Vault Series: Gautam Dhingra, CFA, High Pointe Capital Management, LLC

On September 7th, the CFA Society Chicago welcomed Gautam Dhingra, CFA, the CEO and a portfolio manager at High Pointe Capital Management, LLC to discuss incorporating intangible assets and ESG factors into stock selection.

 

According to Mr. Dhingra, there are multiple examples of intangible assets; patents in the case of Qualcomm, brands like Pepsi and Apple, difficult to replicate assets like Union Pacific railroad, or sanctioned oligopolies like Moody’s, to name a few. When looking to use these intangible assets one should look beyond accounting data and focus on ‘what really matters’, or historical financials versus future economic profits. Much of the value derived from intangible assets, like the ones mentioned, cannot be found on a balance sheet, rather derived through future pricing power or lack of competition, for example. In the growing information based economy, traditional accounting won’t be as useful going forward and stock selection models must be adapted to incorporate intangible assets to find an edge and outperform. An increasing proportion of companies’ values are being derived by intangible assets, which poses a question; should one view Procter and Gamble and Qualcomm as peers, both benefiting substantially from intangible assets?  The answer is yes.

 

The speaker discussed another form of intangibles, Environment, Social, and Corporate Governance (ESG), which can be described as putting your money to work into companies that follow good practices, e.g. treat their employees and other stakeholders well. With employee satisfaction having shown a strong correlation to stock performance by one study, some 3.5% per year above its benchmark, adjusted for characteristics, which found that it could be a leading indicator to predicting earnings surprises.

 

High Pointe conducts its research into ESG and other intangible factors and inputs it into its model that combines ‘franchise quality’ and ‘expected growth’ in an effort to find great stocks. The company seeks to find a business’s ‘franchise quality’ by ranking stocks on a variety of factors, including ‘how good is the business’ (using barriers to entry, degree of competition, pricing power vs. customers, pricing power vs. suppliers, and suitability of advantage) and ‘how well is this being managed,’ which includes management, employees, and governance.

 

CFA Society Chicago Chairman’s Letter to Membership

Marie C. Winters, CFA

I am proud to report that thanks to the efforts of our volunteers, sponsors, and staff, CFA Society Chicago had a very successful FY2017. During the year, we hosted over 150 events to advance educational knowledge, professional excellence, and high ethical standards, and also to enhance the greater good of our community. We also finished FY2017 in a solid financial position with reserves of approximately $2.1 million, up 11% from the prior fiscal year end.

Highlights of our key accomplishments in FY2017 include the following:

Excellence in Education & Ethics

Our education programming spanned a variety of large and small events. Our popular monthly Distinguished Speakers Series drew top leaders, including Liz Ann Sonders, Charles Evans, Richard Driehaus, and Gary Brinson, CFA. Taking advantage of our new office location, we launched the Vault Series where we invited experts to speak on niche topics, including market signals for capital flows. At our 2016 Annual Dinner featuring keynote speaker Cliff Asness, we celebrated over 1,000 registrants for the second time. Investing in Innovation and Investing for the Long-Term consisted of panel presentations that also drew a large number of attendees.

We culminated our year with our largest Society event outside of the Annual Dinner: Active vs. Passive, featuring a discussion between Nobel Laureate, Dr. Eugene F. Fama and Dr. Robert Litterman. Over 400 people attended the event in Chicago and more than 200 additional attendees registered for the live webcast. Subsequently, over 2,000 individuals have watched the archived webcast, showcasing the value your Society brings to CFA charterholders globally.

Career Advancement for Members

Two years ago we committed to invest in our members’ careers. Our member-only program offerings have expanded greatly, focusing on development of soft skills and opportunities to explore alternate career paths at our Annual Career Fair and the Industry Roundtables event. During FY2017, we launched a new entrepreneurial series, Starting an RIA Firm. This has proved to be a big success with our members and we will continue to build on this series in the current fiscal year. Finally, we provided our members frequent occasions to expand their professional networks across our educational, professional development, and social events.

Giving Back to Our Community

The Society launched a financial literacy initiative that reached over 900 high school students in under-privileged neighborhoods by partnering with the Economic Awareness Council (EAC). The program experienced a strong start, attracting more than twice as many volunteers as we had targeted. Interest among our members in this program continues to grow and has already nearly doubled from last year’s volunteers.

Upcoming CFA Society Chicago Events
The Society is proud to announce these upcoming events:
  • September 26 : Education Seminars is hosting Water’s Impact On Investing;
  • September 27: Networking with Leadership;
  • October 3: Our next Distinguished Speaker is Ronan Ryan , President of IEX Group;
  • October 4: Starting Your Own RIA (Part 2): Tips for Marketing and Business Development; and
  • November 1: Our 31st Annual Dinner featuring Keynote David Rubenstein, Co-Founder and Co-CEO of Carlyle Group is at the Hyatt Regency.

Please visit our website at www.cfachicago.org to register for these events.

Looking Ahead to Fiscal Year 2018

Recently, I and the rest of the Executive Committee had the pleasure of meeting with several leaders of CFA Institute to further plans for the current fiscal year. CFA Institute is pleased with the Society’s efforts and will continue to provide solid support for us to pursue a variety of initiatives for education, branding, and technology enhancements, including a new website in the near future. We came away feeling that clearly, CFA Society Chicago is considered a leader among societies globally – we are well-recognized for our leadership and innovative thinking in education and ethics initiatives.

Over the coming year, you can expect to see efforts focused on preparing our members for the future. Many dynamic shifts are impacting our industry, including evolving investor preferences, technological change, and financial regulations, to name a few. These secular trends make it imperative that we have greater professional dexterity in meeting our clients’ expectations as well as in managing our careers. Our volunteers will continue to play a key role in helping all of us prepare for the future and thrive.

I am truly honored and excited to serve as chairman of the oldest and sixth largest CFA Society in the world. With over 4,700 members, CFA Society Chicago is well-positioned given our abundant resources – talented volunteers, dedicated staff, and financial position.

Very best,
Marie C. Winters, CFA
Chairman, CFA Society Chicago

Distinguished Speaker Series: Mario Gabelli, CFA, GAMCO Investors Inc.

Well known value investor Mario Gabelli, CFA, chairman and chief executive officer of GAMCO Investors Inc. and LICT Corp., addressed a capacity audience of CFA Society Chicago members and their guests at the Standard Club on September 14th. In a wide-ranging presentation, Gabelli drew on his four decades as a money manager to offer his insight and wisdom on the current state of the economy and investment markets. He began by extoling the virtues of a CFA Charter, pointing out that only through the detailed analysis of a charterholder could one understand a business well enough to see how it fits into the economy and how to value it correctly. He encouraged everyone to “keep doing what you are doing” to help our country and make capital markets work even better.

Gabelli touched briefly on two topics he believes need regulatory change. The first was ETFs and the advantage they have over mutual funds because of their tax-efficiency.

He strongly advocated for leveling the playing field with an end to the requirement that mutual funds distribute realized capital gains annually, thereby creating a taxable liability for investors even though they have made no transaction. Every other type of investment requires a sale to generate a capital gain, and mutual fund shares ought to be treated the same.

Second, on tax reform, he said Congress needs to cut the corporate income tax rate to make American firms more competitive with foreign ones.  The protracted debate is only serving to delay new investment that our economy badly needs.

Without going into great detail, Gabelli listed several sectors that he thinks currently offer attractive investment opportunities, including:

  • Infrastructure: Although this is on the top of many favored lists, he pointed out that the American Society of Civil Engineers rates infrastructure in the U. S. as D+, which will require new investment regardless of the political environment.
  • Health and Wellness: Drawing on the trend of an aging population, he recommended investments in vision and hearing care, joint replacement, and obesity treatment.
  • Live entertainment: Gabelli described this as being immune to competition from Amazon (or, more generally, the internet). Noting the high valuations put on sports teams in private transactions, he has calculated that a sum-of-the-parts analysis on Madison Square Garden Entertainment yields a value of zero for the New York Knicks.
  • Equipment rental: A secondary play on infrastructure, but one that he expects to do well even without that tailwind.