Storytelling: A Critical Brand Building Skill for Leaders

CFA Society Chicago hosted a storytelling event on May 14th at the Global Conference Center. The purpose of this program was to help society members claim their value using stories as a tool to highlight leadership and communication skills. Storytelling is a big part of personal branding. So, how can it help us and how do we tell a good story while remaining authentic? Daniella Levitt, president of Ovation Global Strategies and Executive Director of Leading Women Executives, engaged our right side of the brain and helped us become more comfortable talking about ourselves and the unique value proposition we bring to the table.

Storytelling shapes how others see us and embodies what we have learned about ourselves as leaders, but telling your own story can be uncomfortable. However, learning and practicing this does reap benefits because stories are 22x more effective than just rattling off a list of accomplishments. A story is a tool of authentic leadership. We started by creating the framework for our leadership stories and exploring the idea of leaders as teachers with a unique teachable point of view (TPOV). 

A TPOV includes the following attributes:

  1. In context of your role as a leader in your organization
  2. In context of your leadership identity.
  3. A direct tie-in with your leadership story and your persona brand.

Elements of this also include ideas, values, emotional energy and edge.  It should reflect how we take risks and make decisions. 

To create our TPOVs, we can create a chart mapping our leadership story placing events on the Y-axis and time on the X-axis. Organizing high events in our lives and careers above a horizontal dotted line and low events below will help uncover insights from our leadership stories. We will be able to answer questions such as: Am I a risk taker? Did my low points bring clarity and help facilitate change? These discoveries will become our TPOV.   

Levitt emphasized that developing this is an iterative process requiring reflection and feedback.  We should also develop a plan that encompasses the most important milestones we can think of and identify a small group of people who can help us move forward with the most critical aspects of our plans. 

We worked in groups at our tables on illustrating our own TPOV and the stories that would bring them to life. Levitt recommended we meet our fellow attendees again for coffee to practice and communicate our next iteration.

Levitt closed the event by providing a checklist for a good story:

  1. Know your theme and punchline.
  2. Draw from what you know.
  3. Simplicity works best.
  4. Adjust chronology as required.
  5. Make your audience care.
  6. Be passionate and value a dash of mystery, unpredictability and drama.

Hopefully with a TPOV and personal story, we will all feel better prepared the next time someone says “Tell me a little bit about yourself”. 

Karyl Innis: Building a Distinguished Career through Personal Branding

The CFA Society Chicago Women’s Network hosted the third event of its four-part Alan Meder Empowerment Series on March 15th at The University Club. The series is intended to support career development and the advancement of women in the investment management profession. This event also attracted a number of men who were interested in the universal topic of Personal Branding.

In today’s workplace how you articulate your value proposition to the organization can make or break your career possibilities. Advocating for yourself, articulating your value and utilizing your branding statement as a part of your personal development strategy are all crucial to long term career success.  Your future at work is tied to who you think you are, as well as who your customers, clients, partners and prospects think you are.

This interactive session was led by Karyl Innis who knows why successful people succeed and, when they don’t, how to help them. She is a career expert, CEO and founder of The Innis Company, a global career management firm, and one of the most successful woman-owned businesses in the country.

Innis took the podium and quickly asked the audience “What do you think of me?” Write down one word that answers that question.  She then asked us to contemplate “what does that word mean to you?” and “what about me made you think that?” She then noted that we’d return to this topic later.

Innis went on to share that how you talk about yourself and how you let others talk about you is a career accelerator or killer! She next asked “how many of you have a brand?” By show of hands, about half the room indicated they have a brand and the other half felt that they didn’t.

Lesson #1: Everyone has a personal brand!  You may or may not know what it is; you may think you know, or you may think it is one thing while others think it’s something else.  You may like the brand people bandy about when they speak of you, or you may want to change it.  Why does personal brand matter?  Because people make decisions based on what they think they know about you. The more you/others hear what your “brand” is, the more it becomes truth and reality. Your brand is other people’s perception of you – rightly or wrongly.  That’s why it’s so important for you to be in charge of your narrative!

Take Oprah for example, she has a personal brand.  She has a lot of other stuff too – television networks, property, copyrights, licenses, and that very valuable personal brand of hers.  Some say the value of that personal brand is worth a tidy 2.4 billion dollars. So what do you get for that $2.4 billion?  Nothing – her brand belongs to her and your brand belongs to you. Oprah’s brand solidifies her reputation, transmits what matters to her, and creates future opportunities for her. Her brand does that for her and your brand can do that for you!

Lesson #2: Brand messaging and brand are different. Brand messaging = Look, Act, Sound, Say. Your brand is how people think and feel about you – it’s a combination of a thought and a feeling. Brand is the place YOU occupy in the decision maker’s mind relative to all others. It’s similar to the place a product occupies in your mind. 

Consider three pairs of leopard shoes: one from Target; one from Nine West; one from Jimmy Choo.  You have a different perception of each shoe based on various factors such as durability, price, styling, etc. Based on these factors you position and differentiate the shoes in your mind and have reasoning for why you would choose one over the other. There is a premium brand, a middle of the road brand, and a low-end brand.   This same positioning and differentiating translates to human capital hiring – are you worth the money? You want to be the premium brand!

Lesson #3: We tend to position ourselves as average. We talk about ourselves with average words, yet we want more pay and more responsibility! We should be using premium words to describe ourselves and our capabilities.  There are A, B, and C levels of words to describe your brand. People frequently use “competent” to describe themselves, when in fact this is a C-level adjective with broad interpretation (having the necessary ability, knowledge, or skill to do something successfully – capable, able, adept, qualified). The elevated or “A” version of this adjective is expert or executive.  Use A-level words to describe yourself and your competencies. How valuable is your personal brand? The more premium you are, the more you can command!

Start creating your brand by selecting three premium words which convey what you want your leader, hiring manager, or others to think of you. 

“A” Words                                                           “C” Words

Expert                                                                   Competent

Authority                                                             Skilled

Strategist                                                             Doer

Master                                                                 Reliable

Visionary                                                             Action-Oriented

Talent Scout

Champion

Guru

Futurist

Leader

Brand makes a difference – you will be hired for what you know and how you’ve applied it:

  • Oil and gas banker – an executive that fixes broken businesses
  • Client service advocate (voice of the client) – leader for everyone
  • Hard worker – powerful leader of people and teams

Lesson #4: Have what it takes to create an initial impression. Brand also has to do with how you look and how you deliver your message.  Initial impressions are key and based on the following: 55% visual; 38% vocal; 7% verbal (this goes up to 22% if you’re talking on a continuum). Everything from the tilt of your head, shoulder positioning, hand and leg placement, clothing, and smile factor in to how you are perceived by others. 

This takes us back to the start of Innis’ presentation when she asked the audience to write down one word describing her, before she had even delved into her presentation. This word was our first impression of her. Since she had barely spoken people’s perceptions of her were largely visual, as findings show.

Creating Your Personal Brand

Like those of us in the audience, you may be wondering how get an accurate assessment of your current brand. Innis suggests gathering performance reviews, email compliments, bio’s, casual notes, etc.  Additionally, interview at least five people, asking them all the same questions, clarifying with them what you thought they were telling you and recording their answers. The takeaways from these various sources will help you gain insight into others’ perceptions of your brand.

In the world of work, you will be talked about. People will describe you as they introduce, evaluate and sponsor you by using a succinct description attached to your name. It’s important that you control the brand attached to you and that it be one that accelerates your career and not one that stalls it. It takes about 18 months for a rebrand to take root, so write yours today!  If you desire Karyl’s help in crafting your brand, she can be reached at info@inniscompany.com

To learn more about career development and advancement, read about the previous events of the series – “Taking Control of Your Career” and “Tips and Tricks for Negotiating for Yourself” on the CFA Society Chicago blog.

Distinguished Speaker Series: Sheila Penrose, Jones Lang LaSalle

On April 9th, CFA Society Chicago’s Distinguished Speaker Series Advisory Group welcomed Sheila Penrose at The Metropolitan. Penrose is Non-Executive Lead Independent Chairman of the Board at Jones Lang LaSalle, a global real estate services company, and also serves on the Board of Directors for McDonald’s. Penrose retired from Northern Trust in 2000. In her 23 years at Northern Trust, she served as President of Corporate and Institutional Services and as a member of the Management Committee, where she was the first woman to serve. Subsequently, she served as an Executive Advisor to The Boston Consulting Group from 2001 to 2007. She has been on the boards of Entrust Datacard Group, eFunds Corporation, and Nalco Chemical Corp. She has also served on the advisory board of the Gender Parity initiative of the World Economic Forum, the board of the Chicago Council on Global Affairs, and as a founding member of the US 30% Club, a group whose initiative is to achieve female representation of at least 30% on corporate boards.

After detailing some of her credentials and experience, Penrose highlighted three topics she wanted to explore:

  1. What issues are boards of directors discussing the most?
  2. How are boards of directors handling the evolution of the business environment?
  3. How do a group of highly ambitious, competitive and capable people, all of whom are used to leading others, form a functioning team that can effectively oversee a company?

She emphasized that in each topic, boards are fiduciaries for both shareholders and stakeholders, and need to understand how to balance the needs of both groups. She also emphasized that individual board members should be listening and learning all the time, while contributing and remaining objective.

Penrose expounded upon the recent transformation of the business environment as it relates to the board of directors.  Recently, boards have become less dominated by the executive. The CEO/Chairman dual role that was so common in previous years is now no longer as accepted as it once was. This was spurred by Sarbanes-Oxley, but also investors and employees who now have more of a voice shareholder activism has increased. Digital disruption has also been a major category for boards to tackle, and relatedly, managing corporate reputation in an age of social media, where all voices have access to the public. Diversity on boards, and not just different kinds of people, but different viewpoints, has also been an important topic. Boards have been seeking to find people who have different types of experience and different types of expertise, as opposed to finding a group of CEOs for the board. Boards need to develop consensus, not groupthink. She brought up the dilemma of cybersecurity. Boards must wrestle with the questions of how much cybersecurity is enough and how quickly the company can react in the event of a breach. Boards must also consider the impact of global events, as almost all large corporations are now global in reach. Lastly, and importantly, she discussed the issue of talent and corporate culture. Boards must grapple with the future of work and the changes in expectations of their employees. Companies assume they will be able to find the skills they need in the labor market, but they are not doing much to develop those skills in employees and not moving quickly enough to develop people whose jobs might be redundant in the future.

Boards also have to understand how best to find directors. With the changing business environment, new skills are often necessary, and boards have begun looking for people who have those skills, such as digital experience, to help them stay current.

The composition of the board, its dynamic, and its leadership are all critically important. The board should be “collegial but not clubby”, and board decisions should be made in the room, not in private meetings.  Board members should maintain a healthy balance of both listening and contributing.

Individual board members should have what Penrose called “The Four Cs.”

  • Curiosity
  • Conviction
  • Courage
  • Compassion

During the Q&A portion of the event, Penrose described how she believes someone can become a member of a board of directors. She said the individual must have a good reason for why they want to join a board, should be strongly curious and constantly learning, should have experience trying to manage a business on some level, and should be wary of joining a board too quickly. Joining a board too quickly usually means that board is likely of lower quality, and the first board you join dictates one’s future opportunities.

The Equity Risk Premium: Applications for Investment Decision-Making

Professor Aswath Damodaran’s opening remarks at CFA Society Chicago’s Equity Risk Premium event on April 2, 2019 at the W Chicago City Center.

Aswath Damodaran, Kerschner Family Chair in Finance Education and a Professor of Finance at New York University Stern School of Business, is well known for his books and articles in the fields of valuation, corporate finance, and investment management, philosophies, and strategies. On April 2, he treated the CFA Society Chicago to a tour de force through the foundations of risk premia, the macroeconomic determinants of equity risk, and how the risk premium can me misused.

Damodaran’s talk was followed by a panel which included himself, Michele Gambera, co-head of Strategic Asset Allocation Modeling at UBS Asset Management, and Bryant Matthews, global director research at HOLT. The panel discussion was moderated by Patricia Halper, CFA, co-chief investment officer at Chicago Equity Partners.

Damodaran pointed out that while the risk-premium is referred to as one number, it contains several various risk factors, such as political and economic risks, information opacity, and liquidity risks. Despite the underlying complexity, a common way to derive the risk premium is from the average volatility of some historical period. This, Damodaran warns, is a dangerous approach. By using historical data you can derive any risk premium you want by using the time horizon of your choosing. When you look at historical averages, you are also searching for a number that nobody has ever experienced. And even if they did, you should not believe that history will simply repeat itself. And even if history did repeat itself, you are still estimating a number with large error margins. In the end, the exercise is just not useful.

Damodaran has done a lot of work determining equity risk premia for different countries and makes his data available on his homepage. His approach is to derive an implied risk premium based on consensus forecasts of earnings and adding country risk premia for different countries. He cautions that there is no pure national premium thanks to our integrated world. Much of S&P earnings, for instance, are derived from abroad, and this must be taken into account.

For a person who has devoted so much time to estimating risk premia, it may come as a surprise that Damodaran thinks people should spend less time on it. His approach is that once you observe the market-implied risk premium, you should use this in your valuation model and devote your attention to estimating cash-flows. Right now, too many people are wasting too much time on valuing companies through finding the perfect risk-premia when cash-flows are ultimately going to determine whether they will get valuations right. Academic finance is another culprit here, which spends too much research time on discount rates.

Ask yourself this, are you working on your model’s risk premia because that is where you have superior knowledge, or because it is your comfort zone?

Damodaran is also critical of the use of the price-to-earnings ratio to assess valuation, since it looks at earnings only for the current period. In the US market the ratio may look high, but the pictures very different for current implied risk premia. Since 2008, risk-free rates have come down while expected stock returns have remained roughly the same. This actually implies a higher risk premium.

 Michele Gambera shares Damodaran’s criticism of historically derived risk premia. He also pointed out that while the risk premium fluctuates a lot, we pretend in our models that it is constant. In effect, Gambera stressed, we are estimating a random-walk variable. A better approach for your valuations is to use a forward-looking covariance matrix with various factor loadings.

Should we therefore throw the historical data out the window? When asked the question, Bryant Matthews of HOLT pointed out that historical data are not all useless in a world where variables tend to mean-revert. But you may need to wait a long time for it to happen.

Is there a small-cap premium? Damodaran pointed out that if you estimate the historical premium since 1981, it is negative, which is clearly fictional. However, Matthews estimated a small cap premium of 0.6%, albeit with a standard error that makes it statistically zero. By slicing the equity market in other ways, he estimates that value stocks tend to have a 3.5% equity premium over growth stocks, while Fama and French’s quality stocks-factor enjoys a 2.1% premium over non-quality stocks.

Matthews has also calculated market implied risk premia for over 70 countries, and found it rising in the US from 0% in 2000 to 4% today. Such estimates, he pointed out, are often counterintuitive for clients. Surely, equities were riskier in 2000 when valuations were high. But precisely because valuations were so high, the implied risk premium, which was part of the discount rate, was low.

Can we make money by investing in high-risk premium stocks? After all, theory tells us returns are the reward for taking risk. Yet as Gambera pointed out, high-volatility stocks tend to be favored by investors in part as a way to leverage up according to the CAPM-models, as is done for instance in risk-parity models. At the same time, pointed out Matthews, low-volatility stocks are generally also high-quality stocks and therefore tend to have high return, despite their historically low risk.

Matthews argued that while profits are high for the US market as a whole, this really applies to only 100 companies. This concentration, he suggested, is due to lax regulations. Damodaran, however, suggested that antitrust measures cannot be relied on to change this fact. They may have been politically attractive in the time of Standard Oil, when that company’s dominated position allowed it to raise prices. The dominant firms of today are offering consumers very low prices. Break them apart and any politician will be met with discontent from voters.

Let us end with some historical perspective from Michele Gambera. Much of the early work on risk premia was made at a time of a very different market structure of industrialized countries. Steel and railroads ruled the day and many of today’s giants were not listed. The likes of Alphabet and Facebook pose new challenges in estimating risk premia. This suggests that now more than ever historical data will be misleading in estimating the risk premium, a modest number that means so much.

Present Like a Pro

In the third installment of a continuing series on communication, Scott Wentworth addressed members of CFA Society Chicago on how to make good business presentations on April 4th.  The capacity crowd of 90 in the Vault at 33 North LaSalle Street spoke to the popularity of the topic as well as the value of Wentworth’s previous two appearances before our society.  Wentworth founded Wentworth Financial Communications in 2015 to help financial businesses (especially investment managers) demonstrate their expertise through various forms of marketing content, including white papers, blogs, and newsletters. Prior to founding the company, he served as the head marketing writer at William Blair & Company. In his previous appearances with CFA Society Chicago (2017 and 2018), Wentworth addressed business writing, the primary focus of his company. This time, he spoke on oral communication, specifically how to make effective presentations.

Wentworth began by demonstrating (without announcing) several common presentation mistakes such as reading from a script, employing busy or confusing graphics, and relying on undependable technology. His point made, he quickly moved on to a very effective presentation embedding his recommendations within it. He pointed out that presenting is not the same as public speaking. A good presenter does not need to have a commanding presence or an abundance of charisma. Of greater importance is identifying and concentrating on one main idea, and then making a compelling case supporting it to the audience. Successful presenting requires skills that can be learned such as clarity, persuasion, concision, and good preparation.

Wentworth then went on to describe in detail his five tactics for a good presentation. First is identifying the goal of a presentation. He gave as examples motivating the audience to action, changing minds, correcting a misconception, or simply gathering information back from the audience. 

With the goal set, the second tactic is to analyze the audience. Is it hostile or supportive?  Uninterested or engaged? Uninformed or well-informed? This may be a difficult step if the presenter has limited information, but may be inferred from factors such as the type, purpose or setting of the presentation. It is important because it will direct the tone of the presentation.  To address a hostile audience, the presenter should emphasize areas of agreement first and seek out areas the audience would view as “win-win”. Whereas, with a supportive audience the presenter should reinforce their enthusiasm and provide an action plan or tools that lead to tangible benefits.

Wentworth described his third tactic as crafting your story arc. He admitted this is the most difficult aspect of a presentation because it is an art, not a science. It begins with identifying the one main idea he mentioned at the outset. This idea should be boiled down to as few words as possible and repeated throughout the presentation to drive it home.  In must be articulated early in the presentation to allow for this repetition, and also to protect against the risk of running out of time. Other features of the story arc include:

  • Using empathy to demonstrate that the presenter understands the audience’s situation and can help.
  • Focusing on the benefits offered rather than features (a common trap for investment managers who often focus on a product’s defining characteristics or performance).
  • Highlighting differentiating factors
  • Making things tangible.  Avoid abstract ideas, or if they’re necessary, convert them to a more tangible concept via examples or anecdotes.

The fourth tactic is creating effective visual aids. This can lead to another common error of presenters: considering the slide deck to be the presentation. Wentworth says it is not.  Rather, slides are a visual aid, just part of the presentation along with the equally-important delivery, the message or theme, and the interaction with the audience. He followed-up with a list of Do’s and Don’ts for slides.

Slides should

  • Reinforce the main idea,
  • Illustrate statistics or relationships,
  • Explain complex ideas, and
  • Keep the audience engaged. 

Slides should not

  • Outline the full presentation (they are just an aid),
  • Serve as a teleprompter, nor
  • Be distractive (too busy). 

As an aside, Wentworth recommended that the slides a presenter uses be pared down as much as possible with the bulk of the information conveyed by the presenter directly.  He recommended to having a more detailed deck as a “leave behind” for the audience.

The final recommended tactic is to practice with purpose for which Wentworth had several helpful hints:

  1. Do a dry run alone to learn the material and time the presentation
  2. Repeat with a reviewer (e.g., a co-presenter, team member, or even a spouse)
  3. Prepare for a failure of technology and have a plan B in case of a breakdown
  4. Don’t memorize lines. You’re likely to forget them which increases tension and nervousness.

Wentworth concluded his presentation, not by asking for questions, but rather asking the audience to provide examples of roadblocks or challenges they had faced in making presentations. Many offered up cases which proved to be good illustrations of how to apply the five tactics he had outlined. The discussion naturally led into a robust series of questions that extended for over half an hour. The level of audience engagement proved that Wentworth had both talked the talk, and walked the walk in demonstrating how to make a good presentation.

Past Wentworth Financial Communications Events:

CFA Society Chicago Book Club:

GDP: A Brief but Affectionate History by Diane Coyle

Don’t confuse familiarity with understanding. That’s perhaps the biggest takeaway from Diane Coyle’s short and highly readable GDP: A Brief but Affectionate History. The official guidance for calculating GDP, the System of National Accounts (SNA), published by the United Nations runs 722 pages. That combined with the difficulties of executing the actual calculation makes one wonder how many people, even ostensible experts, really understand the quarterly numbers. In addition to the intricacies of defining and calculating GDP, Ms. Coyle takes the reader through the short yet turbulent history of the metric, its uses and mis-uses, and several possible improvements and alternatives. The CFA Society Chicago Book Club members who met to discuss the book at their March 2019 meeting agreed that the book left the reader with more questions than answers, which is perhaps one of the marks of a good book.

As for GDP’s short yet turbulent history, Ms. Coyle traces the origins of the modern metric to Colin Clark and his pioneering work at the United Kingdom’s National Economic Advisory Council, an organization based on the then-novel concept of providing economic advice to governments to combat problems, the most notable problem at that time being the Great Depression. On the other side of the pond, the famed U.S. economist Simon Kuznets applied Clark’s concepts to the U.S. economy at the National Bureau of Economic Research, work for which he was later awarded the Nobel Memorial Prize in Economic Science. From the very beginning, Kuznets grappled with using the metric to read into welfare, well-being, or happiness, a theme that’s repeated throughout the book and a problem that persists to this day. 

Spawned in depression, the concept of national accounting gained maturity in war. The Allies’ efforts to defeat the Axis powers required a complete mobilization of their nations’ resources, so it’s no surprise that understanding what those nations’ resources were was vital to that effort.  During that time economists started meaningfully incorporating government spending into GDP calculations for the first time. The reasons for neglecting it previously were numerous.  For one, as is easy to forget with our current bloated governments, government spending prior to the war was miniscule in comparison to aggregate economic output. A second reason for incorporating government spending was a matter of mathematical necessity. Without taking into account government spending, national income would fall short of the market value of goods and services produced. Kuznets again warned that incorporating government spending into GDP “’tautologically ensured that fiscal spending would increase measured economic growth regardless of whether it actually benefited individuals’ economic welfare.’”

Fast forward nearly a century later, and that recurring theme of reading too deeply into GDP notions of happiness or welfare is no less tractable. Efforts to combat that shortcoming include the Human Development Index (HDI), the Index of Sustainable Economic Welfare (ISEW), the Measure of Economic Welfare (HEW), and several others. Those indices try to account for, among other things, leisure time, environmental degradation, crime, the negative impacts of defense spending, and several others. The most compelling response to attempts to read welfare and happiness into GDP might come from Clayton Christensen’s How Will You Measure Your Life.  In that classic book he discusses “motivators” and “hygiene factors” in the context of one’s personal life. Motivators are, like the name suggests, factors that compel people to go above and beyond the call of duty and can include the sense of duty or purpose that comes from curing disease, educating people, or defending the innocent in the military or as first responders. Hygiene factors, like salary, are necessary but not sufficient conditions for happiness. Below a certain level, people are unable to meet basic human needs and their happiness is adversely affected.  After a certain level income level ($75,000, according to a study by Angus Deaton and Daniel Kahneman), there’s little relationship between income and happiness.  Perhaps the same can be said of GDP. Below a certain level of economic output, a country likely will be unable to meet the basic needs of its people, such as nutrition, sanitation, and vaccinations. After a certain point, GDP and happiness likely has a more tenuous relationship. It might even be a negative relationship. Anecdotally, demand for mental health counselling seems to rise with income.

Perhaps people wish too much of one metric. Not only can GDP not explain human happiness and prosperity, but it’s very hard to make it account for economic output. How should GDP account for nominally free services like search engines, Wikipedia, or open-source software? How should GDP account for unpaid labor such as the cleaning and child care services performed by stay-at-home spouses (mostly women), a perennial bugbear among feminists?  Perhaps most consequentially, how should GDP account for the changing variety and quality of goods over time? To account for the change in quality, Ms. Coyle discusses hedonic price measures.  Instead of just looking at the price of a good over time, hedonic price measures regress the price of a good on measures of quality, such as screen size and screen resolution in the case of televisions and computer monitors. The consequences of hedonic price measures for health care and education, two of the goods with the highest inflation rates, could be striking.  The cost of health care has increased markedly in this author’s lifetime, but so have the availability and efficacy of several treatments. Education, unfortunately, has probably suffered the opposite fate. Despite the rising cost of higher education, there’s little evidence that the average graduate has gotten smarter based on measures of verbal and quantitative competency.

Those are just a few of the questions raised in a remarkably short book, only 145 pages. Although those questions deserve careful thought, one should only undertake such contemplation with Ms. Coyle’s warning about GDP: “the ‘object’ being measured is only an idea, not something with an independent existence waiting to be discovered and counted.” With all the variation in definition and measurement, one is unlikely to come to stable and satisfactory conclusions about GDP, but knowing that before contemplating GDP is perhaps the greatest lesson from an excellent book with several such lessons.

Curling at Kaiser Tiger

On a frosty evening where temperatures hovered just above ten degrees, CFA Society Chicago hosted an evening of curling and drinks at Kaiser Tiger, a bar with a large beer garden on Randolph Street. Curling, with origins dating back to 16th century Scotland, involves sliding a smooth stone across a sheet of ice, with the goal of centering the stone in the middle of a target (typically 146-150 feet away, the rink at Kaiser was a bit smaller though). It was added to the Olympics in 1924 as a “demonstration sport”, and was officially added in 1998. Curling is most popular in Canada, but many countries across the globe field teams in the world championships and Olympics, including Finland and Scandinavian nations, the UK and Japan.

This was our first curling occasion as a Society, and it was a packed event, with networking taking place in Kaiser Tiger’s large West Room and participants bearing the cold and taking turns hurling stones outdoors in the ice curling rinks in the beer garden. If you missed the event, you can get a group of friends together rent a lane for $40 per half hour here – Kaiser Tiger Curling. Aside from the networking, attendees were treated to a fantastic menu of craft beers, wine and appetizers. Despite the chilly temperatures, fun was had by all, and curling very well may turn into an annual CFA Society Chicago winter tradition!

Portfolio Construction and Allocation in this ever changing market

On Feb 20th at the UBS Tower, CFA Society Chicago’s Education Advisory Group offered a panel discussion highlighting the issues and opportunities of allocating assets for various types of portfolios. A full room of about 100 financial professionals were privileged to hear from an experienced, diverse group of fund managers and advisors.

Opening speaker Tim Barron, CAIA, CIO of Segal Marco Consulting, prepped the feature event with his entertaining yet practical list of eight things to be aware of and thinking about when structuring portfolios. His list consisted of relating several quips from the likes of Yogi Berra, Mike Tyson, Harvey Pinnick, Wayne Gretzky and Bobby Unser into practical guidance for professional investment of assets. Lessons learned included; understanding the purpose for the portfolio, having a plan in place in the event of market turmoil, not having a false sense of security in making predictions while understanding one’s skillsets, and not being afraid to stand apart from the herd while putting in the hard work necessary for being in a position to win.

A brief Q&A ensued before giving way to moderator Chris Caparelli, CFA, at Marquette Associates and the panel of (1) Patricia Halper, CFA, CIO at Chicago Equity Partners, (2) Josh Lohmeier, CFA, Head of Investment Grade Credit and AIA Investment Officer, Aviva Investors, (3) Ellen Ellison, CFA, Chief Investment Officer, University of Illinois Foundation, and (4) Kevin Zagortz, FSA, US Head of Portfolio Management (OCIO) at Aon.

Caparelli’s first question for the panel was to provide a high-level description of their approach to asset allocation. Kevin spoke first from his background with qualified corporate defined benefit and 401(k) plans. His first objective is to be mindful of mitigating risk before evaluating a multitude of asset classes in priming the portfolio for growth was a common theme across the panel.

Ellison’s perspective is of a large foundation with a very long-term investing horizon, minimal concern for liquidity and growth sourced from a global rolling portfolio approach. The foundation’s clients consist of a large base of living alumni, trustees and committees, with a strong focus on governance and fiduciary risk. The only thing worse than not having a plan is changing the plan over the course so being mindful of the human element is important.

In contrast, Lohmeier has a relatively narrow focus of investment grade credit and is most concerned about target benchmarks and how to manage to against that performance. Common issues to be aware of include behavioral biases, herd mentality, tail risk and downside protection especially in environments of severe stress.

Halper stressed the importance of knowing your place. If your client is relying on investment exposure to a specific asset class then it is imperative to not stray from that mandate. In other words, only perform asset allocation within the bounds that you engaged for.

The remainder of the discussion involved the panelists providing perspective on a variety of topics such as their use of alternatives, adaptation to the market environment, and being tactical  via factor investing. Context is important once again as each strategy depends on the purpose and objective for that client. 

After taking formal questions, the panelists generously made themselves available after for further inquiries.

In summary, this was a fast paced and informative exposure to the topic of portfolio construction. Caparelli was effective in moderating the discussion and the diversity of viewpoints represented on the panel was of tremendous value.

CFA Society Chicago Book Club:

Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou

Silicon Valley and venture capital (VC) in the technology sector always offended this Midwesterner’s conservative sensibilities.  Having come of age during the dotcom boom, I’m skeptical every time a technological shiny thing catches the public’s attention, which seems to happen with alarming frequency given the regularity of fads and corresponding losses to come out of the sector.  John Carreyrou’s masterfully written Bad Blood confirmed my biases.  In addition, he weaved together a highly readable tragedy involving a deceptive and manipulative villain in the form of Theranos’s founder and CEO Elizabeth Holmes; a board that emphasized prestige of its directors to the near complete exclusion of any relevant industry expertise or meaningful control; a media and public blinded by the desire to see women entrepreneurs and women in Science, Engineering, and Technology (STEM) fields; and a group of similarly gullible investors that included Walgreens, Safeway, and several of the Valley’s most prestigious VC firms.

My sentiments during the majority of the book were similar to that of a cynic observing drug dealers fighting over territory: there were no innocent bystanders and the only people who got hurt deserved it.  Unfortunately, though, there were innocent bystanders.  The first casualty is the realities of success succumbing to the Horatio Alger-type myth of the college dropout cum tech entrepreneur.  Elizabeth Holmes, whose family tree includes the founders of Fleischmann Yeast and the Cincinnati Medical School, used her family connections for her initial funding.  Although America is still the land of opportunity, it’ll always be easier to score runs when one is born on third base.  The second casualty is the line workers and main street investors in Safeway and Walgreens who suffered the consequences of poor decisions to partner with Theranos that they had no control over.  Last and most importantly, Theranos made defective medical equipment that hurt the people upon whom it was used without their informed consent—a tenant of ethical medical practice.

First, the villain of our story, Ms. Holmes.  Mr. Carreyrou paints a portrait of unbridled ambition starting from a very young age.  Despite her shortcomings, no one should doubt Ms. Holmes’s  drive.  From a very young age she declared her ambition to be a billionaire and worked tirelessly starting in early high school, studying hard, sleeping little, and earning straight As, a pattern that continued through her brief stint at Stanford and throughout her tenure at the helm of Theranos.  Ms. Holmes seemed determined to emulate Steve Jobs’s path, a point emphasized in the chapter “Apple Envy,” noting Ms. Holmes’s wardrobe, modeled after the Mr. Jobs’s signature black turtleneck, her desire to make “the iPod of healthcare,” and her hiring of TBWA/Chiat/Day, the same advertising agency responsible for the Apple Macintosh’s “Think Different” campaign.  Her infatuation went so far that while reading Walter Isaacson’s biography Steve Jobs, colleagues were able to guess which chapter she was on based on her attempts to emulate Mr. Jobs at different stages of his career.

There are at least two lessons from the Jobs story that Ms. Holmes would have benefited from learning.  First, CEO of Apple was not Mr. Jobs’s first role.  By the time he led Apple, he had served in other roles at Apple, Atari, and Pixar, as well as having founded NeXT, Inc.  Ms. Holmes shortcomings as a manager were apparent throughout the book and she most likely would’ve benefited from the humility and experience gained from working outside the C-suite.  Throughout the book Ms. Holmes comes across as a tyrant who managed through intimidation and ruthlessly eliminated any employee who tried to attenuate Ms. Holmes unrealistic expectations or call attention to her fraudulent business practices.  The second lesson is that Apple isn’t a technology company, a point often made by Rupal Bhansali of Ariel Investments.  Apple didn’t invent the integrated circuit chip or the MP3 format.  It achieved its success through innovative design, novel strategy, and superior marketing—not through any technological breakthrough.  Even Apple’s most distinctive feature, its operating system, was modeled after Xerox’s operating system (Bill Gates benefited from third-mover advantage when he then applied the model to IBM-compatible machines).  Ms. Holmes probably would’ve benefited from staying in school and acquiring the expertise necessary to achieve medical breakthroughs or at least listening to the experts who advised her to develop a minimally viable product instead of swinging for the fence with what was and still is a fictitious miracle machine that fits in a shoe box and can run hundreds of medical diagnostic tests with only a drop of blood.

A second theme in the tragedy involves Theranos’s ineffectual show pony board of directors.  Long on prestige and short on oversight and expertise, the list of directors included then General and future Secretary of Defense James Mattis, a Navy Admiral, and not one but two former Secretaries of State, George Shultz and Henry Kissinger.  Not only did their decades of experience in war and diplomacy, while laudable, have almost nothing to do with blood testing, their collective influence was negligible.  Mr. Carreyrou notes in the Epilogue that Ms. Holmes forced through a resolution giving her 100 votes per share, effectively 99.7 of the votes.  He quotes Secretary Shultz as saying, “’We never took any votes at Theranos.  It was pointless.  Elizabeth was going to decide whatever she decided.’”  Ms. Holmes contempt for corporate governance and board oversight came through in another story.  An interviewee asked Ms. Holmes about the board’s role, to which she shot back, “’The board is just a placeholder…I make all the decisions here.’”  The board failed to notice or act on, among other things, that Ms. Holmes appointed her boyfriend, a similarly flawed individual, as number two at the company.  In perhaps the only time the board came close to taking decisive action, four members of the board met to discuss Ms. Holmes’s financial projections that “weren’t grounded in reality” and were “impossible to reconcile with the unfinished state of the product.”  Having resolved to replace Ms. Holmes, the directors confronted Ms. Holmes.  Then in a two-hour bravura performance of deception and charm, a recurring theme throughout the book, Ms. Holmes convinced the directors that she should remain as CEO.  Mr. Carreyrou raises the question of potential sociopathy but defers to the psychologists for the final answer.  Regardless of the clinical diagnosis, there’s little question that Ms. Holmes was a master manipulator. The last theme that this author will address—also the most important and the one most overlooked in this debacle—was how Theranos flaunted regulation and used faulty equipment on patients without their informed consent.  Since the Nazi experiments on prisoners in during World War II, informed consent has been a core tenant of ethical medical practice.  Right now all over the U.S., researchers are pleading their case before human subjects review committees in order to get approval to use human subjects for experiments as mundane as surveying consumer preferences, yet Theranos was able to use untested and faulty equipment to conduct tests on medical patients, many with terminal conditions.  That last fact receives far too little attention.  What happened at Theranos wasn’t a tragedy—it was a crime.  The culprits should be held to account.

Vault Series: Aegon Asset Management

On Demographics, Growth, and Investing: When the structural collides with the cyclical

Francis Rybinski CFA, treated CFA Society Chicago to his analysis of the current global demographic situation and its implications at the latest Vault Series lecture on March 12.  Rybinski is the chief macro strategist at Aegon Asset Management, responsible for guiding the firm’s global macroeconomic view pertaining to tactical and strategic asset allocation. His presentation included a wealth of statistics that highlighted the weak rates of growth of both population and productivity in developed economies around the world and how that situation limits investment managers.

Rybinski began with some observations on the trend in GDP growth in the U.S.:

  • Actual GDP growth has declined erratically from about 4% in the early post-World War II period, to 3% late in the last century, to just 2% since the last financial crisis. Growth above 2% in very recent quarters has not persisted long enough to define a change in trend.  (Slide 4)
  • Accompanying this change has been a decline in the volatility of the growth rate, both absolutely and relative to potential growth.
  • While growth has been slowing, the business cycle has been lengthening. The economy seems to be stretching out expansions by pacing itself at a slower rate of growth.

The two driving factors behind GDP growth are the rates of growth in the labor force, and in productivity. Both have been anemic with little expectation of a move to the upside. The Congressional Budget Office projects near term potential GDP growth at less than 2%, incorporating 0.5% growth of the labor force and 1.4% productivity growth. Rybinski argued that even if the labor force were to grow at 1.4% (the average since 1950) potential GDP would not reach 3%, and would trend downward after 2020.  Even boosting productivity to 2% gets GDP growth only to 2.5%. While President Trump claims his policies will increase productivity well beyond its recent trend, Rybinski is skeptical. He listed several forces most likely to boost productivity significantly including autonomous vehicles, robotics, 3D printing, genomics, and generally the internet of things. He doubted any of these could be as transformative as the forces that drove productivity higher in the 20th century such as the expansion of the electric power grid, telecommunications, and the development of computers. Maintaining a persistent 3% growth in GDP would take 2% productivity growth—a level last experienced in the 1990’s tech boom–and 1% labor force growth–which would be dependent on increased immigration.

Rybinski applied the term “demographic drag” to the situation he had described. Noting that it exists throughout developed economies, he concluded that “It’s a small(er) world after all”. (Or at least a slower growing world.) This situation, he thought, was at the root of many current global movements such as the new nationalism, anti-immigration stands, and the Brexit vote. The demographic situation also has implications for retirement investing and the social safety net. Lower prospective investment returns will require even higher amounts of savings to fund retirement, and/or an increased burden on government retirement plans.

Rybinski went on to present more demographic data to support his premise.

  • In the 1970’s, a demographic tailwind driven by the maturing of the baby-boom generation and the flood of women entering the work force, provided a big boost to GDP growth in the U.S. This has now become a tailwind as the baby-boomers reach retirement age and the increase in women in the work force has leveled off. This leaves only productivity to boost GDP growth.
  • The fertility rate in the U.S. declined by about 50% from 1960-75 and has been under the replacement rate of 2.1 births per woman for a decade. Similar trends appear around the world in countries across the income spectrum.
  • The share of the U.S. population over age 55 is about 27% and continues to rise.  The share in the prime working years has been trending down for over twenty years and is now under 50%.  The share ages 16-24 is not growing, but is stagnant at about 15%.
  • The old age dependency ratio (ratio of people ages 20-64 vs. those older) has received a lot of attention because of its dramatic down trend. Rybinski showed that, when adjusted for the increase in the labor force participation rate since 1948, the decline is not as significant, but the trend is still negative. This is a common feature across developed economies.
  • Currently, immigration accounts for just over 40% of U.S. population growth and it is rising. Native births account for the other 60%, but the share is declining. Within ten years, these factors will be about equal and by 2045, immigration could provide more than 70% of population growth.
  • Average life expectancy continues to increase and has reached 72 years globally (80 years in high income countries).
  • Increasing life expectancies and earlier retirements mean more time is spent in retirement. In 2010 it reached 13 years in the U.S. and 18 years in Germany.  Even China has advanced to eight years from just two in 1990. This adds stress to retirement plans—an inauspicious factor in the U.S. where over 95% of public pension plans were underfunded to a cumulative total of $1.1 trillion by 2017.

Rybinski had one positive observation regarding inflation, based on the correlation between inflation and the dependency ratio. His data shows that countries with a worsening ratio (primarily the U.S., the E.U. and Japan) have experienced low rates of inflation (under 2%) for the past five years. Countries with higher inflation (such as India, Brazil, Turkey, and South Africa) have improving dependency ratios. Not only has inflation been low in developed economies, but it has also been less volatile. These two trends have put downward pressure on the term premia of sovereign debt. In fact, the term premium on the 10-year U.S. Treasury note is negative, and Aegon expects it to remain so, with the extremely low yields on German Bunds an important reason. 

With the Federal Reserve taking a less aggressive position on raising interest rates and inflation expectations anchored, Aegon expects rates on treasury debt to remain at their historically low levels. 

From his analysis Rybinski provided two implications for asset allocation:

  1. As inflation has declined secularly in the past forty years, the correlation of returns on treasuries vs. equities has fallen from strongly positive, to slightly negative. Thus, treasury debt has been a good hedge against equity markets. With Aegon’s forecast for low inflation to hold treasury yields lower for longer, he expects this hedge relationship to continue.
  2. Low growth of global GDP, and the worsening demographic situation, will place a premium on growth investments. Searching these out will be the primary challenge for investment managers in the foreseeable future. This would typically suggest emerging or frontier markets, but they present increased risks. Many are not easy places to conduct business. Managers will need to be highly selective on choosing which countries to invest in, and will also need to search for pockets of growth hidden in selected industries or companies within developed markets.

Supplement: Post-Event Q&A by Brian Gilmartin, CFA

The overall theme of the presentation was that as the US population has aged, from the 1960’s “baby boom” being in full swing to the Generation X, Y and Z’s, of today, US GDP trend growth has slowed, and the aging of the US population is presenting challenges for everything from retired workers outliving their savings to putting pressure on public and private pension fund plans.

In other words, the “demographic tailwind” has become a “demographic headwind” (per two slides within the presentation) for the USA, much like it has become in Japan.

“Trend” growth for the US economy was 6% in the 1960’s, slowing to 4% in the 1980’s and 1990’s and is now just 2.5% today. (My thought on this was that, the US economy – in terms of real GDP was also much lower in the 1960’s, just under $1 trillion in each of the 4 quarters in 1966 per the FRED database, to over $20 trillion by Q4 ’18. The logic being growth looks faster with a smaller denominator.)

Frank Rybinski noted the decline in global fertility as well as the increasing life expectancy and slowing population growth rates has resulted in a “global silver” economy as the number of countries with more 65+ adults than kids under the age of 15 has expanded from 30 in 2015 to a projection of over 60 by 2035.

From an investing perspective, the presentation noted that the older a society becomes, the slower the change in the CPI, and in the Q&A following the presentation, Frank was asked if this changes the role of the Fed as America ages. Frank Rybinski noted that finding the “optimal policy” for the Fed today is more challenging given demographics, since the “old rules” (and Frank Rybinski” specifically cited the Taylor Rule) may have diminished influence in the future.

From an asset allocation perspective, looking strictly at demographics, the Frontier and Emerging Markets are better longer-term equity investments given that GDP growth and productivity improvements are still to be seen by many of these economies while Japan and old world Europe and other mature countries (and even the US to some degree) are at the opposite end of the spectrum and bond market investments and US Treasuries should be held in portfolios, with Aegon calling Treasuries a “viable portfolio hedge” as structurally slower growth and low inflation keep inflation contained.

Sub-Saharan Africa, Frontier Markets and Emerging Markets should be held as equity investments given the longer-term GDP growth potential, while Treasuries and fixed-income should be held for clients in mature countries.