Preserving Alpha through Successful Execution

Alpha is the ability to generate superior risk-adjusted returns compared to the return of an appropriate index. The purpose of most equity trades for managed portfolios is to hopefully create alpha for that portfolio. The hidden costs of not obtaining the best execution can destroy that alpha.

How does the trader know his trade is being treated fairly with respect to other trades being placed at the same time? Is the trade being shown to the right people? The SEC website lists 20 exchanges approved for securities trading. What drives the decision by a trader to use one exchange over another?

CFA Society Chicago’s Education Advisory Group hosted a panel discussion on insights on market structure in the equity market and how this structure affects equity trading today. The moderator was Michael Thompson, CFA. The panelists were Haim Bodek, Nanette Buziak and Larry Harris, CFA. Their backgrounds are as follows:

Michael Thompson, CFA – Mr. Thompson is a Partner and Head of Domestic Equity and Derivatives Trading for William Blair Investment Management. Mr. Thompson began his career in the late 1980s as a securities trader associate with Principal Financial.

dsc_3238Haim Bodek – Mr. Bodek is a Managing Principal of Decimus Capital Markets, LLC a tactical co nsulting and strategic advisory firm focused on high frequency trading (“HFT”) and U.S. equities market structure. Mr. Bodek is the author of two books on market structure and is known as a whistleblower that brought attention to the questionable practices of HFT.

Nanette Buziak – Ms. Buziak is Head of Equity Trading at Voya Investment Management. Ms. Buziak manages a team of equity traders and is responsible for all facets of equity trading and related operations at Voya.

Larry Harris, Ph.D., CFA – Dr. Harris holds the Fred V. Keenan Chair in Finance at the USC Marshall School of Business.  Dr. Harris addresses regulatory and practitioner issues in trading and investment management in his research and consulting.

Mr. Thompson began the panel discussion by briefly speaking about his background and introducing each panelist. Mr. Thompson provided a brief history of the changes in equity trading since the late 1980s. When Mr. Thompson began his career, there were only two exchanges and orders were brought to brokers who announced the bid or offer on the floor of the exchange. There were only two recognized equity markets, the NASDAQ and the New York Stock Exchange. By his estimate there are now 13 well known exchanges and 40 dark pools that can trade, with all trades done electronically. Each panelist made a brief presentation which is summarized below:

Dr. Larry Harris

  • The need for speed critical, you need to be the first in line for execution or the first to cancel if you don’t want to get hit.
  • A buyer grants a “put” option to the market and the market will move away from a buyer over time.
  • Brokers can hide orders or search for hidden orders. Dark pools will not show orders.
  • Limit trades often come with price discretion. Someone with a limit order of 23 might accept a price of 21; however this fact is not shared with everyone.
  • “Maker-taker” fee structures have become more common. The broker will typically extract a fee from the taker and rebate part of that fee in the form a liquidity rebate to the maker.

Haim Bodek

  • There are basically two worlds in equity trading, HFT and non-HFT. Firms that specialize in HFT exploit the structure of the market to take advantage.
  • HFT is not really a quant strategy.
  • The two biggest HFT firms paid substantial fines to the SEC in 2012 due to the work of Mr. Bodek in exposing the unfair advantage of firms using HFT when competing with traders not using HFT.
  • HFT comprises around 40% of equity volume and is still legal to use as long as those firms use proper disclosure.

Nanette Buziak.

  • Her team is composed of traders, analysts and portfolio managers who are all cognizant of trading costs. The team strives to limit the implicit costs of trading.
  • The average print size of an equity trade is around 217 shares; her typical trades at Voya are in the millions of shares.
  • Need to assess what venue is appropriate for what trade. Does the name trade in dark pools?
  • HFT is not an issue as long as she feels her positions are not compromised. Some venues can be more toxic than others.
  • Liquidity appears to be coming out of the market at this time since the dwindling amount of IPO’s are not able to replace firms lost to M&A.

There was a brief Q&A session following the panel’s presentations that touched on the following topics:

  • There was some frustration expressed on how slowly the SEC responds to complaints. Since the SEC must follow due process, it is up to institutions to do their own due diligences on these venues and brokers.
  • Firms that do large equity buybacks in many cases use minority brokers.
  • In assessing what algorithm to use when trading it’s important not to use those that are repeatable and can be used against you.
  • Voya’s portfolio managers know what names are not liquid and they will not build a large position in a thinly traded stock.

In response to where they see the market in 5 years, most participants felt there would be little change in that time. With the new administration, Dodd-Frank might be in jeopardy

Distinguished Speaker Series: Jeffrey W. Ubben, ValueAct Capital

Come so far…now the slog

dsc_3125CFA Society Chicago’s Distinguished Speaker Series hosted Jeffrey W. Ubben at the University Club. Mr. Ubben is Founder, Chief Executive Officer and Chief Investment Officer at ValueAct Capital. Prior to founding ValueAct, Mr. Ubben was a portfolio manager at Fidelity and a managing partner at Blum Capital. ValueAct is a hedge fund that invests in companies in fundamentally “good” businesses that are available at depressed valuations. The company typically manages 10-18 investments with total assets over $11 billion.

Although Mr. Ubben’ s hedge fund is located in San Francisco, he spent part of his life in the Chicago area and is a graduate of the Kellogg School MBA program at Northwestern University. His appearance at the University Club was in part a homecoming; his parents were in attendance.

Mr. Ubben began his presentation with three charts that chronicled the history of the debt and equity markets beginning in the late 1970’s to its current state. They were as follows:

  • “Corporate Equities to GDP”
  • “Governance Timeline”
  • “US Total Credit Market Debt as % of GDP”

The corporate equities and credit market charts illustrated the rapid growth of the equity and debt markets in comparison to GDP. Mr. Ubben blames “fed-induced financial engineering” for the outsize growth of debt.  Historically low interest rates have fanned these flames as companies have gotten a free pass to increase leverage. He lamented the thinking that stocks are the new bonds and feels that stocks are currently priced nearly to perfection. The “Governance Timeline” showed a history of shareholder activism beginning with hostile LBO’s in the late 1970’s to current attempts by shareholders to change the composition of target companies Board of Directors.

Mr. Ubben stated that value investors like him are attracted to what he termed “pain” experienced by many corporations. This “pain” eventually incents corporations to make decisions that will benefit shareholders. His examples of “no pain” were corporate deal making and lavish pay to CEO’s like Google’s Eric Schmidt.

Mr. Ubben briefly discussed three investments recently made by ValueAct in companies currently experiencing “pain”. These were positions in Rolls Royce, Morgan Stanley and Baker Hughes. In each case Mr. Ubben state briefly what attracted ValueAct and what changes were being made to secure a brighter future for each company. Perhaps this was the “slog” he alluded to in the title of his presentation.

The role ValueAct had in the removal of Steve Ballmer from Microsoft was also discussed. Mr. Ubben stated that he merely encouraged management to listen to its major shareholders opinion of Ballmer’s performance. In contrast, Mr. Ubben made mention of Jeffrey Immelt’s action in selling GE Capital’s multibillion dollar portfolio of real estate assets. GE’s share price has since improved markedly.

There was a lively question and answer session following the presentation. Mr. Ubben was questioned further about ValueAct’s investments. These included questions concerning Morgan Stanley, Valeant Pharmaceutical, Trinity Industries and Alliance Data.

ValueAct’s investment in Valeant Pharmaceuticals was one of which Mr. Ubben spoke at some length. He was quick to admit that this was an investment where ValueAct had taken its eye off the ball. They were instrumental in the CEO change that occurred in 2008 which brought in Michael Pearson. However, Pearson became very aggressive and this led to bad decision making.

Mr. Ubben reiterated his advice to go where there is dis-investment as this is a place where there are lower costs and lower volatility. It is important to measure the quality of any business versus its valuation. Despite many stocks and industries being priced to perfection, there are still parts of the market where opportunities can be found.

 

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Distinguished Speaker Series: Liz Ann Sonders, Charles Schwab & Co, Inc

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The Distinguished Speaker Series recently welcomed Liz Ann Sonders at the Metropolitan Club in the Willis Tower.  Ms. Sonders is currently Chair of the Investment Committee at Windhaven Management Inc., and is Senior Vice President and Chief Investment Strategist of Charles Schwab & Co, Inc.  Her responsibilities at Schwab include market analysis and interpreting economic trends for Schwab clients as they pertain to the equity market.

It is Ms. Sonders view that the following factors mostly favor this “unique” bull market:

  • Central bank policies have diverged with Japan and ECB leading the way in providing any perceived need for liquidity. The US central bank is not going down this path, but rather is looking for opportunities to tighten liquidity.
  • Due to the continued outperformance of the US economy, global economic indicators remain slightly positive. The level of pessimism remains high.
  • A generational shift toward higher savings as driven by the “great recession of 2007-2008” has muted the recovery.
  • The 5-year normalized P/E ratio reveals that the equity market’s value is only slightly above average. This metric is her preferred method of determining the richness of the equity market.
  • Corporate earnings hit a trough in the first quarter, but will recover for the remainder of the year.
  • Leading economic indicators do not lead to the conclusion that a recession looms in the near future.

Ms. Sonders claims the twitter hashtag #NoRecession as her idea; however it is far from “trending” and she does not expect that it will.  The level of pessimism concerning the future of the equity market can be compared to sentiment following the crash of 1987.  This is reflected in equity fund flows that remain negative for equities, making the market mostly reliant on corporate buybacks.

Inflation is something that might derail the bull, and per Ms. Sonders it should be on investors’ radar.  Commodity and wage pressure have not forced the Fed’s hand, however they are keen on attempting to normalize rates.  The velocity of money is most important and that has been slow to increase.  Ms. Sonders postulates that the Fed is driven more by the currency markets and the strength of the dollar may be more of an influence of the direction of the Fed.

Ms. Sonders also touched on the high amount of government debt now held by the US and how she thinks that is affecting the economy.  She stressed that high debt levels have led to low US growth and made the economy prone to mid-cycle slowdowns.  However, it has also served to dampen economic cycles on both the upside and the downside.

In her opening remarks Ms. Sonders referred to Martin Zweig and Sir John Templeton who helped shape her thoughts as an investor.  Sir John Templeton stated that bull markets mature on optimism and die on euphoria.  It appears that we have yet to reach the “optimism” stage.  Bull markets have never been killed by longevity.

In the Q&A session following the presentation Ms. Sonders commented on the following:

  • Gold is less an inflation hedge and is now being used more as an alternate currency. Some sovereign debt now has negative carry similar to gold.
  • Active strategies now have an advantage over passive investment strategies; there will be no reversion to a “nifty 50” as seen in the 1970’s.
  • Increased wages have implications for inflation; a September rate hike is not unrealistic.

CFA Society Chicago Company Presentation: AstraZeneca

DSC_2846The prospect of curing or even “containing” cancer has proven to be an elusive goal. One company that has recently joined the battle against this disease is AstraZeneca, a UK based Biopharmaceutical Company. On June 6th, CFA Society Chicago hosted a presentation by AstraZeneca given by Luke Miels, Executive Vice President Global Products and Portfolio Strategy. Mr. Miels outlined AstraZeneca’s going forward strategy and its plans to return to growth in 2017.

After a brief review of the company’s most recent acquisitions, Mr. Miels illustrated that an increase in research has yielded an increasing number of high-impact publications and Phase III trials of prospective breakthrough drugs. This increase in research and development has set the table for an acceleration of growth that is forecast to occur in 2017.

AstraZeneca will focus on three main therapy areas: Respiratory, Inflammation & Autoimmunity, Cardiovascular & Metabolic disease, and Oncology. There are currently 10 AstraZeneca drugs in late-stage development targeted to treat these diseases. The drugs he highlighted did not exist five years ago. Mr. Miels went on to describe five growth platforms that will support the three main therapy areas. These platforms currently represent 56% of AstraZeneca’s business.

For each of the three main therapy areas, Mr. Miels listed the existing or late-stage trial treatments, the evolution of the treatments and the areas for which the treatments are most profitable. It appears that AstraZeneca is having its greatest success in emerging markets and the EU. It has developed successful treatments for severe asthma and COPD (Beralizumab), a super-aspirin (Brilintal/Brilique) and a treatment for diabetes (Faxiga).

AstraZeneca is a relative newcomer to Oncology. There are new treatments in development for ovarian cancer (Lynparza) and lung cancer (Tagrisso). AstraZeneca intends to focus on tumor resistance, DNA damage response, Immuno-oncology and antibody conjugates in its fight against this terrible disease. The ovarian cancer and lung cancer treatments appear to be more effective for patients with DNA mutations that make them susceptible to these cancers.  Research is ongoing by multiple drug companies on what treatments might make the immune system be able to recognize and fight an invading cancer.

There were several questions posed to Mr. Miels following his presentation. They focused on patent expiration and generic drugs. One question focused on the manufacture of a drug after patent expiration. Mr. Miels stated that it still was cheaper for the company with the patent to manufacture the now generic drug; however there is little incentive for the company to do so.  Another question concerned the efficacy of a biologic generic drug.  Mr. Miels stated that generics of chemical drugs are exact copies, however due to the nature of its manufacturing; biologic drugs are never exact copies.

CFA Society Chicago Book Club:

While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Looms as the Next Financial Crisis by Roger Lowenstein

While America AgedThe specter of unfunded pension liabilities haunts many of our major cities and a large number of public companies. This is especially true in the city of Chicago as public unions continue to threaten to strike over benefits and unfunded pension liabilities. We discussed Roger Lowenstein’s book about this topic at a well-attended CFA Society Chicago Book Club meeting held in April. The book attempts to answer why the private pension system as conceived in the United States has failed.

Mr. Lowenstein divides his book into three parts. Each part addresses the pension crisis from the perspective of; a public company (General Motors), public service workers in New York, and the public service worker pension plan for the city of San Diego.

Part One: Who Owns General Motors?

The question asks whether it is the shareholders or workers who own a publicly traded company.  GM was one of the most successful companies in the world, however due to labor union gains at the bargaining table, its future cash flow would not accrue to its shareholders, but rather to its pension obligations.

This part of the book revolves around Walter Reuther and the UAW. Mr. Reuther became the visionary leader of the UAW in the 1930’s. In 1950 Mr. Reuther crafted what Fortune Magazine dubbed the “Treaty of Detroit”. It was a 5-year agreement which committed GM to guarantee a pension, wage increases with a cost of living formula and hospital and medical insurance at half cost. It was the inability to fund these ever-growing commitments which eventually led to the downfall of GM.

Part Two: The Public Freight

Pension plans for city workers help to guarantee a stable work force; a highly desirable trait for teachers, firemen and transportation workers. Reliable bus and train service is critical for the economy of a city. The second part of the book examines the history of wages and pensions for the public workers of New York City.

The most effective union leader was Michael Quill, an Irish immigrant who was a member of the IRA and fought in the rebellion against the British. In the 1930’s, the Transit Workers Union (“TWU”) was led by a coalition of Communists and former IRA activists. In 1937, Mr. Quill became President of the TWU. A 13-day strike in 1965 permanently changed the dynamic between the unions and the city. New Yorkers endured the worst traffic-jams in its history during this strike. The state government reacted by passing stricter laws prohibiting strikes by public workers. These laws were ignored as union leaders happily went to jail. The citizens of any municipality are captive customers and are unable to shop elsewhere for subway service or police protection.

Part Three: Debacle in San Diego

The risk that the government will put the expense of a pension plan onto future generations is illustrated by the city of San Diego. By the summer of 2005, the municipal pension fund in San Diego, the San Diego City Employees Retirement System (“SDCERS”) was underfunded by $1.7 billion. How it got that way is addressed in the third part of this book.

In 2005 the national press referred to San Diego as “Enron-by-the-Sea”. The cause of the underfunding was the extreme reluctance of local politicians to raise money by increasing taxes. The political climate in the city was very conservative with a mistrust of any tax. The city covered its cash shortfalls by continuing to avoid making the required pension contributions.

Labor unions in the city began to contribute heavily to political campaigns; this was more effective in San Diego which had a weak form of city government where a relatively small amount of votes could sway elections. In the end, public employee unions had political clout on par with business interests. City managers became more adept at structuring solutions which circumvented state laws regarding the required funding of SDCERS.

Conclusion: The Way Out?

The author has a few suggestions as to how to mitigate some of the risks endemic to these pension and health care schemes. However, most participants at the Book Club thought they were rather weak. The author is of the opinion that the 401K is not an adequate substitution for a pension and advocates a “national” 401K offering matching credits to lower wage earners. He also suggests that 401K providers be required to offer an annuity as a default option. The author ends the book with a plea to strengthen social security by raising taxes, an unpopular but perhaps necessary measure.

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Distinguished Speakers Series: John Rogers, Jr.

On February 10th CFA Chicago’s DistinguishedRogers Speaker Series advisory group hosted John Rogers, Jr., Chairman, CEO and Chief Investment Officer of Ariel Investments, the largest minority run investment firm in the US. A question and answer format was used, with Kerry Jordan, CFA, Chairman of the CFA Society Chicago, posing questions to Mr. Rogers.

In a wide-ranging question and answer session, Mr. Rogers responded to questions concerning the role of the Board of Directors of public companies, investment committee best practices, the best measure of investment success, and the current state of the market.

Mr. Rogers, who currently serves on the Board of Directors of Exelon and McDonald’s, stressed that board members must act as independent agents and have knowledge of who the outside shareholders are. Board members need to ensure that outside shareholder concerns are being heard. He argues that board members become more valuable the longer they serve; making term limits a bad idea.

Mr. Rogers’ thoughts on what “best practices” should be for Investment Committees can be summarized as follows:

  • Small size
  • Limited role (trust management to make day to day decisions)
  • Include independent thinkers

Investment performance needs to be monitored; however Mr. Rogers stressed that successful short-term performance does not mean that you are outperforming.  More than a three-year track record is required.

When asked about his key thoughts about the current market Mr. Rogers stated that this is a stressful period similar to 2008-09 and that during this period, it is important to keep in touch with “thought leaders” to see what they are thinking.  Analysts must remain free to recommend anything even though it may be out of favor.

Mr. Rogers stressed that the city culture of Chicago is one of “giving back”.  The Ariel Community Academy is a school in Chicago that fosters financial literacy.  This is knowledge that is sorely lacking, especially in minority communities.  Mr. Rogers, who became interested in stocks at an early age, thinks it is important to get kids to think about stocks.

Questions from the audience centered on active versus passive management and the future of mutual funds.  Mr. Rogers believes that a large portion of any portfolio should be in index funds and wondered how hedge funds can outperform in this market given their fee structure.

Mr. Rogers also believes that despite the emergence of ETFs and other investment instruments, there will always be a role for mutual funds in any portfolio.  There is a role active management can play.  Mr. Rogers concluded with the thought that he is optimistic on the market and there are big bargains out there to be found.

Corporate Tax Evasion or Avoidance?

On December 16th, CFA Society Chicago hosted a timely panel discussion focused on US corporate tax policy and how it compared to the tax policies of other nations.  The current policy motivates US companies to move profits to overseas subsidiaries where corporate taxes are much lower.  Corporate tax inversions may become more common; these will become an important political issue as the election year unfolds.

Mr. Graziano began the event with a presentation entitled “Corporate Tax Risk, The Thin Gray Line”.  He makes the case that US Corporate Tax Policy is not competitive on a global basis.  The US has not cut its corporate tax rate in over 25 years and has the highest tax rate (35%) of any developed country. This antiquated tax policy has motivated US corporations to take action to avoid paying tax in their home country.

The method whereby US companies are able to enjoy the lower tax rates of foreign countries has led to the storing of corporate cash in the country where the lower tax is paid.  Many multi-national US companies now have large cash holdings in countries other than the United States.  The ramifications of these large cash holdings being held abroad by US corporations was discussed at length in the presentation and during the panel discussion.  To repatriate the cash, US corporations would have to pay the 35% federal tax along with any state tax.

Panel Discussion:

Mr. Graziano began the panel discussion by asking if it thinks that US corporations have an economic (or moral) obligation to pay a repatriation tax.  The panelists were unanimous in their opinion that there is not an obligation.  The US has created its own problem in this regard due to its inability to reform these policies.

There was a brief discussion as to how a US value added tax (VAT) might help to replace lost tax revenue if the corporate tax rate was lowered.  The possibility of repeating another “one-time” tax repatriation holiday as was done in 2004 was also discussed.  The panelists were convinced that another “one-time” tax holiday would not solve the problem.  There was very little evidence that the US economy benefitted from the 2004 tax holiday.

Panelists were unanimous in their belief that the antiquated US corporate tax rate puts US corporations in a difficult predicament. Under the current laws, corporations are incented to move cash and business overseas to the detriment of the US economy.  In this environment, tax inversion transactions that make American companies subsidiaries of a parent company in another country can be expected to increase.

Unfortunately, there is no easy solution without bipartisan support for reform.


Ron GrazianoModerator: Ron Graziano, CPA

Mr. Graziano is a Director at Credit Suisse and serves as the Global Accounting & Tax Strategist with the HOLT advisory service of Credit Suisse.

 

Barry Jay EpsteinPanelist: Barry Jay Epstein, Ph.D., CPA, CFF
Dr. Epstein is a Chicago based financial reporting expert, author, and litigation consultant. In his work with Epstein & Nach LLC, he has consulted and/or testified in over 120 cases.

 

Anna GreenPanelist: Anna Green, CPA
Ms. Green is a Tax Partner with PwC Chicago’s Industry Tax Practice. She is responsible for managing a team of professionals providing tax accounting advice to large corporate clients.

 

Robert M. WilsonPanelist: Robert M. Wilson
Mr. Wilson is an investment officer and research analyst at MFS Investment Management. He is responsible for working with portfolio managers to integrate ESG (environmental, social and governance issues) into the investment decision making process

State of the Unions: The EU and the US in the 21st Century

On September 9th, The Chicago Council on Global Affairs and CFA Society Chicago partnered together to welcome Mr. Van Overtveldt, Minister of Finance of Belgium since 2014.  He is an economist, journalist and writer based in Brussels. He has authored several books including, The End of the Euro, Bernanke’s Test and The Chicago School and is a contributor to the Wall Street Journal and other publications.  His presentation revolved around the topic of his new book, A Giant Reborn: Why the US Will Dominate the 21st Century.

Mr. Van Overtveldt began his presentation by referencing literature and writers, who from 1775 through 1965 had predicted the decline of America.  These people had failed to recognize the reasons why America came to dominate and why it will continue to dominate world affairs in the 21st century.  Mr. Van Overtveldt uses an economic based argument of American superiority based on three factors:

  • Human Capital and Knowledge (non-excludable and non-exhaustible)
  • Entrepreneurial Drive (favored in the US economy)
  • Globalization

The above factors have created the environment of what Mr. Van Overtveldt describes as “turbo-change” that thrives in America.  Other countries cannot cope with change the way Americans have demonstrated they can.  Change is part of America’s DNA.

Mr. Van Overtveldt then focused on why Europe and China will not challenge America in the foreseeable future, describing China as having the biggest economic bubble the world has ever seen.  The “Confucian Deal” of the Party guaranteeing jobs and higher wages in exchange for little or no freedom will not work.  In China, debt as a percentage of GDP has doubled since 2008 and overcapacity in real estate is demonstrated by vacant houses and apartments.  China is also surrounded by potential enemies such as Vietnam and Japan.

The European Union has really not achieved a union, since European countries have demonstrated that they will not yield their sovereignty.  Mr. Van Overtveldt argues that the French and German coalition that ran the European Union will no longer work as France’s economy has not been able to keep up with the German economy.

In the Q&A that followed the presentation, Mr. Van Overtveldt stated that the UK has a large influence on the European Union and that its vote to remain in the EU will be closely watched.  The UK’s influence is especially large in Germany.  He also briefly commented on the immigration crisis in Europe, stating that there is no mechanism to arrive at a consensus on this issue.

Mr. Van Overtveldt also demonstrated the effectiveness of the US constitution versus the ineffectiveness of the European Union by comparing the Greek and California bankruptcies. California was able to get money from Washington if it met certain conditions.  The Greeks were given certain conditions; however there was no legal right to enforce these conditions.  The EU had no legal right to dictate reforms as they had to be approved by the Greeks themselves.

Becoming a Values-Based Leader

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CFA Chicago’s Distinguished Speaker Series recently hosted Harry Kraemer, an executive partner with Madison Dearborn Partners and Clinical Professor of Strategy at Northwestern University. Former Chairman and CEO of Baxter International Inc., Mr. Kraemer is author of the book, “From Values to Action: The Four Principals of Value Based Leadership”.  He spoke of the critical need to develop the next generation of leaders and of the “Four Principals” as illustrated in his book.

Mr. Kraemer stressed that leaders need to begin leadership early in their career showing that they want to be “in” the movie, not just “watch” the movie. Leaders must not be content to wait for “those guys” to make decisions; they must want to be one of “those guys”.

In order to influence people, leaders must be able to relate to people. They must also be able to employ common sense and have the ability to make complex problems simple.   It is important to demonstrate these attributes on day one of whatever job they begin.

The “Four Principals” of value based leadership are “Self Reflection”, “Balance”, “True Self Confidence”, and “Genuine Humility”.  In his presentation, Mr. Kraemer went on to describe each principal as follows:hklogo_head

Self-Reflection: A leader needs to be able to get away from the notion of merely going faster to get more things done.  He needs to be able to determine which tasks really matter and ask what could be done differently.

Balance: A leader must be able to demonstrate knowledge about a wide array of topics. To understand all sides of a story, he must understand other perspectives. The incorporation of multiple perspectives makes it easier to move forward.

True Self-confidence: The ability to say “I don’t know” and the ability to say “I was wrong” is evidence that a leader has true self confidence.  An inability to say these things shows that he is too worried about what other people think.  Everybody has strengths and weaknesses and those must be acknowledged in order to improve.

Genuine Humility: A leader must remember where he came from and how he got to where he is.  Luck and timing can be just as important as skill set and prior work performance.  A leader needs to keep in touch with people who knew him “when”.

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Mr. Kraemer stressed the importance of keeping in touch with a wide variety of people from within and outside the organization. He recommends that mentoring not be limited to one or two confidants, but rather come from a wide array of people.  This exposure makes it easier to determine what values are important.

Mr. Kraemer concluded his remarks by speaking about the One Acre Fund which benefits small farmers in East Africa.  The proceeds from his book sales will go to further the aims of the fund.

Distinguished Speaker Series: Kathleen Gaffney, CFA, Co-Director of Diversified Fixed Income, Eaton Vance

The Distinguished Speaker Series featured Kathleen Gaffney, CFA, and Co-Director at Eaton Vance who focuses on fixed income. Eaton Vance is one of the oldest and most distinguished investment management firms in the United States.  Gaffney warned that the “end of the era” of low interest rates is at hand and that more volatility will be the result.

The increase in volatility is due to more than just the expected rise in interest rates.  Gaffney warns that the broker/dealer community has been hard hit by new capital rules that prevent them from holding large inventories of bonds.  Due to the global financial crisis of 2008-2009, this “shock absorber” has been taken away.  Gaffney stressed that moving capital will be difficult, leaving the market vulnerable to sharp corrections.

Gaffney stated that she is convinced that the credit markets are ripe for correction.  The FED’s actions will most likely impact short and intermediate term bonds the most.  If the FED does not begin to tighten in June, it will be accused of being behind the curve. She believes that the fundamentals in the United States are good and that once rate hikes begin; the resulting yield curve will resemble a “bear flattener” as short rates will rise faster than longer term rates.  Inflation will result when economies outside the US continue their economic recovery.

Gaffney is convinced that duration risk is the greatest risk facing the US bond market.  It is her position that US interest rates are too low and that the 10-year treasury yield will approach 4% by year-end.  She also believes that high-yield and investment grade corporate bonds are currently expensive. In this environment, as part of a multi-sector strategy, Gaffney utilizes dividend paying equity substitutes in her fixed income portfolio.

Gaffney purchases equities that yield between 1.5% and 3.0% at prices that are more reasonable than current bond prices.  These equities have yields that currently compare favorably to the 10-year treasury.  The equities market at this time also offers more liquidity than fixed income markets, and she is able to use up to 20% of her portfolio for equities.

In the brief question and answer period that followed Gaffney stated that she is an optimist and that strong GDP numbers which she expects in the near future will be a catalyst for rising interest rates.  She assigns a 0 duration to the equity positions she holds in her portfolio. It was interesting to hear how a multi-sector strategy allows her to include equities in the search for yield.