Distinguished Speaker Series: Kunal Kapoor, CFA, Morningstar

Kunal Kapoor, CFA, chief executive officer of Morningstar, addressed a full house at the University Club on May 16. His address reviewing the current business lines at Morningstar can be summed up in his title–Serving Investors of the Future: Ratings, ESG, and Research Innovations. Most would know Morningstar as a leader in research on mutual funds, the firm’s original product, but Kapoor defined the firm more broadly as a data gatherer and analytics firm. It seeks to deliver innovative data and research to benefit investors by leveraging technology which Kapoor described as an “enabler”.  He provided the following key metrics for the firm:

  • 24 million participants in retirement plans that use Morningstar products or services
  • 12 million individual clients
  • 80% of financial advisors touch Morningstar in some way

Kapoor went on to describe in summary Morningstar’s newer services that many people would not associate with the name. The first was research in individual equities. This began following the tech bubble when institutional investors began to question the objectivity of research from broker-dealers. The environment presented an opportunity for independent research analysis that Morningstar capitalized on. It now employs over 300 equity analysts making it one of the largest independent research providers. Philosophically, the firm takes a very long-term approach a la Warren Buffet. They have even adopted his moat concept to identify companies with defensive characteristics, and as a determinant in Morningstar’s fair value calculation. To judge macro-market conditions, they have developed their proprietary Global Market Barometer (which currently reads as very slightly overvalued).

More recently the firm has expanded into credit research. This was also a response to market upheaval when, after the crisis in housing-related securities, investors viewed research from dealers, as well as the major ratings firms, with skepticism. Kapoor expects credit research to be a growth driver in the future.

Morningstar uses its data and analytics in equity research to provide indices as well. The Wide Moat Focus Index selects for firms with the widest moats in their universe and weights them according to the scale of undervaluation relative to fair value.

Morningstar recently purchased the remaining equity in Pitchbook, a data analytics firm focused on the private equity and venture capital markets, in which it previously had a minority interest. This is a response to the shrinking public equity market that is encouraging more investors to look to the private markets for new investment ideas. Data gathering and analysis is more difficult in this arena, but Morningstar intends to make it an area of focus.

ESG (Environmental, Social, and Governance) investing is yet another new product area for Morningstar. Kapoor noted that this is more than the SRI (socially responsible investing) of the past which sought to eliminate certain out-of–favor companies or sectors (e.g., gamboling, tobacco, or alcohol). Rather, Morningstar scores companies on various ESG-related metrics to identify those more likely to succeed because of their adherence to responsible policies regarding their impact on the environment and their communities. The market for ESG investing is estimated at $23 trillion and covering 26% of retail investments. Additionally, we are at the beginning of a huge wealth transfer from older to younger investors with more women making investment decisions. Both groups demonstrate a preference for investment products with an ESG focus. To address this opportunity, Morningstar has partnered with Sustainalytics, a leader in ESG research and ratings, to score mutual funds and ETFs.

Finally, Kapoor spoke to Morningstar’s processes by describing their Robotic Process Automation (RPA) effort which seeks to automate rote tasks as much as possible to improve the timeliness and reliability of products and services.  He believes there’s no activity that can’t be automated to some degree which offers the benefits of lower cost, increased scale, and improved compliance, all of which contribute to better outcomes for investors who use Morningstar’s products.

Fintech Part 2: Rise of Robo-Advisors

David Koenig, CFA

CFA Society Chicago hosted Rise of Robo-Advisors, the second fintech event of a three-part series. The event was held at The Standard Club on April 19, 2018, commanding a crowd of over 120 people. The event started with a keynote address and was followed by a panel discussion with thought leaders in “Robo-Advisory.” Those in attendance were able to participate in a Q&A session at the end of the event.

David Koenig, CFA, the keynote speaker, is chief investment strategist for Charles Schwab’s digital advice solutions. He helps oversee Schwab Intelligent Portfolios and provides research and analysis about automated investment advisor services. He opened with an introduction to what “Robo-Advisory” really means and provided some background on the topic as well as the agenda for the evening:

  • How technology is changing investment advice
  • Robo-Advice Landscape
  • The rise of technology in investing
  • Where the industry is going
  • Panel Discussion
  • Q&A session

Koenig continued to give a breakdown of how today’s clients interact with technology and how technology is developing in business. He explained that clients are using a variety of devices throughout the day for a variety of tasks from utilizing GPS to ordering lunch online. This attachment to technology has also become pervasive in the business environment from digitizing paperwork and payment systems to hosting virtual meetings. After highlighting the breadth of technology in our lives, he continued to discuss the types of technology we use today—such as social media, mobile processing, and automated payment processing—and what kind of technology we can expect to see in the future through machine learning algorithms and artificial intelligence.

Once the audience had an understanding of the current and prospective technology landscape, Koenig proceeded to discuss the current client experience in financial services. He brought attention to how little time the average investor spends contemplating investment decisions. For reference, he highlighted that, on average, people will spend more time deciding whether or not to take a vacation than make an investment decision. This appears to be due to customer’s lack of satisfaction with the advisory process. Customers tend to classify investment advisory as tedious, intimidating, and inconvenient. However, robo-advisory is shifting that mindset.

Koenig opened the discussion of the current robo-advice landscape by emphasizing that current models typically do not work directly with customers of investment advice. Instead, they work through traditional advisors to empower their decision making and automate redundant technical tasks. This technology has led to more sophisticated advice and asset management being delivered at a significantly lower cost. He went on highlight that this business model was developed by corporate fintech innovators such as Betterment and Covestor and validated by advisory incumbents such as Charles Schwab and Vanguard.

The discussion continued to present the different business models that have emerged over the years: the fully automated robo-only model, virtual advice using both robo and a traditional investment advisor, and institutional services. The robo-only model’s greatest advantage is the extremely low or non-existent investment minimums. The virtual advice model takes all the power of robo model and leverages the skills and experience of a financial advisor. These two models make up the current retail landscape of robo-advice. Koenig also briefly discussed institutional robo-advice in the business-to-business landscape. He highlighted the streamlined client communication and onboarding processes, automated risk profiling and account aggregation, intelligent portfolio construction and rebalancing, and the attractive interface of the modern advisor dashboard. All of these advantages have led to significant growth over the past four years alone—145% compounded annual growth to be specific.

After familiarizing the audience with current landscape, Koenig went into detail about what makes digital advice so appealing. He began by introducing many of the common myths associated with robo-advice and proceeded to break each one. First, he introduced the myth that “robo-advisors are only for millennials.” This was followed by a chart showing that, in fact, baby boomers and Gen X clients are actually the biggest consumers of robo-advisory taking up 44% and 34% of the market, respectively. Next he addressed the myths that “robo-advisors are only for less sophisticated investors” and “robo-advisors are only for small accounts.” These myths were met with examples from Koenig’s personal experience in robo-advisory where he has aided with the direction of several high-net worth and sophisticated accounts. Finally, he addressed the myth of “robo-advisors are going to replace humans” where he once again drew on his own experience to once again explain how the technology is actually used. He emphasized once again that robo-advisory is not replacing traditional advisory, but rather empowering it. His discussion of these myths was closed out by a series of metrics that displayed current investor interest in robo-advisory and highlighted opportunities to educate.

To conclude the keynote presentation, Koenig covered where robo-advisory is going. He drew attention to the fact that it is growing rapidly and differentiating across various financial service functions. He discussed how the implementation of newer technology such as artificial intelligence, chatbots, and machine learning algorithms will continue to empower and change the landscape of financial advisory by adding a heightened level of personalization to the technology. Additionally, he emphasized that he expects consumers will demand both digital and human advice; further perpetuating his message that robo-advisory will empower traditional advisory rather than replace it. He closed out his presentation with a quote from a recent Morningstar editor’s letter stating “Maybe [robo-advisory] automation will make the advisory experience more human.”

The second half of the evening featured a panel discussion moderated by Sunitha C. Thomas, CFA, regional portfolio advisor at Northern Trust, and included speakers Joel Dickson, Sylvia Kwan, and Dan Egan. Each of the panelists introduced themselves and discussed how they leverage robo-advisory for their clients.

Joel Dickson is Vanguard’s global head of advice methodology. As one of the first widely-recognized incumbents to enter the robo-advisory space, Dickson and Vanguard have focused on maximizing their advisors’ alpha, managing global portfolios, and maximizing short and long term goals for clients. They accomplish this through lowering incremental costs to attract clients and automating rules-based tasks as well as implementing continuous risk-profiling of their clients. This continuous risk-profiling is starting to replace more traditional portfolio “bucket” assignments. He also emphasized that robo-advisory has allowed Vanguard’s advisors to focus more on the advisory services by catering more to individual client preferences and goal-focused information.

Sylvia Kwan is the chief investment officer at Ellevest, a technology-enabled investment platform redefining investing for women. In her role, she is responsible for developing investment portfolios and proprietary algorithms that drive Ellevest’s investment recommendations. Ellevest is trying to bridge the investment gap between men and women as current data shows that women are substantially under invested when compared to their male counterparts. Kwan explained that portfolios are assigned through the use of a goals-based questionnaire and client engagement is maintained through a variety of communication channels including their “What the Elle” newsletter. They initially engage their clients through social media and their current community of female investors.

Dan Egan is the managing director of behavioral finance and investing at Betterment, one of the first-movers in the robo-advisory space. Betterment’s value proposition is to “connect common investors to quality advice.” They don’t assign portfolios as much as they allow customization coupled with quality education. With their current product they are working to automate as much as possible and allow their advisors to focus more time on the human element of the business. They use social media to engage clients but their primary source of engagement has been word of mouth and they maintain engagement through precise communication catered to individual clients. This communication includes sharing education on investment planning as well as market news. Machine learning is becoming an increasingly integral part of this communication process.

All of the panelists explained that their current business models are built on advisory fees and a focus on goals-based investing. Additionally, as technology continues to develop and automate the more mundane elements of financial advisory, they are increasingly seeking advisors with greater communication and people skills. The event concluded with a Q&A session.

Q&A

As investing tasks become more automated will investment managers continue to be held accountable for performance? Yes, but accountability will be less focused on short-term and investment philosophy performance and more focused on goal achievement and catering to client engagement.

What has been the conversion rate from traditional to robo-advisory? While nobody could provide an exact metric, the general consensus was that it has been high, especially in more recent years.

Can behavioral coaching be coded? With enough time, yes. However, that technology appears to be in the far future and will likely not be a major impact in the next decade.

How satisfied are people with robo-advisory and how is satisfaction gauged? The success of robo-advisory platforms are measured through client surveys and the current data shows satisfaction rates are high. However, each of the events’ presenters were quick to point out that robo-advisors have yet to endure a recession.

Starting Your Own RIA Firm (Part 3): Infrastructure and Regulatory Requirements

The final event of this three-part series was to explore the infrastructure and regulatory requirements new RIA’s need to satisfy. The two previous events focused on the initial personal challenges of starting your own firm and the marketing and business development challenges.

The four speakers featured for this event included:

Carson BoorasMr. Booras is vice president of Institutional Sales for TD Ameritrade. Booras has over 20 years of experience working within the Financial Industry and has been working directly with Financial Advisors for over nine years. Prior to joining TD Ameritrade, Booras built a fee based advisory practice working with Charles Schwab.

GJ KingMr. King is President of RIA in a Box. RIA in a Box currently helps nearly 1,500 RIA’s overcome the compliance and technical challenges of starting a firm. Prior to RIA in a Box, Mr. King held positions at Goldman Sachs serving advisors to high net worth entrepreneurs, families and foundations.

Joseph Mannon Mr. Mannon is an attorney with Vedder Price Investment Services Group, a legal firm with 35 attorneys serving independent advisors. He focuses his practice on legal and compliance matters for investment advisors, mutual funds and vehicles such as hedge funds.

Ravi Wadhwani – Mr. Wadhwani is the Illinois regional sales director for Morningstar’s Advisor Solutions Group, responsible for building relationships with startup and established RIA’s. His focus is on helping advisors build their practices by leveraging research, data aggregation and practice management technology.

Shannon Curley, CFA, began the event with a brief introduction of the speakers followed by a short presentation from each addressing how their firm helps newly formed RIA’s. King provided event participants with a presentation entitled “RIA Registration 101”, which outlined the steps needed for registration and licensing of an RIA. Wadhwani provided a questionnaire entitled “Taming Your Technologies” which helps evaluate the effectiveness of technology.  Carson stated that TD Ameritrade is a fast growing custodian with dedicated transition teams for RIA’s. As an attorney in his firm’s Investment Advisory group, Mannon has a wide range of experience aiding both new, and experienced, RIAs.

The four speakers spent the remainder of the event responding to questions from the audience, summarized below:

What is the biggest mistake new RIA’s make?

  • Mismatch between the advisory contract and the services you provide to clients.
  • Failure to make clear how your new firm will provide a better experience for clients and result in a better outcome.
  • Unexpected delays due to the ramifications of non-compete clauses with a previous employer. You may not be able to take data with you.
  • Technology does not provide the support envisioned resulting in “biting off more than you can chew”.
  • Using an attorney not experienced with this type of work, or not experienced in working with custodians.
  • Neglecting to create a detailed balance sheet for your new business.

 

What registration is required for trading in alternative assets such as real estate, bitcoin or private equity?

  • Real Estate is not a security, so registration is not a requirement.
  • Private Equity is usually done deal by deal using Special Purpose Vehicles (SPV’s) for each. Registration is not required until the aggregate value exceeds $150 million.
  • Educating clients about bitcoin, does not require registration, but participation in an ICO would require registration.

 

What would be the typical cost of setting up an RIA?

  • If there are no prior employment issues, a bare bones cost could be as low as $2,000.
  • Cost increases dramatically if there are prior employment issues concerning non-solicit and non-compete. In the extreme, costs could exceed $300,000.

 

What are the basics for effective cyber-security?

  • It is important to recognize that typically you are the owner of the data, not the custodian.
  • Ownership of professional business level security software is critical.
  • Stay on top of your vendor’s security practices.
  • If your data center goes down, where do you go? Log on to back-up sites.
  • Consider cyber security insurance and know what is specifically covered.
  • Quick reaction is critical if you suspect the worst. Train staff to deal with situations promptly.
  • Payment of ransom is not recommended, reputational issues may result.

 

What is the most effective way to calculate performance?

  • Use one system to generate ad-hoc reports and fees.
  • Reliance on custodial statements is more common.
  • Clients should have access to all their reports at any time.
  • The trend is for fewer reports (less is more). RIA’s are now involved in more holistic tasks for clients that typically do not require performance reporting.

The brief questions at the end focused on the different requirements for short-only RIA’s or those RIA’s that specialize in hedging or options. These activities are acceptable as long as they are spelled out in the advisory contract.

Volunteer of the Month: May 2018

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Richard Schiller, CFA, CPA

Thank you to all the dedicated CFA Society Chicago volunteers who give selflessly of their time and talents! This month the Communications Advisory Group is recognizing Richard Schiller, CFA, CPA.

Dick has been a member of the Society for two years and joined the Communications Advisory Group. His role as an equity research associate with Robert W. Baird has made him a great fit for the committee. Dick has been an active member of the group since he joined, volunteering to attend various Society events and contributing to the CFA Society Chicago blog. Events he has written about include the Distinguished Speaker Series luncheons featuring Donald Wilson (DRW) and Gary P. Brinson, CFA (The Brinson Foundation) along with the Society’s 31st Annual Dinner which featured David Rubenstein, founder of The Carlyle Group, as the keynote speaker.

He regularly attends advisory group meetings and has been a great source of ideas for both the blog and the new website. Thank you for all your work!

Distinguished Speaker Series: Jane Buchan, PAAMCO

Jane Buchan

The hedge fund industry has been assailed by the media as a costly, underperforming asset class, yet according to PAAMCO CEO Jane Buchan, that rhetoric simply isn’t true. On April 18th, the founder of the Irvine, CA-based hedge fund-of-funds presented to CFA Society Chicago to share her views on the hedge fund landscape.

Buchan is tired of hedge funds getting beat up in the press, and her talk both defended the industry and talked about new opportunities currently being developed. She said that the environment lately has been difficult for active equity managers and interest rates and volatility continue to remain stubbornly low. Some results of this backdrop include:

  1. Investors are focused on beta
  2. Perceived differentiation is low, causing allocators to emphasize fees
  3. Simplicity is key

The market climate has affected the hedge fund industry by giving rise to Alternative Risk Premia (ARP) strategies, which focus on fees and simplicity, and deals and co-investments, which can offer investors lower fees. PAAMCO has been active in developing risk premia solutions, which can be described as a means to access a hedge fund-like return at a lower cost with enhanced liquidity than typical hedge funds. Buchan cited Albourne’s research on ARP that shows $216 billion is invested in these types of strategies today. Somewhat surprisingly, 80% is managed by sell side broker / dealers and only 20% is managed by asset managers.

Despite the media’s negative coverage of the hedge fund industry, there is still a lot of capital in hedge funds at around $3.2 trillion, which has been growing at a fast pace. “It seems like hedge funds are the dog you want to kick,” said Buchan of the media’s view on them, saying she “suppose[s] somebody has to be the villain.” Buchan mentioned news such as the wager between Buffet and Tarrant on hedge funds outperforming the S&P 500. Given the lower market exposure of hedge funds, it is a tough bet for them to win, she said.

Considering the market environment we’re in, what’s an investor to do? “The only free lunch is diversification,” opined Buchan. One example of that is volatility strategies. Buchan said that they often look horrible on a standalone risk-adjusted basis, but on the portfolio level, adding volatility can offer significant benefits. “It’s hard when [investors] add hedge funds for downside protection and there’s no downside,” she said.

“Now let’s have some fun with data,” said the former Dartmouth professor. Buchan showed the audience a number of return histograms and asked them to figure out which asset class they were. One surprise was how concentrated the hedge fund returns were compared to high yield, which had larger tails. Private equity, also a top performing asset class, also had a much fatter tailed distribution of returns than hedge funds. One of the benefits of lower volatility is higher compound returns over time, Buchan said. This is something that current hedge fund investors are well aware of, she said, pointing to the previously referenced $3.2 trillion invested in the industry.

Another positive trend for the hedge fund industry can be found in corporate 10k filings. Buchan said that PAAMCO has been tracking them and has found that corporate defined benefit pensions are moving cash from private equity into more liquid, alpha strategies such as hedge funds. Like all asset classes, there will be periods where hedge funds underperform and outperform, but there is still a lot to like given their high return to risk ratios compared to other asset classes.

Lastly, Buchan encouraged attendees to support women in finance with the organizations Women Who Invest and 100 Women in Finance. Despite a number of studies showing that women can often make superior investors than men, Buchan said that some research indicates that a female hedge fund manager must outperform a male counterpart by 150-200 bps in order to achieve the same level of AUM.

Charterholder Jobs of the Future

Where can CFA charterholders look for career opportunities outside of traditional roles like research analyst or portfolio manager? That was the focus of the Jobs of the Future event sponsored by CFA Society Chicago’s Professional Development Advisory Group on April 12th. Held in the spacious conference center at 1 North Wacker Drive, the event was comprised of two panel discussions preceded by a keynote speech on employment trends in the asset management industry. The topic was popular with society members with nearly 100 in attendance.

Tyler Cloherty, CFA, global head of research at the Casey Quirk Knowledge Center kicked off the event with a research report entitled State of the Industry: Strategic Change in Asset Management and its Impact on Practitioners. He outlined changes currently underway in the investment management field and the consequent effects they will have on the types of roles asset managers will be looking to fill and the skills they will need. To begin, Cloherty noted that employment in asset management is at an all-time high having grown 8.6% between 2014 and 2016.  However, there are meaningful changes in the makeup of the total:

  • Investment professionals (portfolio managers and analysts) have shown the largest growth from 24.9% to 26.6% of industry staff, driven by increases in illiquid capabilities and allocation teams. However compensation for this group has declined slightly.
  • Conversely, distribution has seen the largest decline (from 28.7% to 26.1%) which masks a shift from institutional channels to retail, and an increase in product development roles. Despite this decline, compensation in this area has risen about 5%.
  • Operations has increase share from 45.2% to 46.2% reflecting the build-out of risk management and compliance functions. Here also, compensation has risen by 5%.
  • Firm management has held steady at just over 1% of industry staffing, but compensation has declined by a significant 16%.

Cloherty then went on to describe three factors defining the changing landscape for talent in the industry:

  1. Evolving Client Expectations—Reflecting a general push for cost control, which is manifested in the shift from active to passive strategies, and also the demand for more consistent performance in active products. Clients are seeking value for the fees they pay. In addition, they want more digital engagement to increase their own efficiency.
  2. Industry Catalysts—Including a host of trends: fee compression, commoditization of products, slow growth (especially in developed markets) and rising fixed costs (for more compliance, technology, data collection, and regulations).
  3. External Catalysts—Increasing importance of technology, data, automation, and even artificial intelligence, are the primary external catalysts.

 

Tyler Cloherty, CFA

Cloherty’s research has defined four strategic paths managers may choose to address this changing landscape.  Each has unique consequences for career opportunities for industry participants. The first strategy is to differentiate on product which requires that products perform well relative to expectations. This in turn means clients must see consistent value for the fees charged. Success here will depend on the effective application of data analysis, risk management, portfolio customization, and/or trading enhancements. In addition, cost containment through process automation and systems rationalization will be important. This strategy is likely to offer increased job opportunities involving the collection, analysis, and interpretation of increased volumes of data; fewer roles for traditional investment analysts; a shift of research and portfolio management resources to satisfy the rising demand for illiquid capabilities and allocation strategies; and greater separation of compensation between top talent and the median performers.

The second strategy is to differentiate on client experience by offering a premium service level built around client outcomes. This will require firms to build effective distribution teams to establish and maintain client engagement over a long sales cycle. This begins with identifying prospects using insightful market segmentation and data analysis, and continues through multi-channel outreach, digital marketing, automated sales and client relations tools, thought leadership materials, cross selling, high touch client reporting with mobile capabilities/apps, and in-person client interaction to close the sale and retain business. This strategy will demand more talent in data management, digital marketing, channel expertise, client service, and advice delivery.

Firms can also decide to compete on cost which requires automation, outsourcing, and realignment of incentives. Automation and outsourcing can both be applied to data management, accounting and settlement processes, distribution (via sub-advisory), back and middle office functions, and clerical duties. Investment management and distribution staff are typically the most expensive and their incentives will need to change to make them more efficient. Shifting incentive compensation to long-term payouts and focusing on client retention rather than gross sales are key here. This strategy will boost employment opportunities at third party/outsource providers and internally toward project managers to drive the transformation.

Finally, firm management can choose to engage in M&A to achieve scale and efficiencies. This route has been increasingly popular in recent years. M&A within the asset management industry reached an all-time high in 2017 with over 200 deals worth nearly $3 trillion. Because cost synergies play a major role in the success of this strategy, it is unlikely to drive growth in employment. All aspects of the organization will feel the impact, but operations usually bears the brunt because it offers the quickest and largest cost reductions.

Two panel discussions followed the keynote address. The first featured three Society members whose career paths led to roles that would have been uncommon for portfolio managers in the past, although they are integral to asset management today:

  • Joan Rockey, CFA, principal and CFO for CastleArk Management LLC, a single family office managing $4 billion. She has special expertise in corporate events and transaction strategy within the private equity, finance, energy, and technology industries. While the investments she oversees could generally be labeled alternatives, or illiquid, Rockey’s role is much more expansive covering firm management, client service, staffing, pricing, product development, and analysis of the competitive landscape.
  • Jeff Kernagis, CFA, vice president and senior portfolio manager for Invesco PowerShares Capital Management responsible for a variety of income-based strategies housed in a new generation of exchange-traded fund products.
  • Warren Arnold, CFA, is a team leader in Northern Trust’s National Wealth Advisor Group. As such he is responsible for both the development of custom wealth management plans and their implementation, which requires an extensive amount of client engagement.

L to R: Joan Rockey, CFA; Jeff Kernagis, CFA; Warren Arnold, CFA

Moderator Andy Feltovich asked the panelists to offer advice to younger charterholders seeking to improve their chances at finding new positions leading to rewarding careers. Arnold, an electrical engineer by education, strongly endorsed broadening one’s skill set and continuously striving to learn more. Adding value often comes from outside one’s primary area of responsibility (in his case, tax or estate planning). Kernagis had two recommendations—looking for ways to marry technology to your job, and networking continuously. Rockey noted that no two people will follow the same career path, even if they end up in similar roles. However as a holder of numerous professional credentials (CFP, CPA, and CAIA among them) she advised attendees to grow their skills with additional professional training.

The second panel comprised three experts employed in corners of asset management that are new for charterholders:

  • Lisa Ezra Curran, CFA, co-founder of FinTEx Chicago, a non-profit organization bringing together FinTech and financial services firms seeking to expand Chicago’s role as a center of financial technology innovation.
  • Marcia Irwin, CFA, managing director of Portfolio Specialists at Manulife Asset Management. In that role she serves as the interface between portfolio managers and client-facing partners to ensure effective communication and positioning of investment strategies as well as top notch client service.
  • David Kiefer, CFA, managing director at J. P. Morgan in the Global Consultant Strategy Team where he services investment consultants who recommend J. P. Morgan products to institutional investors.

L to R: Andy Feltovich, CFA; Marcia Irwin, CFA; David Kiefer, CFA; Lisa Ezra Curran, CFA

Each panelist provided useful insight into their roles. Curran noted how FinTech can be viewed as the application of common technologies across multiple financial services, or the marriage of financial expertise applied with technology to create new roles or enhance old ones. As examples, she pointed out that FinTech has opened up alternative investments to new investors, as well as led to the digitization of mortgage records. This facilitates the flow of information and improves the process of mortgage securitization. It also better informs investors on the intricate details defining mortgage-backed securities. Irwin noted because she is positioned between the sales team (and their clients) on the one side and portfolio managers on the other, communication skills are very important. However, the CFA charter sets her apart and proclaims her investment expertise. Kiefer echoed that point by noting the charter stands out in the sales process. Because he deals with consultants–investment professionals in their own right–he can’t speak from a script about his products. He needs to project deep product knowledge and the charter helps with that.

In providing advice on career guidance, Curran said that was difficult to do because FinTech is so new; the roles within it are still evolving. Kiefer suggested that the RFP team provided an excellent entry point into the investment business. It requires strong communication skills and teaches broad knowledge about a firm’s product set. Irwin’s advice was to approach one’s job from the client’s point of view to understand their needs better and determine how to satisfy them.

A Taste of Latin America

CFA Society Chicago held its latest social event on Marth 13th at the Mexican restaurant Pueblo. Pueblo specializes in traditional Mexican fare with a “contemporary twist”, and is located inside of Latinicity on the third floor of Block 37 (northwest corner of State and Washington). Latinicity features eight innovative kitchens, the sit down restaurant Pueblo, a coffee café, full bar, and lounge.

The program for the evening was simple; participants were to watch and learn how to make a three course Latin dinner with hands on instruction from Pueblo’s kitchen staff. The dinner menu included a side dish that each participant would make, while Pueblo’s chef, Marcos Flores would show the group how to make a soup and entrée.

Chef Marcos began the program explaining to the group how to make the first course, Aquachile Ceviche. Aquachile Ceviche is a Mexican seafood dish that includes shrimp, pineapple, cucumber, avocado, celery, tomatillo, serrano, and cilantro. Chef Marcos provided some basic guidance on how to properly use a cutting knife, and then provided specific instructions on how to assemble the dish. Each person made their Aquachile at their station, which were close enough together so that acquaintances could be made and tips could be shared. I found out from sampling my station mates Ceviche that the smaller diced the ingredients, the better the dish.  It is suggested the dish be served with avocado and tostadas, and if you like, beer and tequila.

Once everyone had finished creating their Aquachile, Chef Marcos explained the steps required to make a large batch of Aquachile Sauce to accompany the dish. In a large blender he combined; garlic, white onion, chopped celery, fresh grated ginger, 2 limes, cilantro with stems, 1 whole serrano, 2 ice cubes, 3 small whole tomatillos, and kosher salt. Once those ingredients were blended olive oil was slowly added to complete the sauce. Chef Marcos advised that the sauce should sit for several minutes before serving, chilled.

We relocated to the kitchen where preparations began for Ajiaco Soup – a creamy chicken and potato soup, and Lomo Saltado – a traditional Peruvian dish. The group gathered around Chef Marcos as he prepared the soup. He diced potatoes, and brought them to a boil. Next, he cut raw chicken into strips and browned them in a skillet. Potatoes, chicken, corn, cilantro, green onions, and other spices were then combined into a large pot and let simmer. Chef Marcos explained that Lom Saltado is a stir-fry dish that includes strips of sirloin, sliced onions, and whole tomatoes. Over a medium skillet with hot oil, sirloin was browned, onions and tomatoes were added and sautéed until they were soft. Chef Marcos advised that the dish is traditionally served over fries or rice.

Once those dishes were complete, the group headed to the bar where Pueblo’s head bartender had been making a batch of Pisco Sours, which is made of Pisco brandy, egg whites, fresh lime, simple syrup, and bitters. The Pisco Sour originated from Peru or Chile, and is considered a South American classic. The drink’s name comes from pisco, which is its base liquor, and the term sour is in reference to sour citrus juice and sweetener. One of our group asked the reason for using egg whites. The bartender explained it adds a soft, element to the texture of the drink, and egg whites produce a layer that floats on top of the drink, which is ideal for decorating with drops of bitters or highlighting a garnish.

With drinks in hand we moved to the dining area to enjoy the fruits of our and Chef Marcos’ labor.  Pueblo staff had assembled a large table with the dishes of the evening; the Lomo Saltado, Ajiaco Soup, each participant’s Aquachile Ceviche, the chilled Aquachile sauce, and tortilla chips.

Over dinner we discussed a number of topics from, the reasons that brought us to the event, to economic growth expectations given the passage of the tax bill coupled the general uncertainty that is endemic to the current administration. Several of the participants noted they wanted to take a cooking class but not invest in a full cooking course. A couple of those people remarked that their experience at Latinicity would motivate them to enroll in a cooking class and another couple advised that they had been to Pueblo before and enjoyed the food so much that they wanted to replicate some of the dishes. Our group agreed that the soup was the hands down winner of the best dish of the night. Regarding economic growth expectations? We decided it was more fun to discuss the events of the evening over another Pisco Sour with new found friends.

Distinguished Speaker Series: Rupal Bhansali, Ariel Investments

Rupal Bhansali was the featured guest speaker at CFA Society Chicago’s March Distinguished Speaker Series luncheon held at the Chicago Club. Bhansali is chief investment officer and portfolio manager of Ariel Capital Management’s international and global equity strategies. Her presentation was called The Power of Non-Consensus Investing.

Bhansali began with two examples of non-consensus thinking: the micro-lending phenomenon that has helped eradicate poverty in places like India and the rise of Silicon Valley business model that was radically different from what was conventionally accepted. These examples highlighted that non-consensus thinking can be applied to a variety of situations and disciplines, including investment management. Also, this type of non-consensus thinking can drive alpha in investment portfolios. Considering the non-consensus aspect of your research is a great way to determine if there may be alpha.

The aim of institutional asset management is to be correct – correct in your assumptions, correct on your earnings estimates, correct with rates of growth. The problem with being correct is that it gets you to the same place as other good investors. A research analyst that is correct along with the rest of the institutional market is not necessarily rewarded. Fundamental research is about finding alpha, which in most cases is akin to proving everyone else wrong. Being correct and non-consensus provides rewards. The question then is how to be behaviorally different but remain analytically sound?

Bhansali provided an example of applying non-consensus thinking to the investment prospects of a global tire company. The consensus view of this company (and tire industry) was that tires were a conventional part of a car, low tech in terms of manufacture (it is just rubber and steel bands right?), and that the market is driven by new car sales. That view seemed reasonable, certainly a consensus view at the time. She then offered a non-consensus view. Is the manufacture of a tire a simple process that can be copied by a competitor? Turns out no, tire manufacturing is an involved process that cannot be easily reverse engineered. Do consumers consider tires interchangeable? No – they have brand affiliation. The consumer also cares about safety, fuel economy, and performance, which provides the company a value proposition. What drives this market is miles driven, not new car sales. A sector and business that was consensus branded as a low tech, interchangeable auto part, turned out to be a high tech, branded, mission critical good. If you had a non-consensus view on this market/brand, outsized returns were made.

A second example of a non-consensus investment view was provided on the mobile phone market. There was a time when BlackBerry and Nokia were market darlings. In part, these views were based on advanced technology, great user experience, superior growth, and competitive product advantage. The market took those factors to be insurmountable barriers. In fact these companies suffered from an eroding advantage where their products were surpassed by other brands. Apple seized the opportunity to displace these companies with a better product and user experience, offering the market exceptional growth of its own – for a time. Bhansali remarked that the consensus view on Apple has been positive for too long. Apple also suffers from many of the factors that doomed Blackberry and Nokia: alternative options and equivalent user experience for a cheaper price. She also noted that the iPhone is the dominate driver of revenue for Apple. If iPhone sales falter, Apple returns will suffer.

Bhansali’s last example of consensus/non-consensus thinking was particularly pertinent to the audience. Currently passive management is the go to option for investors. It is consensus – low entry cost, simple, easy, a no-brainer decision, while active management exhibits high costs, might have hidden risks, and is an active decision. Seems like there is no hope for active management given this view. Passive management and ETFs are winning and the outlook for active management is bleak. However, what would a non-consensus view of this subject consider? Although passive management is low cost, it is not low risk. Passive management has come of age in a prolonged bull market. It has not been stressed in a recessionary, or bear market. What might occur when large passive funds try to liquidate at the same time? For starters, the bid/ask spread will widen – a crowded trade is a risky trade. The scale that helps keep the cost of passive management low also exposes it to be too big to liquidate. A non-consensus view of active management might consider that the ease of ETF investing doesn’t equal being right, that real active management pays for itself when true active management is identified with active share, fundamental research, and management that has skin in the game.

The audience then offered some questions to Bhansali:

Q: If you believe that alpha is everywhere then the universe of securities is huge, how do you screen down to a manageable amount of securities?
A: Start from a rejection perspective not a selection perspective. Good securities will be the residual.

Q: In your portfolio what type of downside protection do you use or recommend?
A: I do not use derivatives as they are too short term in nature, and one must get the timing and thesis right for them to be effective. Protection can be obtained via investment ideas – using securities that have low correlation with the portfolio.

Q: What makes a great research analyst?
A: Bhansali noted that although it less common today, that being a generalist was helpful to her evolution as a research analyst. She also advised that a good analyst should follow multiple sectors, and always examine the counterfactual – understand what will cause a company to underperform as much as you understand the factors of outperformance.