CFA Society Chicago Book Club:

The Billion Dollar Mistake by Stephen Weiss

The CFA Society Chicago book club met for their monthly meeting on June 16, 2015 to discuss “The Billion Dollar Mistake” by Stephen Weiss.  Mr. Weiss brings a wealth of knowledge and experience to the table as he has spent nearly 25 years on Wall Street working at Lehman Brothers, SAC Capital, and Salomon Brothers.  Coincidentally, he was booked on Flight 93 for a 9/11/01 departure though decided to postpone the trip to focus on pressing work at Lehman.  The event was a turning point in his life where he left Wall Street to move out west and start a hedge fund.  This is where he began thinking about his next phase in life and writing this book.  At the end of the day, a mistake is a mistake, whether it is a billion dollars, a million, or a buck.  This book presents several different case studies which can help us minimize the number of our future mistakes.  The book also provides several 101 type lessons in finance to help explain the various case studies.  The case studies involve the ponzi scheme of Madoff, AIG’s deviation from its core business, Aubrey McClendon’s excessive leverage at Chesapeake Energy, and activist investor Ackman’s divergence from his investment discipline.  To sum up a few of the key takeaways, we have put together the following bullets:

  • Never let your passion override your sense of discipline.  Always perform your due diligence and remember that times, facts, and investment scenarios are constantly changing.
  • Be careful of rushing into a market that is falling fast.  Let the knife fall.  It is better to fully understand the investment rather than impulsively jumping in.
  • Insider buying and selling must be carefully analyzed.  Understand the context and motivation for the transaction.  Insider buying isn’t always a buy signal.
  • Leveraging your portfolio can enhance your returns, but never over leverage to the point where you don’t have the necessary collateral to meet your margin requirements.
  • Know the investment discipline established by your manager and ensure they stick to their mandate.  Venturing outside their area of expertise leads to style drift and potential losses.
  • Short selling can be a dangerous strategy.  Remember that the market has an upward bias and going against it is similar to trying to beat the house.
  • Rarely does a fall in stock price equal an opportunity.  Prices move in response to new information resulting in a very efficient market.
  • Beware outsized returns.  They almost always indicate excessive risk.  Be sure you are willing and able to take on the risk, otherwise stay conservative.
  • Don’t just diversify across asset classes; consider diversifying across investment managers which can lead to increased risk mitigation.


Upcoming Schedule:

July 21, 2015: On Saudi Arabia: Its People, Past, Religion, Fault Lines – and Future by Karen Elliott House

*(NOTE: Those who attend the July Book Club meeting will receive a free copy of “Superpower: Three Choices for America’s Role in the World” by Ian Bremmer)

August 18, 2015: Superpower: Three Choices for America’s Role in the World by Ian Bremmer

*(NOTE: Author Douglas Sisterson is attending the PDDARI meeting which takes place just before the book club meeting on 8/18. He will be discussing his book “How to Change Minds About Our Changing Climate”.

September 15, 2015: The New Cold War? Religious Nationalism Confronts the Secular State by Mark Juergensmeyer

October 20, 2015: TBD


To sign up for a future book club event, please click here:

Next-Level LinkedIn Strategies


Is the resume becoming extinct?  JD Gershbein thinks it’s possible.  Every professional knows that it’s a good idea to have a LinkedIn profile, but how best to build it and find new opportunities?  Gershbein encourages professionals to continuously improve their LinkedIn profiles, which have emerged as the most versatile business document around.  In his talk, Gershbein focused his presentation around what he would do on LinkedIn if he needed a job.  “You’re competing on LinkedIn for three things: time, visibility and attention,” he told us. Gershbein stated that it is important to convert action on LinkedIn to a strategy.  Working with LinkedIn for job leads or new business is a lot like panning for gold in that there is a lot of junk, but worth it if you are methodical and consistent in your approach.  In terms of developing LinkedIn profiles, Gershbein said that there are three sub-movements within the social media revolution currently taking place that we should consider:

Brand Storytelling – where you embrace uniqueness in contributory form or aspirational form

Content Marketing – how you sell yourself

Community Management – living the story you tell in front of the real world

One way that a LinkedIn profile can be better than a resume is that it allows you to show potential employers what you accomplished, along with what you learned as a result of what you accomplished.  Gershbein says that the latter explanation is a very important way to show employers your self-awareness and personal development.  Using LinkedIn publishing, a platform for blog posts and original content from LinkedIn users, is also a good way to achieve your content marketing goals. Writing is a valuable skill in almost every business field and any piece of communication you produce should be considered as part of your strategy.  It’s also important to be accessible.  You can develop an e-signature for your personal email, and you should always include your email address and telephone number in your LinkedIn profile.  When making contact on LinkedIn, Gershbein says it is good to quickly move the conversation offline and schedule what he calls a “brief discovery call”.  Most people are much more likely to agree to a call if it’s described as brief, Gershbein has found.  Another important tip is don’t make the LinkedIn profile a redundant document that provides the same information as your resume.

The most important area on your LinkedIn profile is the summary section.  According to Gershbein, this is the “make or break section” and should be written in third person narrative format.  The summary needs to answer three questions:



Why should I hire you?

What contributions will you make?

What were the results from what you did?


Everything on the LinkedIn profile should help answer these three questions.  Contributions should center on two main areas: contributions to company culture and contributions with clients.  It’s important to answer the question of “Why would you recommend yourself to others?” also.  Keywords are an important consideration because this is how recruiters will find you and connect with you.  Anything shown in bold on your LinkedIn profile appears higher in search results.  The main keywords you want to focus on include your industry, market, job title and specific skills.  It’s a good idea to sprinkle in relevant keywords throughout your profile to rank higher in recruiters’ search results which tend to favor profiles with many connections and profiles with more sections completed.

LinkedIn is an extremely popular website with nearly 350 million users yet remains underutilized by many.  With a more strategic approach and a carefully crafted profile, LinkedIn can provide job seekers with a strong platform for branding, networking and finding new employment opportunities.


JD Gershbein is the CEO of Owlish Communications and a specialist in LinkedIn strategy. For more information, visit

Networking at Weber Grill Restaurant!

SteakThere’s no better way to start the summer than with good barbecue! In early June 2015, CFA Chicago members gathered at the Weber Grill Restaurant in Lombard, where patrons can watch Master Chefs grill steaks, burgers, chops, chicken and fish – right before their eyes – on real Weber Kettle Grills.  That’s right; The Weber Grill heats about 2,000 lbs of real charcoal per day to 1,500oF for a unique indoor grilling experience.

Shannon Curley, CFA, Executive Director – CFA Society of Chicago, and Kim Augustyn, CMP, Director of Programs and Sponsorships, warmly welcomed CFA Chicago members to the evening’s three-course progressive networking dinner. The atmosphere was relaxed and jovial with table conversations ranging from hedge funds and derivatives to golf and new babies (congratulations Brendan!).

Kim explained that attendees would switch tables to meet different people after each dinner course, according to the information printed on our nametags.  It sounded great until I realized that my nametag read: Table 4, Table 4 and Table 4.  I was beginning to feel like Marlon Brando, the Don of the Corleone crime family in the Godfather movie, conducting business in a restaurant.

Then, suddenly it all made sense. CFA Charterholders would recognize this as a simple case of serial correlation. Statistically, given the smaller size of the gathering, extreme events like this were even more likely to occur than in larger samples.  It all worked out in the end, but in real life, we must remember that patterns tend to repeat themselves more often than we think they should and this, of course, also explains why Apple had to reprogram its “random” iTunes shuffle algorithm so the same song doesn’t play twice in a row.

Don’t worry if you missed this great networking opportunity—there will be many more in the near future. In the meantime, there’s no reason you need to miss out on good BBQ, so here’s my favorite recipe for great 4th of July BBQ ribs!

Day Before: Put pork ribs in crock pot. Pour in one 16-oz bottle of Coke (to break down connective tissue).  Cover and leave on high for 4 hours.  Wrap ribs in plastic wrap and aluminum foil.  Refrigerate overnight.

Next Day:  Make “The Secret Sauce”: ½ c Ketchup, 1 ½ T Worcestershire Sauce, 1 can tomato soup, 1 can water, 1 good-sized onion diced, celery (to suit your taste).  Bring to boil on stove.  Then, simmer for 15 minutes with cover off.

Brown ribs on grill.  Apply some BBQ sauce on the grill and pour the rest over on plate.


Hey! They’re Raising the Price of the Free Lunch

On May 21st, Tad Rivelle gave a presentation over lunch at the Chicago Club.  The subject “Hey! They’re Raising the Price of the Free Lunch” revolved around on how interest rate increases and deleveraging will affect the economy, capital markets, and the investor class.

Mr. Rivelle is the Chief Investment Officer, Fixed Income for the TCW and MetWest Fund brands.

Tad started his discussion noting that too much thought and weight are given to next word or phrase that is added or eliminated from Fed pronouncements and minutes.  Instead, more time and thought should be applied to considering the overall policy and climate that it is applied in. The stage and length of the business and market cycle are also of great importance; “Identify those variables that drive the cycle, as opposed to those variables that are driven by the cycle.”

Tad described a traditional cycle in which business overproduction leads to layoffs and excessive growth rates push inflation higher.  Historically central banks have then stepped in to lessen the effect of the cycle by using monetary policy to slow the economy.  Tad suggested that this cycle is different as the inventory cycle has largely been eliminated with more efficient supply chain management and the current cycle has been fueled with cheap credit and quantitative easing (QE) programs.  These include several rounds of QE initiated by our own central bank, Abenomics in Japan, and now the ECB’s version of QE in Europe.  What then will kill the current cycle?  Expanding credit past reasonable levels and the resulting debt service hitting a tipping point (usually unseen) will push the current cycle to recession.

One of the problems with all of the recent QE programs is that they are designed to only “fix” one problem, while the capital markets commonly believe that these programs can remedy an assortment of problems; stagnant wages, slow growth, inflation/deflation, and suppress volatility.  At its core, a QE program is a credit centric growth model structured to enhance near-term growth at a cost of building up a stock of bad loans and malinvestments (badly allocated business investments, due to artificially low cost of credit and an unsustainable increase in the money supply).  These bad loans will end a cycle and the central bank, using the tools at hand, will not be able to stave off a market correction.  In simple terms QE was designed to promote cheap credit and the efficient allocation of resources.  Substantially QE has changed the allocation of loanable funds.  Cheap capital has been pushed to unproductive endeavors while capital is rationed to more productive business oriented endeavors.

The current QE program in Europe is one that promotes inflation and a weaker currency.  The ECB will likely succeed by “importing” growth and economic activity.  A tangent result will be that as Europe imports growth, they will also “export” deflation to the U.S.

While the intent of QE programs has merit, their effects have been and will continue to be problematic.  In the United States, GDP and inflation were both supposed to rise – they haven’t.  In Europe and Japan growth prospects are stagnant to recessionary.  Mexico and Canada (our largest trading partners) are in an economic slowdown.  There is a recession in Brazil, depression in Russia.  China’s growth is at a 25-year low, and global disinflation has continued unabated.

Tad provided some conclusions; he expects a flattening yield curve, which foreshadows an economic slowdown.  The Fed, with its expanded balance sheet, will not be able to maneuver in an economic decline.  If the Fed carries out on its promise to renormalize or raise rates, then risk assets will suffer and marginal borrowers will be crowded out by higher rates.

So then how should one position themselves in the market?  Tad recommended playing defense with risk assets, under weighting airline, bank, and utility debt, and strong underweight high yield and bank loans.  Overweight; non-agency MBS (ongoing de-leveraging of senior tranches limits downside risk), CMBS / ABS (the capital structure of CMBS are reasonably valued).

Tad concluded the presentation by taking questions.  One member of the audience asked Tad to comment on the muni bond market and in particular his view of the Illinois and California public debt problem.  Tad’s answer was brief, but perhaps a relief to an audience of Illinois residents as he saw no obvious catalyst to bring the current public debt problem to a head.

ESG: A Material Information Advantage

Does your ESG integration program have an edge? If not, read on. Everyone knows that it’s difficult to produce alpha—an abnormal excess return over the market—due to skill rather than luck. And yet, by looking deeply, and at the right factors, one can find investment opportunities (and market inefficiencies) that are overlooked by others.

Howard Marks, Co-Chairman of Oaktree Capital Management, refers to this process as “second-level thinking” in his incredible book The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor (46). Marks goes on to explain:

 Second-level thinkers know that, to achieve superior results, they have to have an edge in either information or analysis, or both” (78).

Sustainable investing is all about second-level thinking. First, we need to gain an informational advantage by identifying material environmental, social and governance (ESG) factors. Then, we need to understand how that information drives intrinsic value, and cash flow, to design investment strategies that appropriately meet the client’s risk and return objectives over an appropriate time horizon.


Corporate Sustainability: First Evidence on Materiality

The good news is that Harvard researchers have found new evidence linking performance on sustainability issues to financial performance. Importantly, the research differentiates between material and immaterial sustainability factors—addressing a significant gap in prior research.

Authors Mozaffar Khan, George Serafeim and Aaron Yoon from Harvard Business School present their findings in Corporate Sustainability: First Evidence on Materiality (Working Paper 15-0703). A major finding is that firms with high performance on material sustainability issues and concurrently low immateriality  scores have the best future stock performance—generating an annualized alpha of 6.01%.

Using calendar-time portfolio stock return regressions we find that firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing” (1).

In addition, firms with good performance on material sustainability factors also  outperformed those with good performance on immaterial sustainability factors by an annualized alpha of 1.96%. So, again good performance on the right (material) ESG factors adds value. The results are summarized below.

Source: Sustainability Accounting Standards Board (SASB) Industry-based Standards to Guide Disclosure and Action on Material Sustainability Information Slide 22 (2015).

Even good performance on immaterial sustainability factors added .6% annualized alpha. At a minimum, this means that sustainability investments are not shareholder value-destroying (3). However, firms with poor performance on sustainability factors (both material and immaterial) underperformed by an annualized alpha of -2.90%.

What’s the big idea? Access to material sustainability information can give your ESG integration program an edge.


Material ESG Information Access

In the Harvard study cited above, the data collection process was driven based on materiality guidance on sustainability issues from SASB. The SASB website provides a sector-level materiality map that identifies sustainability issues by level of materiality at In short, this map is a great starting point for identifying which issues are likely to be material for more than 50% of the industries in the sector. Then, the Harvard researchers used MSCI KLD as the source of their sustainability data—which is the most widely used dataset by past studies (7).

SASB sustainability issues are organized under the following five categories: Environmental, Social Capital, Human Capital, Business Model and Innovation and Leadership and Governance. For example, the environmental category contains issues like greenhouse gas (GHG) emissions, air quality, energy management, fuel management, water and wastewater management, waste and hazardous materials management and biodiversity impact.

After identifying the material issues, the SASB Standards Navigator can be used to research specific “evidence-based metrics” that are known to impact business value in the areas of revenues, costs, assets, liabilities and cost of capital. Bottom line, it’s all about analyzing the right non-financial ESG metrics that can have a material impact on financial performance.

For illustrative purposes, a few SASB environmental accounting metrics applicable to the Oil and Gas Exploration and Production industry are shown below. As you can see, each metric in the SASB Standards has a unique reference number, description and a clearly defined unit of measurement.

Sector: Non-renewable Resources, Industry: Oil & Gas Exploration and Production

  • Greenhouse Gas Emissions – Accounting Metric NR0101-01 – Gross global Scope 1 emissions, percentage covered under a regulatory program, percentage by hydrocarbon resource. Unit = Metric tons (t) CO2-e, Percentage (%). The registrant shall disclose gross global Scope 1 greenhouse gas (GHG) emissions to the atmosphere of the six greenhouse gases covered under the Kyoto Protocol: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride
  • Air Quality – Accounting Metric NR0101-04 – Air emissions for the following pollutants: NOx (excluding N2O ), SOx, volatile organic compounds (VOCs), and particulate matter (PM) Unit = Metric Tons (t)
  • Water Management – Accounting Metric NR0101-06 – Volume of produced water and blowback generated; percentage (1) discharged, (2) injected, (3) recycled; hydrocarbon content in discharged water. Unit = Cubic meters (m3), Percentage (%), Metric tons (t)
  • Reserves Valuation & Capital Expenditures – Accounting Metric NR0101-22 – Sensitivity of hydrocarbon reserve levels to future price projection scenarios that account for a price on carbon emissions. Unit = Million barrels (MMbbls), Million standard cubic feet (MMscf).

Importantly, SASB standards are drawing wide interest across the globe and have been downloaded over 27,392 times by more than 4,640 users in over 65 countries in top capital markets including the U.S. ($25.9B), E.U. ($10.4B), Japan ($4.6B), China (3.9B) and Hong Kong ($3.1 B) (Slide 24).

SASB standards can be downloaded, at no charge, for a variety of sectors and industries at: Additionally, MSCI ESG Research sells a comprehensive suite of ESG data, ratings and research products.  See


A Vision of the Future

As noted at the outset, after gaining an informational advantage one must then be able to efficiently analyze the data in order to design investment strategies that appropriately meet the client’s risk and return objectives. Given the wealth of new ESG information that will be coming down the pike through the SASB Standards, there will be exciting opportunities to develop new investment strategies and analysis.

For example, financial analysts will enjoy creating new multi-factor regression models that incorporate material ESG factors in an attempt to forecast sources of performance and risk. And there will be even more ways to conduct peer comparisons with a complete data set—using consistent ESG units—while benchmarking against the industry average.

SASB provides a vision of this future in the illustration below. It shows a hypothetical peer comparison using sustainability fundamentals in the pharmaceutical industry.

Source: SASB: Industry-based Standards to Guide Disclosure and Action on Material Sustainability Information Slide 19 (2015).

It’s my hope that more access to high-quality, material ESG information will improve the investment decision making-process, increase business competition and lead us to a more sustainable future.

Leadership: Managing Talent and Comp in the New Era

Exhibiting investment leadership, establishing a winning culture, building high performing investment teams – are all intertwined.

On Wed., May 27th at the Hotel Allegro, Jim Ware, CFA presented from the new white paper from Focus Group Consulting “”Investment Challenges: Remaining Relevant through Compelling Value”. The 35 people in attendance were given terrific insights into what it will take for investment management firms to be successful in the post-financial crisis era.

Unlike many talks and studies of the success criteria in the investment industry, Jim’s material did not dwell on a benchmark beating strategy or how to become better at marketing. Rather, through the right kind of investment leadership, winning firms will be successful at hiring the right people and developing a strong culture. Improved talent retention and decision making will directly lead to the success of the firm.

Strengths, weaknesses, and inattention to blind spots were discussed. Leadership in the investment industry has tended to fall onto driven, smart individuals with exceptional technical skills. However, developing talent, collaboration and self-awareness tend to be not so strong in traditional investment leaders, yet these areas are most important for creating success in the new environment.

Through audience polling attendees were able to directly provide feedback based on observations within their own firms, and the results were compared to averages compiled by Focus Consulting Group in similar talks both within and outside the U.S.

Regarding leadership, Mr. Ware made an observation that only perhaps 50% of an investment management firms success relates to performance. The other 50% is based on relationship, thus the intangibles that were at the heart of the discussion. He cited a firm that had 7 consecutive years of relative outperformance yet had not grown assets under management due to neglect for the culture and leadership concerns.

A few best practices that were highlighted include that good leaders will get curious about a weakness, not defensive. This requires creating a good feedback channel. Modeling good behaviors, and considering culture and values in employment decisions were also of importance.

In conclusion Jim left everyone with a Checklist for the New Era which is a scorecard of 10 important factors that should be assessed by all senior members of a management team and evaluated on a strongly agree – strongly disagree scale. For more information on this please contact the CFA Society Chicago office.


CFA Chicago: Investing in Latin America

CFA Chicago: Investing in Latin America

¡Que fantástico! ¡Que increíble!  The CFA Society of Chicago recently celebrated its 90th anniversary by welcoming investment professionals from across Latin America to the Midwest for its 2015 Annual Conference: Emerging Opportunities in Latin America!

Christopher Vincent, CFA, Chairman CFA Chicago and Partner at William Blair, cast the vision for the conference that enabled participants to gain deep market insights on Latin America and foster new relationships across Latin American CFA Societies. On the Society’s 90th anniversary, Chris pointed out that CFA Chicago is the oldest investment analysts society in the world. It was founded in 1925—with a membership of 4—and today is the 6th largest society in the world with more than 4,300 members.

Chris gave a special thanks to Marie Winters, CFA, SVP Northern Trust, Larry Cook, CFA, Executive Director UBS Global Asset Management and Garrett Glawe, CFA, Vice President MSCI, who did a fantastic job as co-chairs for the 2015 Annual Meeting. Garrett Glawe served as an outstanding Master of Ceremonies (and is now available to MC other events…The Academy Awards, Music Awards, Emmys, etc.). Chris gave special thanks to Northern Trust, Aberdeen Asset Management, BNY Mellon and FitchRatings for their support and generous corporate sponsorships which made the event possible.

On a brief housekeeping note, the information flow at the conference was designed like a funnel. We started at the macro / geo-political level and gradually worked our way down through broad Latin American business issues and investment industry trends to more specific regional and industry investment risks and opportunities. Please keep this in mind as you look for information relevant to your needs in the report below.

It should also be noted that the panelists did not provide specific recommendations to buy or sell particular securities or provide investment advice.

The Politics of Economic Reform

Christopher Garman, Head of Country Analysis at eurasia group, opened the conference with a broad overview of how the  Latin American political environment may impact your investment portfolio. Although each country has different political issues, Garman emphasized, “For the first time in a long time, emerging markets are at a political turning point which investors need to appreciate.” In short, today there really is a unifying theme in emerging markets that are at a political inflection point.

For the first time in a long time, emerging markets are at a political turning point which investors need to appreciate.” Chris Garmen, eurasia group

Specifically, Garmen observes that Latin America is at the end of a “political super-cycle.” Back in 2002, commodity prices were low and political incumbents only held office for 3 years on average. Then, commodity prices increased, there was a period of rapid economic growth and incumbents remained in office for 7.2 years on average. In short, it was a very good time to be a politician but not many economic reforms took place.

Source: eurasia group, May 2015 Latin America Outlook (Slide 2)

Today, Garman indicates that Latin America is facing slower economic growth and a “messy” end to its super-cycle. Incumbents barely win re-election and weak second-termers hold office while facing high fiscal demands from a rapidly growing middle class. Garman explains that the problem is particularly acute in Latin America where economies are highly dependent on commodity exports and the growing middle class makes up a larger share of the population than in other emerging markets.

Source: eurasia group, May 2015 Latin America Outlook (Slide 3)

As shown above, there has been extraordinary growth in the emerging middle class across Latin America which now represents 30% to 80% of the population in some countries. These new middle class families demand more security, education, health care and other public services from overwhelmed governments that are rapidly losing public support as shown below.

Source: eurasia group, May 2015 Latin America Outlook (Slide 3)

Garmen then presented a detailed analysis and outlook for a number of Latin American countries. The highlights are summarized below.

Brazil: Short-term Trajectory: Neutral, Long-term Trajectory: Neutral

Garman is cautiously optimistic on Brazil. In the wake of the state-controlled oil company scandal at Petrobras, Garman feels President Dilma Rousseff’s administration is seeing a meaningful course correction. He feels Brazil is moving towards a more market-friendly equilibrium and a constructive response to the political pressure. The government can increase taxes without congressional approval and has already done so to avoid losing investment grade status on its debt. In the oil and gas E&P sector, Garman expects an open pre-salt costal shelf framework will allow others to get involved in production. In addition, watch for aggressive selling of assets to improve Brazil’s financial position and new rules to attract investors to infrastructure projects like airports, highways and railroad projects.

Garmen estimates a 60% probability that Brazil “muddles through” and a very large fat tail risk of 40% that the course correction could be undermined if the corruption probe (Operation Carwash) spreads to other sectors of the economy with knock-on effects. There is significant risk the investigation grows because the federal prosecutors office, federal police and judiciary all have a high degree of independence (normally a very good thing) in Brazil. The bad news is that if it grows to the scale of the Italy’s Mani Pulte (“clean hands”) operation—which reached 5,000 executives and politicians—then Garman points out we could see a 3% to 4% contraction in GDP.

Mexico: Short-term Trajectory: Positive, Long-term Trajectory: Positive

Garmen notes that Mexico is the inverse of Brazil. Although President Pena Nieto has lost popularity amidst scandals it shouldn’t influence his ability to execute reforms. Importantly, President Nieto made significant constitutional reforms in energy, education and other areas all within his first year in office and the June 2015 mid-term elections shouldn’t change this dynamic. Garman expects that quick implementation of energy and telecom reforms are still likely. Longer-term, the big risk is that slower growth and discontent produce a leftist candidate in 2018.

Colombia: Short-term Trajectory: Neutral, Long-term Trajectory: Neutral

Colombia is facing strong external headwinds due to lower oil prices. Garman believes that President Santos’ second-term success will be tied to his ability to deal with the Revolutionary Armed Forces of Colombia (FARC) but expects that a deal remains likely within a year and will be a boon for the oil sector. Lower oil production will add pressure to the fiscal accounts increasing risks for higher taxes and short-term pain but Garman has a constructive muddle-through view.

Argentina: Short-term Trajectory: Negative, Long-term Trajectory: Positive

Garmen expects the October elections to be very competitive between Daniel Scioli (FPV), Sergio Massa (FR) and Mauricio Macri (PRO) but notes that there are no major differences between the candidates. In short, he feels that there will be constructive policy adjustments after the election regardless of whoever wins. However, successful implementation of the adjustments will be very challenging for any administration due to significant macroeconomic events. Watch for a lifting of foreign exchange (FX) controls, increased debt issuance and a possible settlement with holdouts.

Venezuela: Short-term Trajectory: Negative, Long-term Trajectory: Negative

In Venezuela, Garman estimates the probability of a credit event in 2016 at 60%. He reports that it’s likely the government will make the necessary adjustments to service its debt in 2015 but will enter 2016 with very little in the bank. The government is willing to dramatically cut imports and liquidate assets. Garman feels President Maduro will maintain power through the election. However, if Maduro is unable to finish his term, with 70% disapproval ratings, then Garman suggests a social/political crisis could develop where the military steps in to put a damper on it. Complicating matters further, there are no strong alternative candidates within the chavismo.

Chile: Short-term Trajectory: Negative, Long-term Trajectory: Negative

In Chile, Garman reports that the risk to investors will be high as costly reforms advance and economic growth remains subdued. Tax and electoral reforms have been approved and education and labor reforms are advancing. Chile had enjoyed more than two decades of successful economic policies and political stability but today there are high demands for additional spending and regulation.

Peru: Short-term Trajectory: Neutral, Long-term Trajectory: Neutral

In Peru, Garman feels that the political risk is high but it remains one of Latin America’s best performing economies. He believes that its economic and investment polices are unlikely to change before the end of President Humala’s term in 2016. However, it’s likely that a populist candidate could emerge and reverse policy in 2016.

Click here for a link to Chris Garman’s full presentation.

Navigating Business Challenges in Latin America

The first panel discussion of the day was moderated by Ignacio Campos, Director of Strategy & Business Development, Fortune Brands Home and Security, and revealed key insights on navigating business challenges in Latin America. This panel of corporate executives provided interesting perspectives across the pharmaceuticals, lighting and food service industries.

Anil G. D’Souza, Corporate Vice President – Japan and Emerging Markets, Hospira, Inc., sees the best opportunities for Hospira’s infusion and pharamcutical services in Brazil and Mexico due to the size of the markets and low per capita spending on healthcare. D’Souza explains, “Healthcare is not a want but a need—and that’s a huge advantage.” He believes it’s essential to develop your strategy and then stick with—only changing tactics—until a fundamental change occurs.

Hospira’s strategy works with governments and industry associations to stay ahead of the game and influence results. D’Souze capitalizes on acquisitions and joint ventures as a means to gain access to public tender participation bids. His biggest challenges involve import restrictions. In Brazil, public-private partnerships are utilized to transfer technology over a five to ten year period which D’Souze reports works well if the technology will be obsolete after 5 years.

Dave Riesmeyer, Executive Vice President of Panasonic Lighting Americas, Inc.believes it takes two things to win in Latin America. First, a well-postioned entry strategy with a strong brand and technology that’s recognized. Second, a strong local partner. He observes that the customer is no less demanding in Latin America and you need the proper logistics, import and legal support to get the product delivered on time. Like D’Souza, Riesmeyer looks for joint venture opportunities to reduce investment costs and provide an off ramp if things go wrong.

Reismeyer stresses that security issues are the biggest risk of doing business in Latin America. He believes security is worse in Mexico today than it was ten years ago—especially near the US border. Reismeyer said, “It’s statistically more dangerous to travel in Latin America than it is in Africa.” In addition, he points out that all of the Latin American countries have old infrastructure (roads, bridges, etc.) which significantly impact traffic and logistics.

It’s statistically more dangerous to travel in Latin America than it is in Africa.” Dave Riesmeyer, Panasonic Lighting Americas, Inc.

John Naoum, Sr. Marketing Manager, Global Business Development, Brinker International (owner of Chili’s Bar & Grille and Maggiano’s Little Italy) covered the food service industry. About 30% of Brinker’s fleet of restaurants are in Mexico and the  Andean States where there is a mature market and steady growth. He sees huge potential for growth in Peru and Colombia where Brinker still needs to build infrastructure.

In regards to strategy, Naoum agrees that finding a strong local partner is the most important factor for success. If the market accepts American brands and views the United States in an aspirational manner then it’s a positive sign. However, significant tax and import challenges exist. Naoum explained that it can take six months to launch a new menu item in Latin America as compared to only 3 to 4 weeks in Asia and the Middle East. Furthermore, some import taxes are as high as 45% and make some products, such as ribs in Ecuador, cost prohibitive. Overall, it’s easy to trade and import goods in Mexico, due to NAFTA, but taxes can be high.

Luncheon Keynote Speaker: Ambassador Luis Miguel Castilla

Luis Miguel Castilla, Ambassador of Peru in the US, presented the luncheon keynote address. Ambassador Castilla believes  we are at the end of a structural super cycle in commodities across Latin America. Approximately 81% of Peru’s exports are currently in commodities like copper (which has declined in price for the past 15 quarters), oil and gold. So Peru wants to diversify its export basket and transition to a knowledge-based economy. To that end, Ambassador Castilla stressed the importance of the US-Peru Free Trade Agreement (FTA), the Trans Pacific Partnership (TPP) and Pacific Alliance to Peru’s future.

Ambassador Castilla explained that its FTA with the US is comprehensive and goes well beyond basic goods to include labor, services, investment, intellectual property, government procurement, legal and institutional issues, human rights and democratic principals. In addition, the TPP represents a potential market of over 800 million people and 40% of the world’s GDP. Since interregional trade in Latin America is still less than 10%, due to physical and sanitary barriers, it’s critical for Peru to get to the other side of the Pacific. Peru currently operates the busiest shipping port in South America and ultimately wants to become a hub in the global supply chains through the TPP.

In addition, Peru formed an alliance with Mexico, Chile and Colombia to pursue deep financial integration (e.g. by viewing investments in pension funds in Colombia as domestic investments), liberalization of trade, infrastructure improvements and sharing public finance resources such as disaster risk management. This block of countries represents over 200 million people and a combined GDP of $2.1 trillion USD.

Source: Estimates WEO-FMI (2013), Peru – Development Challenges in a Global Setting, Luis Miguel Castilla (May 2015).

In closing, Ambassador Castilla was asked what advice he would give US Presidents and he replied, “A lack of active US presence in the region is being filled by other big countries.” He went on to point out that the US is the fifth largest investor in Peru after a number of European and Asian countries so he asked, “Why is the US so far down the list?”

A lack of active US presence in the region is being filled by other big countries.” Ambassador of Peru in the US, Luis Castilla

Click here for a link to Ambassador Castilla’s full presentation.

Asset Managers: Opportunities & Challenges in Latin America

Raman Aylur Subramanian, CFA, Managing Director & Head of Index Applied Research for the Americas, MSCI, moderated the next panel discussion on the asset management industry in Latin America. According to Boston Consulting Group, Latin America accounted for only 2.5 % of global assets under management (AuM) in 2013. And this represents a very low proportion relative to GDP. Therefore, Subramanian points out that the nascent industry has significant opportunities for growth. Further supporting this hypothesis, the PwC analysis shown below estimates that AuM in Latin America will grow at a 12.5% CAGR between 2012 and 2020.

Ned Burmeister, SVP & COO, Principal International (US $519 bn AuM, $97.2 bn AuM in Mexico, Brazil and Chile) started off with Principal’s Latin American business strategy. Specifically, Principal seeks to leverage its high-quality pension and mutual fund expertise, within developed pension markets of sufficient size, then springboard into the voluntary mutual fund space.

Burmeister sees great opportunity in the Latin American pension and retirement space because he feels the mandatory contribution programs, in and of themselves, will never provide the kind of replacement income that’s necessary for retirement. As shown on the left, pension assets as a percentage of GDP in Latin America significantly lag those in the US and Europe.

In Brazil, Burmeister says, “The first and only person investors call is the bank.” Banks have had an aggressive and closed architecture directing  clients to their own investments. Hence, Principal sources mostly through Banco do Brasil. Finally, Burmeister believes emerging markets are going to leapfrog from plain vanilla equity or fixed income funds to lifestyle and solutions funds.

Lucas Ramirez, CFA, Head of Research, Sura Asset Management (US $114 bn AuM) also observed that the mutual fund industry in Latin America is dominated by the banks. Ramirez says, “You don’t see Vanguard, Fidelity or Blackrock—but local banks that protect their distribution channels by closing them to others, like Sura.”  Yet, Ramirez points to the expected growth in Latin American AuM, in the BCG forecast provided above, and is optimistic that Sura has the right strategy.

Sura is the largest pension fund manager in Latin America with over 17 million clients and a 23.3% market share in AuM across six countries (Mexico, Colombia, El Salvador, Peru, Chile and Uruguay.) Ramirez explained that Sura’s strategy is to  build a regional sales force of financial advisors offering different solutions (real estate, infrastructure funds, etc.) to increasingly more sophisticated clients in Latin America. Sura then relies on third-party investment teams to pick the stocks.

Manuel E. Mejía-Aoun, Founder, Managing Partner, and Chief Investment Officer of Alpha4x Asset Management, says he launched a hedge fund rather than compete with Principal and Sura. Alpha4x manages two global macro hedge funds: Cayman and Brazil. Their strategy is to focus on interest rates, currencies, sovereign credit and equity indices rather than picking stocks. Overall, Alpha4x tries to create low to slightly negative correlations to major indices, produce consistent risk-adjusted returns and maintain disciplined risk management processes.

Mejia-Aoun explains that a global middle class is developing in Latin American that has more more in common with a lawyer in New York City. When asked about his views on Brazil, Mejia-Aoun joked, “The optimist says Brazil is the country of the future. The pessimist says it will always be.”

The optimist says Brazil is the country of the future. The pessimist says it will always be.” Manuel E. Mejia-Aoun

Click here for a link to Session 3: Asset Managers in Latin America

Investment Opportunities & Risks in Latin America

Dan Kastholm, CFA, Managing Director, Latin America Corporate Finance, FitchRatings, moderated the last panel discussion of the day and successfully brought us from 30,000 feet down to ground level. I had the pleasure of working with Dan to organize this last panel of experts and can tell you that we were fortunate to have Kastholm’s more than twenty years of experience in Latin American markets at our disposal. Kastholm noted that FitchRatings has more than 200 people in Chicago with 60 analysts covering Latin America and following 550 credits. FitchRatings also rates 97% of all cross-boarder issues placed globally. Dan led an interesting discussion with the panel across a variety of asset classes and sectors including equity, fixed income, real estate, energy and infrastructure.

Michael Reynal, Senior Portfolio Manager, Head of Emerging Markets; RS Investments; specializes in Latin American equity investments and markets. Reynal bluntly described the current situation in Latin America as dire with earnings growth crushed the last couple of years and I/B/E/S consensus estimates at -2% in 2015. However, he is a professional stock picker and says, “We are often too negative and don’t capture the turn in the markets.” Reynal tries to look past the political drama and be positioned to avoid the risk of underperformance.

Reynal likes finding promising second and third-tier corporates in Latin America and says, “You have to get on a plane and check them out.” Without providing  specific investment advice, Reynal noted Volaris as an example of a growing low-cost Mexican airline carrier and Ferreyros, a successful Caterpillar distributor, headquartered in Lima, Peru. He also noted M.Dias Branco, a Brazilian cracker and pasta company, which has a large market share in the unbranded cracker market and Gruma—the largest manufacturer of corn flour and tortillas in the world—headquartered in San Pedro Garza García and Nuevo León Mexico. Reynal is optimistic on the energy and transportation sectors in Mexico but is more speculative about prospects in Brazil.

Elizabeth Bell, Investment Manager, Aberdeen Asset Management, is responsible for real estate investment activities throughout the Americas on behalf of both separate accounts and fund-of-funds managed by Aberdeen. Bell sees positive opportunities for local, residential real estate developers in Mexico. She reports that the drop in oil prices has been good for the US consumer and is driving manufacturing in Mexico—which in turn drives demand for industrial warehouse space and housing. She also points to a slowdown of residential demand in Brazil. And she worries that if lending dries up Brazilian developers won’t be able to refinance their working capital and become distressed.

Despite the fact that three large Mexican public home builders filed for bankruptcy in 2014 (Urbi, Homex and Corporación Geo SAB), Bell points to pent up demand for residential housing and says, “There are housing deficits of 10 million units across the residential segment in Mexico.” Furthermore, she explains that one-third of the deficit is in the middle-income segment which is doing well. Bell says, “The problem is that banks are not lending to the sector and equity investors have been too timid to put their capital at risk.”

The problem is that banks are not lending to the sector and equity investors have been too timid to put their capital at risk.” Elizabeth Bell, Aberdeen Asset Management

Bell sees Mexican housing as a bright spot for those who want to step in and fill the liquidity gap by lending to small developers who need capital. Bell has seen 18% to 20% returns on senior debt and 20% to 25% on mezzanine debt. She explains that you have to get past the headline risk and fear of bankruptcy because  many local developers are still earning profits and are willing to take on expensive debt in order to achieve their returns. Also, there is good support for low to middle income buyers who can get loans. Finally, Bell cautions that real estate is high risk and you need to find best-in-class partners to do business in Latin America.

Juan Bosch, Senior Investment Strategist (Argentina) and Independent Director of Compass Group; highlighted the favorable total debt-to-GDP ratios in Latin America provided by aMcKinsey & Company study (below). After the 2008 financial crisis, debt-to-GDP ratios in developed countries increased significantly more than in Argentina, Peru, Mexico, Colombia, Brazil and Chile which are still below 150%. Bosch points out that interest rates in Argentina are near 9% to 10% while other areas of Latin America are at 5%.

Source: McKinsey & Company

Bosch is focusing on more liquid asset classes right now and feels that corporate bond yields are good and is long in the financial sector. He emphasizes the need to  take advantage of growth in the Latin American middle class which is just below Eastern Europe and Central Asia (shown below.) Bosch feels that pursuing alternative investments like real estate and infrastructure is an effective way to tap this demand.

Source: BCA Research 2014

Uwe Schillhorn, CFA, Head of Emerging Market Debt, UBS, views Latin America as many different markets rather than just one. Yet, Shillhorn finds the common denominator to be their heavy reliance on extractive industries and commodities.  In fact, he notes that oil and other commodities have been correlated and this has been a big disappointment for countries like Peru. He’s seen currencies weaken (but says they were fundamentally expensive before) and large nominal devaluations but expects currencies will appreciate once commodity prices stabilize. Schillhorn sees Mexico as a glimmer of hope that’s now in need of a second generation of reforms.

In the bond market, Schillhorn warns that it could be very bad for Latin America when US interest rates start to go up. Schillhorn says, “If rates go up in an orderly fashion then the risk premium won’t go up. But if the market moves quickly then risk premia will widen. And if it’s a violent change then credit spreads will blow out.”

“If rates go up in an orderly fashion then the risk premium won’t go up. But if the market moves quickly then risk premia will widen. And if it’s a violent change then credit spreads will blow out.” Uwe Schillhorn, UBS

Closing Keynote Address

Ernesto Zedillo, President of Mexico (1994-2000), Director of theYale Center for the Study of Globalization, was introduced by Chris Vincent, CFA, to provide the closing keynote address at the 2015 CFA Chicago Annual Conference. Vincent noted that Mr. Zedillo’s life story is truly amazing. Rising from humble working-class beginnings, with a public school education, Zedillo’s drive for self-improvement and public service earned him a masters degree and PhD in economics at Yale University and brought him to the presidency of Mexico.

Zedillo argued that CFA Chicago’s discussion about investing in Latin America was vitally important for two reasons. First, investors simply cannot ignore such an important middle-class region of the world with per capital income at $16,000 USD, over 600 million people and a combined GDP of over $6 trillion USD. Second, Zedillo says Latin America is going through a “special moment.” He explains that about four to five years ago there was widespread optimism and it was easy to invest in Latin America. Today, Zedillo asserts that you must exercise greater caution and use more sophisticated analysis to find the opportunities.

Zedillo argues that we must first understand the history of the region. He believes that most Latin American countries overestimated the resilience of their domestic policies and falsely attributed the results to skillful policy rather. Correspondingly, they underestimated the significant role external events would have on their economies—for good or bad. In retrospect, he points out that there was a systematic underestimation of the impact of the super cycle—which can now be declared as over—and other significant structural challenges (e.g. demographic changes, etc.) now lie ahead. Zedillo warns, “The day of reckoning for becoming complacent is not tomorrow—it’s today”

The day of reckoning for becoming complacent is not tomorrow—it’s today.” Ernesto Zedillo

Zedillo emphasized that Latin America is at a “fork in the road” and the urgency for change in each country is even more critical. He says the “homework” ahead of the region is very complex and cannot be oversimplified. Yet, Zedillo says that with gains in productivity the region can make gains in alleviating poverty, inequality and low per capita income.

Zedillo closed with a few observations on regional challenges. He calls Venezuela’s situation “catastrophic” since its GDP fell 4% last year and is estimated to fall another 7% this year and in 2016. He feels that Argentina, though in recession, is “fixable.” In regards to Brazil, the Latin American giant in terms of size and complexity, Zedillo feels the economy will contract by 1% this year and  be in recession. On a positive note, Zedillo says Mexico is lucky to be more “interdependent” with the US (e.g. NAFTA) than other Latin American countries. Therefore, he believes Mexico will consistently do better after a crisis given its strong connection to the US economy.