picture of economic fundamentals for both consumers and corporations is a rosy one. A slight rise in consumer delinquencies in 2016 is attributable to borrowers with low FICO scores, under 660 at origination.

The persistence of low interest rates, and the “risk-on” sentiment in financial markets, has pushed valuations to extreme levels. Credit spreads on high yield bonds sit more than a full standard deviation below average levels, and the VIX index of equity market volatility remains very low.

The Case for Marketplace Lending

At its essence, MPL loans involve the use of online platforms to provide secured lending to consumers and small businesses funded by institutional investors. Between borrower and lender sits an innovative loan originator that relies on technology to gather the data to support extending the original loan, servicing it, and monitoring the credit quality. There are 125-150 originators of loans but Lending Club, dating back to 2007, is the largest and most experienced in the market. Established “brick and mortar” banks are only just beginning to get involved.

Bartow began his case for investing in MPL by pointing out the huge spread between the average credit card loan (almost 21%) and the long term average yield in the bond market (measured by the Barclays Aggregate Bond Index) of 4.52%. MPL offer a potential benefit to both borrowers and investors inside this wide difference. The long term average coupon rate on MPL loans is just over 13%, while investors have earned an average of 8.13%.

Several characteristics of MPL loans are instrumental in providing better risk-adjusted returns going forward than direct consumer lending in the past.

  • In particular, originators focus on the higher end of the credit spectrum, lending only to borrowers with FICO scores of 640 to 850 (with an average of 705). This puts them in the higher end of the “near prime” category or better. Borrowers considered subprime and even prime are excluded.
  • In addition, MPL loans are always amortizing installment loans, in contrast to the typical credit card or consumer loan that comes in the form of a revolving credit line. MPL loans thus exhibit a constant rate of repayment, a predictable cash flow, and a lower duration, all of which reduce credit risk. In contrast, revolving credit loans don’t decline. In fact, they often increase ahead of a default as the borrowers tend to draw on their lines more as their financial health slips (slide 16).

An efficient frontier plot of the Orchard U.S. Consumer MPL Index covering January 2014 through September 2017 shows a superior risk-adjusted return versus a variety of relevant Barclays fixed income indices including the 1-3 Year Treasury Index, ABS Credit Card index, Aggregate Index, and High Yield Index, as well as the S&P 500 Index.

Bartow provided further information on the market for investing in MPL loans in general as well as some standards that RiverNorth follows. Although often compared to credit cards loans, MPL loans come in various types and are made to differing borrowers. The most common are consumer loans which are usually used to pay off or consolidate credit card debt. Originators may use a lower loan rate to induce borrowers to allow the originator to pay the credit card directly with the loan proceeds. Doing so has proved to lead to a better record of payment. Student loans and franchisee loans are other common types.

The secondary market for MPL loans is not a liquid one. Trades occur literally “by appointment” when originators announce dates in advance when they will bring supply to market. RiverNorth’s registered mutual fund that invests in MPL loans is an “interval fund”, meaning that it accepts new investments daily, but distributes withdrawals only quarterly, with a limit on the amount. Although many loans go into securitized products, RiverNorth prefers to invest in whole loans directly to improve gross returns. They also buy the entire balance of loans which gives them more control in the case of deteriorating credits or defaults. Loan originators, however, usually retain servicing rights on loans they sell.

Vault Series: Bob Greer, CoreCommodity Management LLC

The why and how of commodity investing–especially when considered as a core position in a well-balanced portfolio–was the topic of the latest CFA Society Chicago Vault Series event held on November 28th, 2017. The presenter was Bob Greer, Senior Advisor at CoreCommodity Management LLC, and Scholar in Residence at the JP Morgan Center for Commodities at the Denver School of Business of the University of Colorado.

Commodities as a Hedge Against Inflation

Greer began by presenting a ten year chart of the Bloomberg Commodity Spot Index (slide 2) which showed considerable swings from highs to lows, but not an impressive net average annual gain. However, for comparison he pointed to other periods when large cap stocks (measured by the S&P 500 Index) provided similarly bland returns—for example, the decades ending in 1974 and 2008 (slide 3). Rather, it’s when one looks at commodities in a portfolio reaching across asset classes that the benefits show up in diversification and the contribution to risk-adjusted returns. This has been especially true during periods of rising inflation when commodities have provided returns that vastly exceed those of bonds and global equities–and even beat natural resource equities by several hundred basis points (slide 4).  This performance, in turn, stems from the high correlation commodities have to inflation—especially unexpected inflation (slides 5 & 6). Unexpected inflation is the investor’s worst enemy in that it has been a major factor in extremely poor, highly correlated returns for both equities and fixed income. Conversely, periods of high unexpected inflation are precisely when commodities have been at their best. Because inflation has been low for a long time, unexpected inflation may have faded from investors’ memories, but Bob offered a list of reasons why that could change soon:

  • Slow growth in the supply of labor in developed countries, with demographic trends showing no sign of reversal, will eventually lead to wage inflation,
  • The rise of populists governments makes trade restrictions increasingly likely,
  • An infrastructure build-out will increase demand for commodities,
  • Large, and growing, government budget deficits are more likely to lead governments to choose a monetary solution (i.e., inflation).

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Commodities as a Diversifying Element

Besides performing as a good inflation hedge, commodities have also performed well as a diversifying element. Greer presented a chart (slide 8) of three year correlations between commodities, stocks, and bonds that showed, at least until the 2008 financial crisis, that pairing commodities with stocks and bonds, diversified as well as the more common stock/bond pairing. During the crisis, this benefit broke down as the unprecedented need for liquidity among all types of investors, raised correlations for many asset classes far beyond anything measured in the past.

Slide 8

Successful commodity investing calls for active management in Greer’s view.  He compared the returns of the Bloomberg indices of spot and futures commodity prices from 2001-17 (slide 9).  While both were volatile, the spot prices generated a cumulative return of about 150%, but the futures prices ended with a small negative cumulative return.  Because the price curve of most futures contracts exhibits a positive slope, rolling out of an expiring contract and extending into a new, longer contract, usually creates a loss. This “negative roll yield” causes the persistent return lag in commodity futures portfolios, and is a primary reason Bob advocates for an active strategy in commodity investing. Commodity futures are less subject to the forces of “irrational exuberance” because there is no limitation on the number of contracts that may trade, and futures prices must converge with cash market prices eventually. This makes analysis of commodity futures prices more effective than for other asset classes. Among the tools managers use to beat the index are:

  • Timing of the roll into new contracts
  • Curve positioning
  • Mis-weighting the constituents versus the index
  • Management of collateral away from passive T-Bills
  • Selective use of commodity equities in place of futures.

Slide 9


One metric managers use in applying these tools is a comparison of commodity prices relative to the underlying cost of production (slides 11-12). Over long periods, prices have averaged 30-35% above the cost of production but with significant variability (and including occasional periods of a discount relationship). This applies not only in the aggregate, but also among the various commodities within the Bloomberg Commodity Index. Recent data for the prices of the index members showed a range from a discount of 29% below the cost of production (for Kansas City Board of Trade Wheat) to a premium of 71% (for London Metals Exchange Zinc).

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Commodities as an Asset Class

After laying out his reasoning for including commodities in a well-diversified asset allocation model, Greer explained why the timing is good now for an initial investment into commodity futures. The basic reason? They are cheap relative to the more common asset classes (slide 13). Of the twenty-two constituents in the Bloomberg index, only zinc currently trades above 50% if its long term value. By comparison, stocks, bonds, and REITs are all currently above the 95% mark. Global demographic and economic developments indicate a long term rising trend in the demand for all manner of commodities.  World population continues to grow (slide 19), with a concentration in developing countries. Economic growth in these countries will engender an increasing demand for commodities broadly. This is already reflected in changing dietary habits in developing countries where the consumption of meat in all forms is increasing (while it declines in the U.S.). This has knock-on effects on the prices of grains needed to produce the meat (slides 20 & 21).  Growth in developing economies also increases demand for energy (mainly oil) and metals and industrial goods (to build out infrastructure). Graphs displaying the consumption of corn, wheat, copper, coffee, and oil all show persistent, long term rising trends (slide 22).

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Greer provided greater detail regarding the supply and demand for oil. The two most populous countries in the world, China and India consume significantly less energy per capita in the form of oil than developed, slow growing, Japan and the United States (slides 24-26). So, as their economies develop and grow faster than the developed world, China and India will drive global oil demand. Meanwhile the spare productive capacity of OPEC countries has been declining since 2009 (slide 27) and shale oil production in the U.S. is still a small contributor to global supply–just 5% (slide 28).  Thus the long term trend in global economic growth, driven by the developing world, argues for an allocation to commodities as a contributor to both returns and diversification in a well-balanced portfolio.

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Corporate Governance in an era of Clawbacks, ESG, Mega-Managers, and Zombie Investors

Two expert panels came together at the Conference Center at UBS Tower on November 29th to provide insights to various aspects of board related corporate governance. The first panel, moderated by Eileen Kamerick, focused on Management and Directors. Kamerick is a current and previous board member of several financial and industrial companies and is an adjunct professor. The panel included Thames Fulton, managing director at RSR Partners (executive recruiting); Frank Jaehnert, member of the board of directors of Briggs & Stratton, Itron, Inc., and Nordson Corporation; and Todd Henderson, professor of law at the University of Chicago Law School.

Kamerick started with a question about board diversity – should investors care about diversity? Henderson believes board diversity is a top issue and gave the following example of why boards lack diversity. When adding board members it is typical to get one or two women and / or a minority on a board, and then the board stops diversifying. Boards go through a ‘we are diversified enough’ type of thinking. Boards also suffer from a bias by what traits they look for in a new board member, which is usually for a former CEO or an operating exec type skill set. The pool of women or minorities coming from this group is already small, so the odds of getting a diverse board pick is reduced. The lack of diversity in the C-suite carries forward to the board. To combat the small pool of current/former women CEO’s corporate boards should look for a skill set other than a CEO, looking at other non-corporate entities such as universities, foundation/endowments or the private equity world. While the panel was in favor of board diversification, they were against legislation for mandatory board seats for women – legislation of behavior is not usually effective.

The panel then considered the topic of executive compensation, which is under the prevue of a corporate board. How should the board determine reasonable compensation? Jaehnert advised that the alignment of executive compensation with that of the shareholders is crucial, and that compensation should not be mandated but it should be provided in a defined and appropriate manner. Henderson considered that boards and investors spend too much time on CEO pay, because CEO’s are underpaid relative to revenues.

Kamerick asked the panelists to elaborate on how to set executive compensation. The panel advised that even if peer compensation or quasi government mandated compensation is used as a guide, the compensation committee is still responsible for setting executive compensation. However, most of these committees lack the training or background that is typically required. To obtain the appropriate skill set a board should have a current or former head of HR as a board member. In practice a board is more likely to rely on the job training, gathering executive compensation skills in a disjointed manner. One area that should be considered to obtain expertise on management compensation is the private equity world, which is better suited to choose compensation packages.

Kamerick brought up claw back policies – should they be used, are they effective. The panel as a whole was in favor of claw backs for a variety of instances including fraud, and for reputational damage as a result of executive actions. The panel advised a downside of claw backs; provisions of this sort would increase CEO pay. If a CEO understands that he/she will continue to be responsible for claims against them, the CEO will mitigate that by asking for more compensation. To combat this behavior the panel suggested using disgorgement of earnings, which would work better than claw backs.

The last topic the panel discussed was that of board services. An example why board services make sense was provided; when a corporation needs financial or legal help, the corporation hires a CPA or law firm to get the needed expertise. However, when a corporation needs governance (via a board) they hire individuals who do not have the collective depth of governance knowledge required. Hiring for board services should be allowed, but is illegal in Delaware (which exclude corporations) as well as in the Investment Company Act of 1940 (which exclude investment companies). An area in which there examples of professional boards could be found in the LLC space.

The panel provided some final thoughts based on audience questions;

  • If you have been on a board for a lengthy period of time, you are probably no longer independent.
  • Search firms are not favored by boards when looking for new board members. The board will seek out people they know or have had a history with.


The second panel focused on topics related to investors and asset managers. The moderator was Bob Browne, CFA, executive vice president and CIO at Northern Trust. The members of this panel included Gillian Glasspoole, CFA, senior associate of Thematic Investing for the Canada Pension Plan Investment Board; James Hamilton, CFA, director at BlackRock; and Kevin Ranney, director of product strategy and development at Sustainalytics.

Browne started with a question about analysis of a corporate board governance – is good or bad governance worthy of investor analysis? Hamilton advised that as an investor engagement of a board is process oriented, meeting with the board as well as senior management. It is through these meetings where one can get a sense of if the board is adding value. Depending on the size of the corporation, some education of the board regarding governance can occur. Larger cap companies have ESG processes in place, whereas the middle and small cap corporations are more open to having institutional investors provide guidance on ESG good practices.

Browne then asked the panel to consider difference between corporate governance in Europe versus the United States. Europe is more tuned in to ESG and looks to meet or exceed international standards. In Europe board diversity and executive compensation are linked to ESG targets. From the asset owner perspective Europeans are more inclined to think about ESG and have specific goals to address them. However, Europeans do not try to link alpha to ESG as much as it is done in the United States and Europe considers ESG value unto itself, without the need to have a positive correlation to alpha.

Another cultural board difference between Europe and the United States is the holding of CEO and chairman role by the same person (common in the United States, frowned upon in Europe). Hamilton considered that holding the CEO and chairman position is an acceptable practice, but other strong independent voices are needed in the boardroom to offset that dynamic.

The panel closed the program with a discussion regarding board transparency. How does an investor know if a board is doing the job they were hired for, and they are acting in the best interest of stakeholders? The panel noted in practice it is hard to determine if a board is engaged, but there are ways to get an overall idea. Do all the board members go to all committee meetings, do they have onsite visits to offices other than the headquarters? Learn to ask the correct questions and then you will uncover issues that will impact the value of the company.

Volunteer of the Month: December 2017


Amir Moaiery, CFA

CFA Society Chicago would like to recognize Amir Moaiery, CFA, for his contributions with the Society’s Industry Roundtables event and the Job Seekers Forum. Today, Amir Moaiery is the Professional Development Advisory Group’s Volunteer of the Month.

Amir has been a CFA Society Chicago member for more than two years and joined the advisory group in July 2017. He worked with a small group of volunteers that planned the Society’s Industry Roundtablesa member-only event where table hosts discuss their respective sectors in the investment industry. Amir has also been involved in ensuring facilitators of the Job Seekers Forum are prepared to lead discussions by updating the Job Seekers Facilitator Guide with current tips and best practices.

Thank you Amir! We’re lucky to have you as a part of our society!


Distinguished Speaker Series: Myron Scholes, Ph. D., Janus Henderson Investors

Nobel Laureate and co-originator of the Black-Scholes options pricing model Myron Scholes, Ph. D., gave a crash course to a sold-out crowd on utilizing risk management over stock selection at the Palmer House Hilton on November 17th. Over 250 CFA Society Chicago members and finance professionals braved a dreary day to learn how options might be used as a predictor of market prices.

Scholes maintains that as investors pursue compound returns, tracking error and portfolio mandates constrain managers to stay close to the benchmark. Management of portfolios is left to asset allocators and active managers will hug the benchmark in times of risk. Relative performance constraints or not deviating from the benchmark is an implicit cost. The take away is that average returns produce average performance.

When looking at bell curve distributions, Scholes suggests focusing on the gains and losses in the tails to manage risk and not paying attention to the averages or the “stuff in the middle”. Every performance period matters and as time compresses, risk increases with compound returns being asymmetric. Letting risk fluctuate around an average can reduce returns. He also opined that with time diversification and cross-sectional diversification being free, time diversification is more important.

So, given all of this, how do we get measures of risk?  This is where options markets come in to provide risk prices. Per Scholes, people ignore valuable options information when they are constrained. As Scholes expanded on this theme, the audience learned about the fallacies of some of our industry’s well-known and highly utilized risk measures. For example, our much loved and used Sharpe ratio does not fit in with this thought process because it is a mean variance measure. The closely watched Chicago Board Options Exchange Volatility Index (VIX) gives correlations that are in the center of the distribution. Knowing the limitations of traditional risk measures, how can investors use option information? Back tested options information should be used to see the risk distribution allowing reallocation and management of risk in a portfolio.

The presentation concluded with a question and answer session. Attendees were clearly thirsty for information about this methodology from this industry icon and were interested in comparing it to momentum investing and other popular valuation methodologies.

CFA Society Chicago 31st Annual Dinner

The Chicago Cubs didn’t win the World Series like they did during last year’s Annual Dinner but the 31st CFA Society Chicago Annual Dinner was yet another terrific evening honoring 163 new CFA charterholders and two recipients for the Hortense Friedman, CFA, Award for Excellence. We also had fantastic keynote speaker, David Rubenstein, founder of The Carlyle Group.

During the evening, our newest charterholders were acknowledged for making substantial investments in their careers by passing all three levels of the CFA exam as well as completing the four years of relevant work experience required.  Earning the CFA designation requires a significant investment of time, energy, and tenacity demanding for most nearly 1,000 hours of study.  The new charterholders are joining an exclusive club of investment professionals that possess both a high level of investment aptitude and a commitment to uphold the highest ethical standards.

Congratulations to all the new charterholders!

CFA Society Chicago Chairman Marie Winters, CFA

On behalf of the Society, congratulations to all those who met the rigorous requirements to become a CFA charterholder. After acknowledging the new charterholders, two individuals were honored for the Hortense Friedman, CFA, Award for Excellence.  This award is presented annually to individuals who have demonstrated initiative, leadership, and a commitment to professional excellence.

Larry Lonis, CFA, and Marie Winters, CFA

Larry Lonis, CFA

The first award recipient was Larry Lonis, CFA, who has worked in the industry since 1989, first for JP Morgan and more recently for Bank of America’s US Trust wealth management group where he served as the lead portfolio manager for a REIT equity strategy. Currently, he serves as the COO for the specialty asset management unit specializing in direct investments in oil and gas, farm, commercial real estate, timber, and private business assets.  In Larry’s speech, he was most thankful for being able to have a career where he is paid to learn every day as well as work alongside the incredibly bright people that he has had the opportunity to work.  As his father would always remind him, the most valuable asset each of us own is our name, which we must uphold to the highest standard along with the industry and the CFA designation.

Robert Harper’s son, Blake Harper, accepts the award on his behalf.

The second award went to Robert Harper, CFA, (posthumous) who grew up on the north side of Chicago, attended the University of Illinois where he studied Finance, and earned his MBA from Northwestern University.  He started his career at Stein Roe & Farnham where he became a senior analyst and Partner.  He later spent 22 years at Harris Associates, where he was the first director of research and the first institutional portfolio manager.  Mr. Harper was known for his contrarian views and was actively involved with the Investment Analysts Society of Chicago, known today as the CFA Society Chicago.

As the Friedman awards concluded, David Rubenstein took the stage and captivated the audience with a collection of videos of himself, including commercials, one in which he was running a young girls lemonade stand in which he suggesting bringing in LP’s and taking the company public or an outright sale through an LBO, in another video he was out-lifting bodybuilders in the weight room and another, showcasing his rapping ability while promoting his firm, The Carlyle Group.  After several laughs, Mr. Rubenstein talked about how he started his private equity firm, The Carlyle Group, which led to a review of how his success at Carlyle lead him to contribute philanthropically to our society, and finally a list of predictions for the economy over the next 12-18 months.

Rubenstein grew up in Baltimore, the son of a blue collar Jewish family whose father worked at the post office and never made more than $7,000/year.  In hindsight, it was a great advantage to have the unconditional love of two parents that didn’t have a lot of wealth – you know you’re going to have to do something on your own to create your own success.  Rubenstein attended Duke, where his initial calling was into politics after being captivated by John F. Kennedy’s first inaugural address given on January 20th, 1961.  This is the speech when JFK famously said, “Ask not what your country can do for you, but what you can do for your country.”  Continuing with his passion for politics, Rubenstein subsequently pursued law school at the University of Chicago where he graduated from in 1973.  After law school, he went to work for the man who wrote JFK’s speech, Ted Sorensen, who saw Rubenstein was interested in politics, but that he didn’t have the skills to be a terrific lawyer.  From there, he worked as chief council for Birch Bayh, a former US Senator from Indiana, who dropped out of a political race 30 days after David joined leaving him without a job.  Rubenstein then found a job working for Jimmy Carter at a time when Carter was a 33 point favorite to beat our Gerald Ford.  President Carter later won by only one point.  One of Rubenstein’s jobs while working for President Carter was to fight inflation, and if you remember back to this time inflation rose as high as 19%!  Quite the contrast from several economists today more worried about about deflation in today’s environment.  President Carter later ran against a much older Ronald Reagan and lost, putting Rubenstein yet again out of a job.  Without your party in power in Washington, it’s safe to say it’s very hard to find a job.  “If you want a friend in Washington, go buy a dog.”

Reconsidering his path in politics, Rubenstein read a blurb in the newspaper that changed his life.  The article highlighted Bill Simon whom started an investment firm which performed a “leveraged buyout” in which it bought Gibson’s Greeting Cards from RCA for $1 million and made $80mm in two-and a half year period.  He had the ambition and entrepreneurial spirit to start the first private equity firm in Washington DC and recruited the CFO of MCI and an executive from Marriott to be his partners.  They named their firm “The Carlyle Group” after a hotel in New York, for which ironically none of them had ever stayed.  The first four investors in their fund collectively contributed $5 million, or $1.25 million each.  The first deal was Chi Chi’s, a fast food Mexican food company that was looking to go private after being a public company.  The investment turned out successfully and today Carlyle Group has grown to one of the largest private equity firms in the world.  Rubenstein attributes the tremendous success to the creation of numerous styles of funds: a small buyout fund, a growth fund, a mezzanine fund, a debt fund, an institutional fund, and last but not least a family of funds among others.  He and his partners then took this idea of a multi-faceted fund structure and globalized it.

At 54 years old, Rubenstein came across a second newspaper article that also had a significant impact on his life.  This time it was an article of the wealthiest men in the world according to Forbes magazine, where he was featured for creating a very large fortune.  After living two-thirds of his actuarial life, Rubenstein signed a pledge to give away nearly all of his net worth—donating his fortune to educational institutions, medical research firms, and volunteering his time by serving as Chairman of Kennedy Center, Lincoln Center, and The Smithsonian.  A few years later, a THIRD article changed his life, this time coming in the form of an advertisement.  Flying home from London to New York, he read an invitation that an official copy of the Magna Carta was being auctioned off, of which there are currently 17 copies of around the world.  Ross Perot had bought one in 1981 and had since decided to sell it.  Rubenstein prevailed in the auction and has now donated it to the United States National Archives.  He continued purchasing historical documents that had significant to our country’s founding including the Declaration of Independence, the Emancipation Proclamation, the Thirteenth Amendment of the Constitution, rare copies of the constitution, and the first map of the United States.  After acquiring these meaningful documents, he has put them in places where Americans can see them so Americans can be inspired to learn more about the history of our country.

Rubenstein left us with quick yet informative bullets on his forecast for the economy and private equity industry:

  1. We are not going to have a recession anytime soon.  We are likely to have the longest growth cycle in the post WWII era
  2. New Fed Chair Jerome Powell will continue the Federal Reserve’s rate increase trajectory. Expect a 25bps rate increase in December
  3. US unemployment rate will hold steady and we will stay near full employment for the near-medium term
  4. Core inflation will stay below 1.5%
  5. NAFTA will be renegotiated but we will not withdraw
  6. We will have a tax cut bill.  Corp tax rate will go to 20%.  AMT / Estate tax will go away and repatriation will occur.  401k, SALT taxes will be preserved.  Expect tax cuts to pass early next year
  7. US Dollar will strengthen as the US economy continues to strengthen
  8. Europe will grow GDP nearer 2%; China will slow down to 5.5% – 6%
  9. Middle East conflicts won’t get resolved anytime soon.  Expect us to still be in Afghanistan 5-10 years from now
  10. Don’t expect a military confrontation North Korea
  11. Brexit will occur, however it won’t unduly kill the British economy
  12. Global climate change regulation will stay in place and actually will be enhanced
  13. Cyber warfare will continue to be the most important issue, and threat, to our country today
  14. Life expectancy will continue to rise globally as emerging markets catch up to developed world
  15. Private equity returns will drift down, but still beat index returns; United States private equity will outperform globally
  16. Sovereign wealth funds will continue to be increasingly important to the industry
  17. Government will allow retail investors to invest in private equity
  18. The largest private equity firms will continue to increase market share and grow globally

Concluding on Rubenstein’s philanthropic effort, he left us with “If you can make your mother proud, that’s where you’ll find real happiness is in life.”  For all the great deals that Carlyle had done and even after going public, he never received a congratulatory call from his mother.  He did however receive a call every time he donated his money and time to a worthy cause.  Even though many of us in the room won’t have the wealth that Rubenstein has created, you can still dedicate your time and skills to help make the world a better place.  Go out there and “Do something that will make your mother proud!”









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