Annual Celebration 2016: New Member and Volunteer Recognition

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CFA Society Chicago Advisory Group Co-Chairs

CFA Society Chicago held its annual celebration for new members and volunteers on Thursday, January 26, 2017. The site was a unique one–the dress circle lounge at the Chicago Opera House, which was filled to near capacity. The event provided a wonderful opportunity for new members to build their professional networks, and a time for everyone to reconnect with friends and colleagues.

Chairman of the Society, Doug Jackman, CFA, led off the official portion of the event by welcoming everyone, and thanking the many volunteers for their hours of effort that make the CFA Society Chicago a success. The Society currently has more than 225 volunteers who make the 100 plus events over the year possible. Jackman gave a special welcome for the new members and encouraged them to seek out the members of the various advisory groups represented at the meeting and to consider joining one to assure the continued success of the society’s programming:

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  • Communications Advisory Group
  • Distinguished Speaker Series Advisory Group
  • Education Advisory Group
  • Membership Engagement Advisory Group
  • Professional Development Advisory Group
  • Social Events Advisory Group
  • CFA Women’s Network

Executive Director Shannon Curley, CFA, then stepped to the mic and announced the list of volunteers recognized for their outstanding contributions during 2016 to each advisory group:

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CFA Society Chicago Volunteers – Outstanding Contribution 2016

Annual Dinner – Melissa Binder, CFA

Professional Development – Shai (Shy) Dobrusin, CFA and Samantha Grant, CFA

Communications – Brad Adams, CFA

Education Seminars – Jeanne Murphy, CFA and Cindy Tsai, CFA

Distinguished Speakers Series – Alan Papier, CFA

Membership Engagement – Gerald Norby, CFA

Social Events – Taylor Champion, CFA

Curley continued by thanking the co-chairs of the advisory groups for the extensive time and energy they put into making the events the society offers so valuable to our membership. All recognized volunteers received a gift from the society in appreciation of their service. The final piece of official business was the drawing of raffle prizes (to some the highlight of the event). This year, everyone could choose to enter their choice of three drawings, each offering a combination of dining, entertainment and hotel vouchers. With the official business completed, the socializing continued for the remainder of the event.

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Diversity Improves Your Bottom Line and How You Can Achieve More of It: Andie Kramer and Al Harris

Recognizing the benefits of a diverse workforce, and overcoming the challenges to it (which are often subtle and hidden below the surface) was the theme of the presentation Andie Kramer and Al Harris made to the CFA Society Chicago on January 18. Andie and Al are practicing attorneys, and also business partners working to build awareness of the benefits of expanded diversity–especially gender diversity–in the workplace. Their starting premise is that teams of diverse members will be more productive because the differences among the members requires that they be more careful in their deliberations, more thoughtful about what they say, more collaborative with each other, and in the end, more productive and innovative. So, increased diversity is not just morally and ethically right, it can also lead to improved results and profits.

If greater diversity is so good, why is it difficult to achieve? Mainly because it takes us out of our comfort zones. We naturally prefer to associate and work with people who are like us in many ways. Reaching consensus with people of differing perspectives can be difficult, so we tend to avoid diverse groups to reduce tension and conflicts. Improving diversity requires addressing several areas, first among them is the challenge of bias which Kramer and Harris define as an unconscious belief, preference, or inclination that inhibits impartiality. Bias in turn is shaped by stereotypes which ascribe behavioral characteristics to someone based on an easily observed characteristic (such as gender, age, race, etc.). These stereotypes form our perceptions and expectations about people even before we know them. Our challenge is to invalidate these misperceptions with real evidence.

Kramer and Harris pointed out two types of personality characteristics that stereotypes assign by gender. Stereotyping considers communal characteristics such as compassion, affection, modesty, sympathy, and warmth to be feminine. Conversely, agentic, or action-oriented characteristics such as aggressiveness, confidence, risk acceptance, and independence are masculine. We naturally consider successful leaders to be agentic, and if we consider those characteristics to be masculine, we create a bias toward men as leaders. Gender bias is often manifested through “micro-aggressions” such as subtle putdowns (verbal and nonverbal), sarcasm, and dismissive gestures.  In Kramer and Harris’s view these provide the scaffolding for workplace discrimination.

What can men and women do to improve this situation? Men must first learn to recognize gender bias, using the indicators of micro-aggressions, and object to it firmly. They should “think slow”, using their rational brains more than the emotional. They should advocate for women as mentors (whether formal or not), and embrace differences. Women need to perform a balancing act: recognize the importance of agentic characteristics, but temper them with the communal.

Organizations can improve diversity by recognizing that gender bias exists and that by holding back women, it leads to sub-optimal results. They should strive to make hiring and promoting practices fair and equitable. An important step toward this is removing subjectivity from the evaluation process as much as possible (for example, eliminating open-ended questions in interviews). Finally, managers should seek feedback on their efforts from employees or external experts.

Vault Series: Melissa Brown, CFA, Axioma

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Managing risk, specifically equity market risk, was the topic of CFA Society Chicago’s new Vault Series on January 11. The series brings noted investment experts to Chicago on a bi-monthly basis to share their thoughts and insights on the investment scene. The name comes from the common-area conference room in the Society’s new home at 33 North LaSalle Street, a space that was, indeed, once the safe deposit vault for a bank. The latest flat screen video monitors hang over the bare steel safe deposit boxes still line the walls. The day’s speaker was Melissa Brown, CFA, Senior Director of Applied Research at Axioma, a provider of risk management and portfolio analysis models and tools serving asset managers and institutional investors. Brown provides perspective and insight on market risks as measured and quantified by Axioma’s data and analytics.

Brown began by noting there are many types and measures of risks (e.g., Value at Risk, standard deviation, credit risk, liquidity risk, etc.) but Axioma defines it as the expected volatility of a market (they focus on equity markets) over a defined investment horizon. It is a function of volatility and correlations, both of which they see as being persistent over time, and therefore possible to forecast from the past. Currently, Axioma sees benchmark risks as low, but volatility is unlikely to decline further. In 2016, volatility declined in most equity markets around the world, despite a jump in mid-year following the “Brexit” vote. This was more pronounced in U. S. markets than other countries, and also in developed markets more than emerging markets. The level of volatility at the end of the year was not materially different from levels in 2000.

Axioma decomposes risk by looking at five components:

  • Portfolio holdings (generally are they more or less risky?)
  • Characteristics of the holdings (sector, industry, cap size, etc.)
  • Security-specific risks (which rose in 2016)
  • Factor volatility (an important component in Q4)
  • Correlations

The last one, correlations, is very low now and is the reason market volatility is low despite the relatively high volatility of individual securities.  Sector also plays an important role here. In the U. S. in 2016 there was a wide dispersion of risks and returns by sector. Consumer discretionary, Technology, Energy, and Materials all did well with declining risk. Finance, real estate, telecom, and utilities had very mixed results, but also with generally lower risk (except for finance). The dispersion of sector returns peaked in November at levels near records for Axioma’s database. Brown pointed out that the low correlations could provide an opportunity for active management to outperform passive.

Taking an international view, Brown noted that as of the end of the year, risk in developed markets is highly concentrated (see Italy, Greece, and Iceland) while in emerging markets, risk is more widely (and evenly) scattered. This situation developed during the fourth quarter and reflects the strength of the dollar, which is more of a challenge for emerging markets than for developed. Switzerland just nudged out the U. S. for the lowest risk by country at year end. Mexico holds the distinction as the riskiest country, again reflecting the weakness of the peso since the U. S. election.

Distinguished Speaker Series: Dan Clifton, Strategas Research Partners

“Angry is the New Hope” was the title and theme of the presentation on December 6 from Dan Clifton, Partner and Head of Policy Research for Strategas Research Partners. Hope was the watch word of the Obama administration, but the surprise election of Donald Trump reflects anger in the electorate. This anger stems from the persistent, subpar economic growth since the end of the financial crisis. In the eight years since, growth in GDP has averaged just 2%, versus the long term trend of 3%. That 1% annual shortfall, has created a cumulative GDP gap of $2.6 trillion dollars. The support that Bernie Sanders received late into the campaign indicates the voter anger extends across the political spectrum, not just within the Republican Party.DSC_3255

While Donald Trump’s election may have surprised many people, beneath the surface there were several indications that he would prevail:

  • Audiences for the Republican debates were three times what the Democrats attracted in 2008, the last time there was an outgoing administration. Ratings for these debates were even greater than popular reality television shows suggesting a great interest in making changes in Washington.
  • Weakness in the U.S. equity markets in the three months leading up to the election has a reliable history as an indicator for a loss by the party in power.
  • The finance and energy sectors outperformed the broad market in the last three months, also predicting a Republican win.
  • Support for populist, “non-traditional” parties, is gaining momentum around the world as confirmed by the Brexit vote in the United Kingdom. The push for change is global, not limited to the U. S.

This global shift toward populism is creating an urgency for governments to get their economies moving faster again. Hence, the victory for Donald Trump. Clifton listed several areas of emphasis for the new Trump Administration:

  1. DSC_3257Greater geo-political risk—as we have already seen from the phone call to the President of Taiwan, Trump has little concern for protocol and his use of Twitter increases the chance of off-the-cuff communications.
  2. Trade Policy—Trump made bold changes to trade policy a key part of his campaign and as president he will have the power to enact many of them unilaterally. Will he do so without seeking the guidance of his advisors or the congress?
  3. Fiscal Policy—the financial markets have quickly priced in everything Trump promised to do during the campaign (witness the sharp increase in interest rates and stock markets). In reality congress is unlikely to give him everything he wants and, even that, more slowly than the market expects. In particular, congress is likely to be more concerned about increasing the budget deficit than will be the president.
  4. Tax Reform—done correctly, tax reform (unlike a tax cut) will be neutral to the deficit in the early years, but achieving it is difficult and slow. True tax reform has only been done once before (1986).  A key question is whether it’s done via budget reconciliation, which is very partisan and leads to compromises that reduce the effectiveness, or dynamic scoring which accounts for the stimulating effect of the reduction in tax rates. Clifton called repatriation of foreign earnings the crown jewel of tax reform with a forecast of a potential $1 trillion coming into U. S. over fifteen months. This will add to the stimulus impact from tax reform and fiscal spending.
  5. Stimulus spending—also difficult to get done quickly–see Obama’s disappointing efforts in 2009. Clifton thought infrastructure stocks had run up too far, too fast since the election and that energy-related projects will get the emphasis from president Trump. He is likely to give a green light to several dozen projects currently being held up by the Obama administration over global warming concerns.

Trump made repealing Obama Care a signature feature of his campaign but the Republicans in congress are unlikely to repeal it without a viable replacement (which they don’t yet have). More likely they will start by cancelling the surtaxes included in the plan. This will provide a little more stimulus.  The Dodd-Frank law is likely to remain in place, but will also face revisions.

Finally, Clifton predicted that lobbyists will enjoy increased influence in the new administration. Trump will be much more susceptible to their approaches because he is not the ideologue that Obama is.

In response to questions, Clifton predicted that James “Mad Dog Mattis will get the waiver of the seven year rule to allow him to take the Secretary of Defense post and he will be a tough negotiator in that role. As a consequence, David Petraeus (another former general) will not become Secretary of State.

There are several big hurdles in the road to tax reform. One is whether to enact “border-adjustable taxes” (also called the out-sourcing tax) that would prohibit companies from deducting the cost of imported goods from taxable income. This would hurt import heavy industries (like retailers) and help exporters.  Momentum seems to be in favor of it, but it would likely draw a challenge from the World Trade Organization.

The second hurdle is a restriction on using repatriated foreign earnings for share buy-backs.  While it would enjoy political support, it would be very difficult to enact, as money is fungible. It would also be counterproductive by reducing the amount repatriated, and limiting the capital gains take from buybacks.

To the last question about raising the debt ceiling, Clifton called this an under-appreciated, but very important point. It will have to be addressed by this summer and could interfere with the tax reform efforts.

Distinguished Speaker Series: Jimmy Levin, Och-Ziff Capital Management

dsc_3148With interest rates at historic low levels and equity markets at concerning valuations, the subtitle of Distinguished Speaker Jimmy Levin’s presentation on October 4th, Finding Value in the Current Investment Environment, was alluring to say the least. Levin is Executive Managing Director and Head of Global Credit at Och-Ziff Capital Management, a manager of alternative asset strategies for institutional investors. The firm focuses on equity, real estate, credit, and—in particular–multi-asset strategies.  As of the presentation date Och-Ziff was managing approximately $36 billion in assets with nearly half that falling within the firm’s broad definition of the Credit sector. They separate Credit into two categories: Institutional (primarily Collateralized Loan Obligations—CLOs) and Opportunistic. They further separate Opportunistic Credit into Corporate (meaning any single-payer form of debt including sovereign and municipal debt) and Structured Credit which includes all manner of securitized, or asset-backed pools.  Distressed situations are common to both products, and often involve litigation and liquidations. A defining feature of the situations Och-Ziff finds attractive is the opportunity for the firm to exert influence over the resolution of these distressed situations. They prefer to exert this influence in a cooperative manner, but circumstances may require them to play an adversarial role.

Levin asserted that finding value in the current environment requires searching in pockets of the market that are less efficient because institutions, mainly investment banks, are less involved than was the case prior to the financial crisis of 2008-09. Situations involving corporate restructurings were once very big for Och-Ziff but this niche has become very competitive in recent years with more players crowding into the space. Instead Och-Ziff has found success by concentrating their efforts in three areas:

Structured Finance, or working out broken-down, asset-backed products: The securitized market is many times larger than the U.S. High Yield market and the products are more complicated, making for a much less efficient market. The structures were designed to be “bankruptcy- remote” and, therefore, the governing documents do not provide any rules or guidelines for restructuring. That allows a manager able to do its homework and understand the situation to exert a great deal of influence on the resolution.

Market Cycle Trades (essentially market timing): It’s impossible to call turning points perfectly, but a careful manager can make informed judgements on when a market is especially cheap or rich and adjust risk exposures accordingly.  Success here requires that the manager take a contrarian approach, maintain enough liquidity to support opportunistic trading, and be ready to take the opposite side of trades when others are either overly fearful or greedy. Equally important is maintaining moderate risk when the market is not at an extreme valuation.

Bank Disintermediation Trades: Opportunities presented by changes in the regulatory environment since 2009 have reduced the number of market makers as well as their level of activity.  During a period when the size of the credit markets has approximately doubled, sell side activity by any metric has declined by perhaps as much as 80%. The obvious result has been sharply diminished liquidity in all sectors of the market, especially during times of stress such as the first quarter of 2016. These present attractive risk/reward opportunities for managers who are ready, willing, and able to step in and provide liquidity when others can’t. Success here requires patience and flexibility, characteristics that are now lacking in banks because of tighter capital requirements.

The keys to success in all three of these strategies include smart, incisive analysis; astute trading; thorough understanding of complicated structures; and the discipline to be selective about when to enter or exit positions.