CFA Society Chicago hosted a storytelling
event on May 14th at the Global Conference Center. The purpose of this
program was to help society members claim their value using stories as
a tool to highlight leadership and communication skills. Storytelling is a big
part of personal branding. So, how can it help us and how do we tell a good
story while remaining authentic? Daniella Levitt, president of Ovation Global
Strategies and Executive Director of Leading Women Executives, engaged our
right side of the brain and helped us become more comfortable talking about
ourselves and the unique value proposition we bring to the table.
Storytelling shapes how others see us and embodies what we
have learned about ourselves as leaders, but telling your own story can be
uncomfortable. However, learning and practicing this does reap benefits because
stories are 22x more effective than just rattling off a list of
accomplishments. A story is a tool of authentic leadership. We started by
creating the framework for our leadership stories and exploring the idea of
leaders as teachers with a unique teachable point of view (TPOV).
A TPOV includes the following attributes:
In context of your role as a leader in your
In context of your leadership identity.
A direct tie-in with your leadership story and
your persona brand.
Elements of this also include ideas, values, emotional energy
and edge. It should reflect how we take
risks and make decisions.
To create our TPOVs, we can create a chart mapping our
leadership story placing events on the Y-axis and time on the X-axis.
Organizing high events in our lives and careers above a horizontal dotted line
and low events below will help uncover insights from our leadership stories. We
will be able to answer questions such as: Am I a risk taker? Did my low points
bring clarity and help facilitate change? These discoveries will become our
Levitt emphasized that developing this is an iterative
process requiring reflection and feedback.
We should also develop a plan that encompasses the most important
milestones we can think of and identify a small group of people who can help us
move forward with the most critical aspects of our plans.
We worked in groups at our tables on illustrating our own
TPOV and the stories that would bring them to life. Levitt recommended we meet
our fellow attendees again for coffee to practice and communicate our next
Levitt closed the event by providing a checklist for a good
Know your theme and punchline.
Draw from what you know.
Simplicity works best.
Adjust chronology as required.
Make your audience care.
Be passionate and value a dash of mystery,
unpredictability and drama.
a TPOV and personal story, we will all feel better prepared the next time
someone says “Tell me a little bit about yourself”.
On April 9th, CFA Society Chicago’s Distinguished
Speaker Series Advisory Group welcomed Sheila Penrose at The Metropolitan. Penrose
is Non-Executive Lead Independent Chairman of the Board at Jones Lang LaSalle,
a global real estate services company, and also serves on the Board of
Directors for McDonald’s. Penrose retired from Northern Trust in 2000. In her
23 years at Northern Trust, she served as President of Corporate and Institutional
Services and as a member of the Management Committee, where she was the first
woman to serve. Subsequently, she served as an Executive Advisor to The Boston
Consulting Group from 2001 to 2007. She has been on the boards of Entrust
Datacard Group, eFunds Corporation, and Nalco Chemical Corp. She has also
served on the advisory board of the Gender Parity initiative of the World
Economic Forum, the board of the Chicago Council on Global Affairs, and as a
founding member of the US 30% Club, a group whose initiative is to achieve
female representation of at least 30% on corporate boards.
After detailing some of her credentials and experience, Penrose
highlighted three topics she wanted to explore:
What issues are boards of directors discussing
How are boards of directors handling the
evolution of the business environment?
How do a group of highly ambitious, competitive
and capable people, all of whom are used to leading others, form a functioning
team that can effectively oversee a company?
She emphasized that in each topic, boards are fiduciaries
for both shareholders and stakeholders, and need to understand how to balance
the needs of both groups. She also emphasized that individual board members
should be listening and learning all the time, while contributing and remaining
Penrose expounded upon the recent transformation of the
business environment as it relates to the board of directors. Recently, boards have become less dominated by
the executive. The CEO/Chairman dual role that was so common in previous years
is now no longer as accepted as it once was. This was spurred by
Sarbanes-Oxley, but also investors and employees who now have more of a voice shareholder
activism has increased. Digital disruption has also been a major category for
boards to tackle, and relatedly, managing corporate reputation in an age of
social media, where all voices have access to the public. Diversity on boards,
and not just different kinds of people, but different viewpoints, has also been
an important topic. Boards have been seeking to find people who have different
types of experience and different types of expertise, as opposed to finding a
group of CEOs for the board. Boards need to develop consensus, not groupthink. She
brought up the dilemma of cybersecurity. Boards must wrestle with the questions
of how much cybersecurity is enough and how quickly the company can react in
the event of a breach. Boards must also consider the impact of global events,
as almost all large corporations are now global in reach. Lastly, and
importantly, she discussed the issue of talent and corporate culture. Boards
must grapple with the future of work and the changes in expectations of their
employees. Companies assume they will be able to find the skills they need in
the labor market, but they are not doing much to develop those skills in
employees and not moving quickly enough to develop people whose jobs might be
redundant in the future.
Boards also have to understand how best to find directors.
With the changing business environment, new skills are often necessary, and
boards have begun looking for people who have those skills, such as digital
experience, to help them stay current.
The composition of the board, its dynamic, and its
leadership are all critically important. The board should be “collegial but not
clubby”, and board decisions should be made in the room, not in private
meetings. Board members should maintain
a healthy balance of both listening and contributing.
Individual board members should have what Penrose called “The Four Cs.”
During the Q&A portion of the event, Penrose described
how she believes someone can become a member of a board of directors. She said
the individual must have a good reason for why they want to join a board,
should be strongly curious and constantly learning, should have experience
trying to manage a business on some level, and should be wary of joining a
board too quickly. Joining a board too quickly usually means that board is likely
of lower quality, and the first board you join dictates one’s future
Aswath Damodaran, Kerschner Family Chair in Finance
Education and a Professor of Finance at New York University Stern School of
Business, is well known for his books and articles in the fields of valuation,
corporate finance, and investment management, philosophies, and strategies. On
April 2, he treated the CFA Society Chicago to a tour de force through the
foundations of risk premia, the macroeconomic determinants of equity risk, and
how the risk premium can me misused.
Damodaran’s talk was followed by a panel which included
himself, Michele Gambera, co-head of Strategic Asset Allocation Modeling at UBS
Asset Management, and Bryant Matthews,
global director research at HOLT. The panel discussion was moderated by Patricia
Halper, CFA, co-chief investment officer at Chicago Equity Partners.
Damodaran pointed out that while the risk-premium is
referred to as one number, it contains several various risk factors, such as
political and economic risks, information opacity, and liquidity risks. Despite
the underlying complexity, a common way to derive the risk premium is from the
average volatility of some historical period. This, Damodaran warns, is a
dangerous approach. By using historical data you can derive any risk premium
you want by using the time horizon of your choosing. When you look at
historical averages, you are also searching for a number that nobody has ever
experienced. And even if they did, you should not believe that history will
simply repeat itself. And even if history did repeat itself, you are still estimating
a number with large error margins. In the end, the exercise is just not useful.
Damodaran has done a lot of work determining equity risk
premia for different countries and makes his data available on his homepage. His approach is to derive an implied risk
premium based on consensus forecasts of earnings and adding country risk premia
for different countries. He cautions that there is no pure national premium
thanks to our integrated world. Much of S&P earnings, for instance, are
derived from abroad, and this must be taken into account.
For a person who has devoted so much time to estimating risk
premia, it may come as a surprise that Damodaran thinks people should spend
less time on it. His approach is that once you observe the market-implied risk
premium, you should use this in your valuation model and devote your attention
to estimating cash-flows. Right now, too many people are wasting too much time
on valuing companies through finding the perfect risk-premia when cash-flows
are ultimately going to determine whether they will get valuations right.
Academic finance is another culprit here, which spends too much research time
on discount rates.
Ask yourself this, are you working on your model’s risk
premia because that is where you have superior knowledge, or because it is your
Damodaran is also critical of the use of the price-to-earnings
ratio to assess valuation, since it looks at earnings only for the current
period. In the US market the ratio may look high, but the pictures very
different for current implied risk premia. Since 2008, risk-free rates have
come down while expected stock returns have remained roughly the same. This
actually implies a higher risk premium.
shares Damodaran’s criticism of historically derived risk premia. He also pointed
out that while the risk premium fluctuates a lot, we pretend in our models that
it is constant. In effect, Gambera stressed, we are estimating a random-walk
variable. A better approach for your valuations is to use a forward-looking
covariance matrix with various factor loadings.
Should we therefore throw the historical data out the
window? When asked the question, Bryant Matthews of HOLT pointed out that
historical data are not all useless in a world where variables tend to
mean-revert. But you may need to wait a long time for it to happen.
Is there a small-cap premium? Damodaran pointed out that if
you estimate the historical premium since 1981, it is negative, which is
clearly fictional. However, Matthews estimated a small cap premium of 0.6%, albeit
with a standard error that makes it statistically zero. By slicing the equity
market in other ways, he estimates that value stocks tend to have a 3.5% equity
premium over growth stocks, while Fama and French’s quality stocks-factor enjoys
a 2.1% premium over non-quality stocks.
Matthews has also calculated market implied risk premia for
over 70 countries, and found it rising in the US from 0% in 2000 to 4% today.
Such estimates, he pointed out, are often counterintuitive for clients. Surely,
equities were riskier in 2000 when valuations were high. But precisely because
valuations were so high, the implied risk premium, which was part of the
discount rate, was low.
Can we make money by investing in high-risk premium stocks?
After all, theory tells us returns are the reward for taking risk. Yet as
Gambera pointed out, high-volatility stocks tend to be favored by investors in
part as a way to leverage up according to the CAPM-models, as is done for
instance in risk-parity models. At the same time, pointed out Matthews,
low-volatility stocks are generally also high-quality stocks and therefore tend
to have high return, despite their historically low risk.
Matthews argued that while profits are high for the US
market as a whole, this really applies to only 100 companies. This
concentration, he suggested, is due to lax regulations. Damodaran, however,
suggested that antitrust measures cannot be relied on to change this fact. They
may have been politically attractive in the time of Standard Oil, when that
company’s dominated position allowed it to raise prices. The dominant firms of
today are offering consumers very low prices. Break them apart and any
politician will be met with discontent from voters.
Let us end with some historical perspective from Michele
Gambera. Much of the early work on risk premia was made at a time of a very
different market structure of industrialized countries. Steel and railroads
ruled the day and many of today’s giants were not listed. The likes of Alphabet
and Facebook pose new challenges in estimating risk premia. This suggests that
now more than ever historical data will be misleading in estimating the risk
premium, a modest number that means so much.
In the third installment of a continuing series on communication, Scott Wentworth addressed members of CFA Society Chicago on how to make good business presentations on April 4th. The capacity crowd of 90 in the Vault at 33 North LaSalle Street spoke to the popularity of the topic as well as the value of Wentworth’s previous two appearances before our society. Wentworth founded Wentworth Financial Communications in 2015 to help financial businesses (especially investment managers) demonstrate their expertise through various forms of marketing content, including white papers, blogs, and newsletters. Prior to founding the company, he served as the head marketing writer at William Blair & Company. In his previous appearances with CFA Society Chicago (2017 and 2018), Wentworth addressed business writing, the primary focus of his company. This time, he spoke on oral communication, specifically how to make effective presentations.
began by demonstrating (without announcing) several common presentation mistakes
such as reading from a script, employing busy or confusing graphics, and relying
on undependable technology. His point made, he quickly moved on to a very effective
presentation embedding his recommendations within it. He pointed out that
presenting is not the same as public speaking. A good presenter does not need
to have a commanding presence or an abundance of charisma. Of greater
importance is identifying and concentrating on one main idea, and then making a
compelling case supporting it to the audience. Successful presenting requires
skills that can be learned such as clarity, persuasion, concision, and good preparation.
then went on to describe in detail his five tactics for a good presentation. First
is identifying the goal of a presentation. He gave as examples motivating the
audience to action, changing minds, correcting a misconception, or simply
gathering information back from the audience.
goal set, the second tactic is to analyze the audience. Is it hostile or
supportive? Uninterested or engaged? Uninformed
or well-informed? This may be a difficult step if the presenter has limited
information, but may be inferred from factors such as the type, purpose or
setting of the presentation. It is important because it will direct the tone of
the presentation. To address a hostile
audience, the presenter should emphasize areas of agreement first and seek out
areas the audience would view as “win-win”. Whereas, with a supportive audience
the presenter should reinforce their enthusiasm and provide an action plan or
tools that lead to tangible benefits.
described his third tactic as crafting your story arc. He admitted this is the
most difficult aspect of a presentation because it is an art, not a science. It
begins with identifying the one main idea he mentioned at the outset. This idea
should be boiled down to as few words as possible and repeated throughout the
presentation to drive it home. In must
be articulated early in the presentation to allow for this repetition, and also
to protect against the risk of running out of time. Other features of the story
empathy to demonstrate that the presenter understands the audience’s situation
and can help.
on the benefits offered rather than features (a common trap for investment
managers who often focus on a product’s defining characteristics or performance).
things tangible. Avoid abstract ideas,
or if they’re necessary, convert them to a more tangible concept via examples
tactic is creating effective visual aids. This can lead to another common error
of presenters: considering the slide deck to be the presentation. Wentworth
says it is not. Rather, slides are a
visual aid, just part of the presentation along with the equally-important
delivery, the message or theme, and the interaction with the audience. He
followed-up with a list of Do’s and Don’ts for slides.
the main idea,
statistics or relationships,
complex ideas, and
the audience engaged.
Slides should not
the full presentation (they are just an aid),
as a teleprompter, nor
distractive (too busy).
As an aside, Wentworth recommended that the slides a
presenter uses be pared down as much as possible with the bulk of the
information conveyed by the presenter directly.
He recommended to having a more detailed deck as a “leave behind” for
recommended tactic is to practice with purpose for which Wentworth had several helpful
Do a dry run alone to learn the
material and time the presentation
Repeat with a reviewer (e.g., a
co-presenter, team member, or even a spouse)
Prepare for a failure of technology
and have a plan B in case of a breakdown
Don’t memorize lines. You’re likely
to forget them which increases tension and nervousness.
concluded his presentation, not by asking for questions, but rather asking the
audience to provide examples of roadblocks or challenges they had faced in
making presentations. Many offered up cases which proved to be good
illustrations of how to apply the five tactics he had outlined. The discussion
naturally led into a robust series of questions that extended for over half an
hour. The level of audience engagement proved that Wentworth had both talked
the talk, and walked the walk in demonstrating how to make a good presentation.
On a frosty evening where temperatures hovered just above
ten degrees, CFA Society Chicago hosted an evening of curling and drinks at
Kaiser Tiger, a bar with a large beer garden on Randolph Street. Curling, with origins
dating back to 16th century Scotland, involves sliding a smooth
stone across a sheet of ice, with the goal of centering the stone in the middle
of a target (typically 146-150 feet away, the rink at Kaiser was a bit smaller
though). It was added to the Olympics in 1924 as a “demonstration sport”, and was
officially added in 1998. Curling is most popular in Canada, but many countries
across the globe field teams in the world championships and Olympics, including
Finland and Scandinavian nations, the UK and Japan.
This was our first curling occasion as a Society, and it was a packed event, with networking taking place in Kaiser Tiger’s large West Room and participants bearing the cold and taking turns hurling stones outdoors in the ice curling rinks in the beer garden. If you missed the event, you can get a group of friends together rent a lane for $40 per half hour here – Kaiser Tiger Curling. Aside from the networking, attendees were treated to a fantastic menu of craft beers, wine and appetizers. Despite the chilly temperatures, fun was had by all, and curling very well may turn into an annual CFA Society Chicago winter tradition!
On Feb 20th at the UBS Tower, CFA Society Chicago’s Education Advisory Group offered a panel discussion highlighting the issues and opportunities of allocating assets for various types of portfolios. A full room of about 100 financial professionals were privileged to hear from an experienced, diverse group of fund managers and advisors.
Opening speaker Tim Barron, CAIA, CIO of Segal Marco Consulting, prepped the feature event with his entertaining yet practical list of eight things to be aware of and thinking about when structuring portfolios. His list consisted of relating several quips from the likes of Yogi Berra, Mike Tyson, Harvey Pinnick, Wayne Gretzky and Bobby Unser into practical guidance for professional investment of assets. Lessons learned included; understanding the purpose for the portfolio, having a plan in place in the event of market turmoil, not having a false sense of security in making predictions while understanding one’s skillsets, and not being afraid to stand apart from the herd while putting in the hard work necessary for being in a position to win.
brief Q&A ensued before giving way to moderator Chris Caparelli, CFA, at
Marquette Associates and the panel of (1) Patricia Halper, CFA, CIO at Chicago
Equity Partners, (2) Josh Lohmeier, CFA, Head of Investment Grade Credit and
AIA Investment Officer, Aviva Investors, (3) Ellen Ellison, CFA, Chief
Investment Officer, University of Illinois Foundation, and (4) Kevin Zagortz,
FSA, US Head of Portfolio Management (OCIO) at Aon.
Caparelli’s first question for the panel was to provide a high-level description of their approach to asset allocation. Kevin spoke first from his background with qualified corporate defined benefit and 401(k) plans. His first objective is to be mindful of mitigating risk before evaluating a multitude of asset classes in priming the portfolio for growth was a common theme across the panel.
Ellison’s perspective is of a large foundation with a very long-term investing horizon, minimal concern for liquidity and growth sourced from a global rolling portfolio approach. The foundation’s clients consist of a large base of living alumni, trustees and committees, with a strong focus on governance and fiduciary risk. The only thing worse than not having a plan is changing the plan over the course so being mindful of the human element is important.
In contrast, Lohmeier has a relatively narrow focus of investment grade credit and is most concerned about target benchmarks and how to manage to against that performance. Common issues to be aware of include behavioral biases, herd mentality, tail risk and downside protection especially in environments of severe stress.
Halper stressed the importance of knowing your place. If your client is relying on investment exposure to a specific asset class then it is imperative to not stray from that mandate. In other words, only perform asset allocation within the bounds that you engaged for.
The remainder of the discussion involved the panelists providing perspective on a variety of topics such as their use of alternatives, adaptation to the market environment, and being tactical via factor investing. Context is important once again as each strategy depends on the purpose and objective for that client.
taking formal questions, the panelists generously made themselves available
after for further inquiries.
summary, this was a fast paced and informative exposure to the topic of
portfolio construction. Caparelli was effective in moderating the discussion
and the diversity of viewpoints represented on the panel was of tremendous
On Demographics, Growth, and Investing: When the structural collides with the cyclical
Francis Rybinski CFA, treated CFA Society Chicago to his
analysis of the current global demographic situation and its implications at
the latest Vault Series lecture on March 12.
Rybinski is the chief macro strategist at Aegon Asset Management,
responsible for guiding the firm’s global macroeconomic view pertaining to
tactical and strategic asset allocation. His presentation included a wealth of
statistics that highlighted the weak rates of growth of both population and
productivity in developed economies around the world and how that situation
limits investment managers.
Rybinski began with some observations on the trend in GDP
growth in the U.S.:
Actual GDP growth has declined erratically from about 4% in the early post-World War II period, to 3% late in the last century, to just 2% since the last financial crisis. Growth above 2% in very recent quarters has not persisted long enough to define a change in trend. (Slide 4)
Accompanying this change has been a decline in the volatility of the growth rate, both absolutely and relative to potential growth.
While growth has been slowing, the business cycle has been lengthening. The economy seems to be stretching out expansions by pacing itself at a slower rate of growth.
The two driving factors behind GDP growth are the rates of growth in the labor force, and in productivity. Both have been anemic with little expectation of a move to the upside. The Congressional Budget Office projects near term potential GDP growth at less than 2%, incorporating 0.5% growth of the labor force and 1.4% productivity growth. Rybinski argued that even if the labor force were to grow at 1.4% (the average since 1950) potential GDP would not reach 3%, and would trend downward after 2020. Even boosting productivity to 2% gets GDP growth only to 2.5%. While President Trump claims his policies will increase productivity well beyond its recent trend, Rybinski is skeptical. He listed several forces most likely to boost productivity significantly including autonomous vehicles, robotics, 3D printing, genomics, and generally the internet of things. He doubted any of these could be as transformative as the forces that drove productivity higher in the 20th century such as the expansion of the electric power grid, telecommunications, and the development of computers. Maintaining a persistent 3% growth in GDP would take 2% productivity growth—a level last experienced in the 1990’s tech boom–and 1% labor force growth–which would be dependent on increased immigration.
Rybinski applied the term “demographic drag” to the situation he had described. Noting that it exists throughout developed economies, he concluded that “It’s a small(er) world after all”. (Or at least a slower growing world.) This situation, he thought, was at the root of many current global movements such as the new nationalism, anti-immigration stands, and the Brexit vote. The demographic situation also has implications for retirement investing and the social safety net. Lower prospective investment returns will require even higher amounts of savings to fund retirement, and/or an increased burden on government retirement plans.
Rybinski went on to present more demographic data to support
In the 1970’s, a demographic tailwind driven by the maturing of the baby-boom generation and the flood of women entering the work force, provided a big boost to GDP growth in the U.S. This has now become a tailwind as the baby-boomers reach retirement age and the increase in women in the work force has leveled off. This leaves only productivity to boost GDP growth.
The fertility rate in the U.S. declined by about 50% from 1960-75 and has been under the replacement rate of 2.1 births per woman for a decade. Similar trends appear around the world in countries across the income spectrum.
The share of the U.S. population over age 55 is about 27% and continues to rise. The share in the prime working years has been trending down for over twenty years and is now under 50%. The share ages 16-24 is not growing, but is stagnant at about 15%.
The old age dependency ratio (ratio of people ages 20-64 vs. those older) has received a lot of attention because of its dramatic down trend. Rybinski showed that, when adjusted for the increase in the labor force participation rate since 1948, the decline is not as significant, but the trend is still negative. This is a common feature across developed economies.
Currently, immigration accounts for just over 40% of U.S. population growth and it is rising. Native births account for the other 60%, but the share is declining. Within ten years, these factors will be about equal and by 2045, immigration could provide more than 70% of population growth.
Average life expectancy continues to increase and has reached 72 years globally (80 years in high income countries).
Increasing life expectancies and earlier retirements mean more time is spent in retirement. In 2010 it reached 13 years in the U.S. and 18 years in Germany. Even China has advanced to eight years from just two in 1990. This adds stress to retirement plans—an inauspicious factor in the U.S. where over 95% of public pension plans were underfunded to a cumulative total of $1.1 trillion by 2017.
Rybinski had one positive observation regarding inflation, based on the correlation between inflation and the dependency ratio. His data shows that countries with a worsening ratio (primarily the U.S., the E.U. and Japan) have experienced low rates of inflation (under 2%) for the past five years. Countries with higher inflation (such as India, Brazil, Turkey, and South Africa) have improving dependency ratios. Not only has inflation been low in developed economies, but it has also been less volatile. These two trends have put downward pressure on the term premia of sovereign debt. In fact, the term premium on the 10-year U.S. Treasury note is negative, and Aegon expects it to remain so, with the extremely low yields on German Bunds an important reason.
With the Federal Reserve taking a less aggressive position on
raising interest rates and inflation expectations anchored, Aegon expects rates
on treasury debt to remain at their historically low levels.
From his analysis Rybinski provided two implications for
As inflation has declined secularly in the past forty years, the correlation of returns on treasuries vs. equities has fallen from strongly positive, to slightly negative. Thus, treasury debt has been a good hedge against equity markets. With Aegon’s forecast for low inflation to hold treasury yields lower for longer, he expects this hedge relationship to continue.
Low growth of global GDP, and the worsening demographic situation, will place a premium on growth investments. Searching these out will be the primary challenge for investment managers in the foreseeable future. This would typically suggest emerging or frontier markets, but they present increased risks. Many are not easy places to conduct business. Managers will need to be highly selective on choosing which countries to invest in, and will also need to search for pockets of growth hidden in selected industries or companies within developed markets.
Supplement: Post-Event Q&A by Brian Gilmartin, CFA
The overall theme of the presentation was that as the US
population has aged, from the 1960’s “baby boom” being in full swing to the
Generation X, Y and Z’s, of today, US GDP trend growth has slowed, and the
aging of the US population is presenting challenges for everything from retired
workers outliving their savings to putting pressure on public and private
pension fund plans.
In other words, the “demographic tailwind” has become a
“demographic headwind” (per two slides within the presentation) for the USA,
much like it has become in Japan.
“Trend” growth for the US economy was 6% in the 1960’s,
slowing to 4% in the 1980’s and 1990’s and is now just 2.5% today. (My thought
on this was that, the US economy – in terms of real GDP was also much lower in
the 1960’s, just under $1 trillion in each of the 4 quarters in 1966 per the
FRED database, to over $20 trillion by Q4 ’18. The logic being growth looks
faster with a smaller denominator.)
Frank Rybinski noted the decline in global fertility as well
as the increasing life expectancy and slowing population growth rates has
resulted in a “global silver” economy as the number of countries with more 65+
adults than kids under the age of 15 has expanded from 30 in 2015 to a
projection of over 60 by 2035.
From an investing perspective, the presentation noted that
the older a society becomes, the slower the change in the CPI, and in the
Q&A following the presentation, Frank was asked if this changes the role of
the Fed as America ages. Frank Rybinski noted that finding the “optimal policy”
for the Fed today is more challenging given demographics, since the “old rules”
(and Frank Rybinski” specifically cited the Taylor Rule) may have diminished
influence in the future.
From an asset allocation perspective, looking strictly at
demographics, the Frontier and Emerging Markets are better longer-term equity
investments given that GDP growth and productivity improvements are still to be
seen by many of these economies while Japan and old world Europe and other
mature countries (and even the US to some degree) are at the opposite end of
the spectrum and bond market investments and US Treasuries should be held in
portfolios, with Aegon calling Treasuries a “viable portfolio hedge” as
structurally slower growth and low inflation keep inflation contained.
Sub-Saharan Africa, Frontier Markets and Emerging Markets
should be held as equity investments given the longer-term GDP growth
potential, while Treasuries and fixed-income should be held for clients in
On February 6th Mellody
Hobson was the featured guest at CFA Society Chicago’s Power Breakfast series
held at The Standard Club hosted by the
CFA Women’s Network. Hobson, president of Ariel
Investments, is responsible for
managing Ariel’s business operations, development, and strategic
event was a conversational interview and moderated by Linda Ruegsegger, CFA. Ruegsegger started by asking Hobson what she sees as
current risks and challenges in the investment industry. Hobson answered by
stating that most risks should be considered as opportunities to be exploited
whether they are new/emerging or persistent risks. The proper frame of
reference is key to this here. Hobson used a hot topic as an example; the
movement from active to passive management, or the growth of the ETF market. The
growth of the ETF/passive market has come primarily at the expense of active
management. With wide availability, it can be an easy choice to go the passive
route. While ETFs are not inherently bad or wrong to own, they will only
provide an average return – beta. Since the average market return is the best
one can earn, eventually investors will realize that obtaining alpha is a
valued outcome, and they will understand that it is worthwhile to pay for an
active return. Since an ETF portfolio can only offer the market return,
reversion to the mean should favor the active manager.
Hobson brought up a related
topic – fee compression and how different ages of investors evaluate the cost
of investing. The latest generation of investors have been able to invest their
entire (short) life with investments that are effectively free. There are any
number of Vanguard, Fidelity, and Schwab products that are no cost or near zero
cost options. There is no turning back from these products – they are becoming
the default option for the market investor. How then does an active manager
compete against these companies/products? These companies have scale, which
cannot be easily duplicated, thus midsized companies could be squeezed out of
the market leaving a barbell-type investment manager landscape with large, mega
cap providers on one side, and smaller niche-oriented managers on the other. However,
it is the smaller provider that can use their size to be nimble and capitalize
on customization and client service.
Hobson noted another result of
the increased use of passive investments. It is getting more difficult for a
401K plan to provide a combined suite of active and passive investment options.
Active portfolios are being squeezed out due to their perceived expensiveness. She
told the audience of a conversation she had with a trustee of a 401K plan
noting the trustee would no longer consider including active strategies because
of the price difference from passive strategies.
Ruegsegger brought up the
great recession and asked how Ariel Investments made it through 2008-2009.
Ariel underperformed in a material way during this period. According to Hobson
this was the first time this happened. AUM fell due to market declines and significant
client defections. Hobson developed a mentality of ‘just getting through’ to the
next week, next the month, next the quarter and urged her staff to do the same.
There was no payoff at the end of these periods in terms of gift cards, cake, or
parties. The payoff was the opportunity to come back to the job of managing
money for clients and hope that the next period would be better than the last. With
this mindset came more focus from the staff, brutal self-evaluation, and
admitting mistakes that were made. Hobson also developed what she called a
depression baby mentality – scrutinizing all expenses, making due with what you
have, a needs-only mentality. This mentality served Ariel well during that
period. It is important to be able to hold this mentality not just in stressful
times, but also in better times as good times will ebb and flow.
During the downturn Hobson
also met with all Ariel investors – these were hard discussions as many
long-term clients withdrew their assets. For the clients that remained, positive
performance was not promised, but she told her clients she would not bet
against Ariel. Patience was the key – after 2008-09 the Ariel midcap blend was
ranked number one in the Morningstar Mid-Cap Blend category out of 311 funds
that were in existence over the 60-month period ended March 31, 2014.
Ruegsegger deftly segwayed by
asking if patience is ok when bringing diversity to the investment industry. Hobson
answered with a resounding “No!” Lack of diversity is corporate suicide, she
opined. Hobson mentioned a book by Scott Page, The Diversity Bonus: How Great Teams Pay Off in the Knowledge Economy.
The theme of the book is that diversity will always trump intellect. Hobson
recommended the book and gave an example from it about how the small pox
vaccine was discovered. Although there were teams of doctors researching for a
cure, the idea that led to the vaccine was not found by a team of (like-minded)
doctors, but buy a dairy farmer – from a person with a different (diverse)
point of view than the teams of researchers.
Most companies do not
formally address lack of diversity, and while it is great to aspire to having a
diverse workplace, a process must be in place to build and maintain a diverse
team. First, there needs to incentives in place to promote diversity. Incentivizing
behavior will get the desired behavior. Second, have a process in place to
source different pools of people. One must look for talent in a number of pools
– the source of talent must be diverse. Firms
must realize and accept that one person of color, creed, ethnicity does not
make a diverse workplace. More than one of X, Y or Z is needed. Third is having
a mindset of diversity. Building a team is not a choice of taking the best
person or the diverse person. This is the wrong perception. To find and build a
diverse team move away from looking for a skill or credential. Instead look for
intellect and be willing to train. Most people have biases, but they usually do
not realize this fact. Teach yourself and your team to identify bias. Hobson
believes diversity at Ariel is what makes the firm special, it is a competitive
At the conclusion of the
discussion, Hobson took questions from the audience. Several of the audience
members asked questions directly related to her comments on diversity –
Q – Should legislation be
used to improve diversity of corporate boards?
Hobson made some
observations; 25% of public companies domiciled in California do not have any women
on their board, and white adult men constitute 30% of population, but 70% of
corporate board seats. It is painfully obvious that corporate boards need to be
more diversified. However, while mandates for diversity forces us to look at
the facts, the U.S. as a country does not handle these mandates well.
Q – When looking to fill a
position should one find the right intellect or the person that adds to a more
Hobson stated that when given
the question of ‘should I hire the best person or the diverse person’ the answer
should be yes. One must understand that it is not a choice of hiring one or the
other. Circumstances will dictate the best person for the job provided that
diversity is valued at the workplace. That someone does not have the correct
skill set is not an acceptable excuse for hiring in a diverse manner. Any
person can be trained to on aspects of the job that they may not have
previously encountered. It is worth the investment to train in order to obtain
a well-rounded, diverse workplace.
Howard Marks, CFA, is co-chairman of Oaktree Capital, where he contributes his experience to big-picture decisions relating to investments and corporate direction. He shared his insights on investing and managing the business cycle for the CFA Society Chicago community on February 22, 2019. His presentation, entitled “Investing in a Low-Return World,” touched on some of the big questions investors are asking themselves today: Should we lower our return expectations? And if so, how do we make money in a low-return world?
Marks describes today’s environment as a “low-return,
high-risk world.” Prospective returns and safety are hard to come by in the
current over-optimistic climate where people have great trust in the future. Combined
with higher risk-aversion, such sentiments lead to asset price appreciation, which
means lower future returns, without any lower risk.
Let us follow Marks back to basics to consider what lower
returns actually mean. Consider the CAPM model, which shows the trade-off
between risk and return. As central banks have lowered interest rate, this line
has shifted down. For the same level of risk, you now have lower returns,
whether you are investing in T-bills or equity. The CAPM model hints at two
reasons why taking more risk is no surefire way to higher returns. For one, the
downward shift in the CAPM-line means that returns are lower even for such
risky ventures like private equity. Secondly, and more fundamentally, the CAPM
does not ensure higher return for riskier assets. As Marks explains, if higher
returns were guaranteed for these assets, they would not be risky. For risky
assets, therefore, while required returns appear to be higher, there is a wide
range of possible outcomes that offer no safe way to high returns.
In Marks’ view, the seven worst words are ”too much money
chasing too few deals.” This is what we are seeing today, with returns lower
across the board. As Marks clarifies in a memo,
“too much money” does not mean investors have more money on their hands to
invest, but that they are moving resources out of cash, where returns are low, to
seek more risky opportunities, and as such, push down required returns on
What, then, is an asset manager to do in this environment? You
cannot both position yourself correctly in a heated bull market and be
positioned for reversal at the same time. Counting on historical returns being
the same in the future is foolish but settling for today’s low returns
contradicts the business plan of most organizations. You may not survive in the
business if you go all into cash and wait for a better environment.
As an asset manager, argues Marks, you have two jobs, that
of asset selection and cycle positioning. You cannot give up on timing when to
be aggressive because then you cannot ever be defensive. Cycle positioning does
not mean forecasting economic growth for the next year. Marks makes very clear
that he does not believe in forecasting. Instead, you need to understand where you
are in the relevant cycles, such as the business cycle, credit cycle, and the
market psychology cycle. Knowing where you are gets the odds on your side. It
does not mean you can predict what will happen tomorrow but it should tell you
whether to be more aggressive or more cautious. Marks explains that there are
times for aggressiveness and times for caution:
When prices are low, pessimism is widespread and
investors flee from risk, it is time to be aggressive.
When valuations are high, enthusiasm is rampant
and investors are risk-tolerant, it is time for caution.
It seems Oaktree’s view is that the current environment is a
mixed bag. For the past three years, their mantra has been “move forward but
with caution.” This, as Marks explains, means being fully invested while biasing
the portfolio towards defense rather than offence.
In addition to getting the cycles on your side, explains
Marks, there are opportunities for alpha also in the current environment.
Despite low returns overall, there are mispricings to exploit. You do have more
and less efficient markets, and with the right set of skills, you can identify
them. This is harder than it used to be, when there were more structural and
persistent inefficiencies to exploit. Nowadays, most inefficiencies are
cyclical, and emerge only once in a while.
In inefficient markets, some investors will earn positive
alpha, and some negative alpha, so you should enter these markets only if you
think you can be on the right side of the trades. You can do this only if you
dare to be a contrarian. Going this rout is risky and costly but it is the
right way to invest if you have the skills to do it.
For additional reading, see Howard Mark’s memo “Risk and Return Today.” You can find all his memos while at Oaktree here. You can also view the CFA Society Chicago luncheon presentation below.
On January 16, 2019, a profound reflection on economic
policy, politics’ influence on it, and the US economic outlook took place at
the Standard Club in Chicago. The discussion was moderated by CFA Society
Chicago’s very own Lotta Moberg, CFA,—with William Blair’s Dynamic Allocation
Strategies team—and featured David Lafferty, senior vice president and chief market
strategist at Natixis Investment Managers; Nicholas Sargen, chief investment officer
for the Western & Southern Financial Group and chief economist of its
affiliate, Fort Washington Investment Advisors Inc.; and Jas Thandi, associate partner
of Aon Hewitt’s Global Asset Allocation Team. The discussion began with setting
up the big picture of the world economy with the US as the focus and then
progressed to cover the panelists’ outlook on how central bank policies and
deregulation will play out in the US. Finally, the panelists shared their
perspectives on the future of globalization before offering some concluding
remarks. After the panel discussion was completed, Moberg opened the panel to
Sargen kicked off the discussion by encouraging the
attendees to “not focus on the tweets”—referring to the President’s activity on
Twitter—or even the Federal Reserve. Instead, he encouraged people to focus on
economic policy. He walked through the story of Trump’s economic policy since
he took office citing the corporate tax cuts and deregulation in 2017. Sargen
explained his view that these policies carried the markets through 2017 and by
2018 most of this positive news was already priced in to the market. The
realization that these policies were already priced in combined with the new
developments in the China Trade War led to 2018 falling flat by the end of the
year. He closed his opening remarks citing political gridlock in America and a
global economic slowdown as the continuing risks for markets. Lafferty
continued the conversation agreeing with Sargen on all counts and expanding
with his views on the global economic slowdown. He laid out a view of global deceleration
across all major asset classes stating that some of the pessimism is already
priced in. Lafferty even conjectured that he believed most broad asset classes
were not far from fair value. However, none of these broad asset classes are
currently priced for recession. Thandi rounded out the opening remarks by
emphasizing politics’ growing role in markets and bringing focus back to the
U.S.-China trade war and its implications on global assets—especially in
Europe. He expounded on his European focus by pointing to the ECB and the need
for investors to be wary of their policy actions as well. He wrapped up the
opening remarks by touching on the increase in supply of treasuries due to the
runoff of the Federal reserve balance sheet and the impact we should expect to
be seen in the credit markets. This final point set up Moberg’s next point of
discussion: how will the U.S. markets react to recent U.S. government and FED
Thandi picked up by stating his belief that the U.S. economy
would experience a soft landing due to some growth from the tax stimulus.
However, he has been surprised by the way capital expenditures by corporations
has “fallen off a cliff.” Lafferty followed Thandi’s comments regarding low
capital expenditures by explaining that the execution of economic policy can
have an outsized impact. Lafferty explained to attendees that the corporate tax
cuts should have incentivized companies to spend more on capital expenditures,
however, due to recent protectionist rhetoric from the President many companies
became cautious to make capital expenditures due to political uncertainty.
Lafferty also stated that the current political gridlock in the U.S. government
could be dangerous for markets should any major problems arise. Despite these
warnings, Lafferty too expressed some optimism stating his belief that we are
merely experiencing a slowdown. However, he cautioned that Federal Reserve
adjustments could have already killed the expansion. Sargen agreed with
Lafferty regarding Fed policy and shared his view that the Fed’s communication
regarding policy has been poor. He also revisited Thandi’s point of the tax cut
stating his belief that the resulting stimulus would run its course by mid-2019.
However, Sargen also supported the view of a soft landing stating that the U.S.
would not experience a recession this year—but a recession beyond that short
horizon is likely.
The next topic for the panel was deregulation in the US.
Before this topic was kicked off Lafferty offered thoughts by first stating
that there has been a surprising focus on regulating new forms of systemic risk
and investor protection. He cited the growth of the ETF market as a point of
concern for regulators. After making this point he explained that deregulation
has been positive for smaller shops as it has eased their regulatory burden.
Sargen expounded on this point by saying that executives overwhelmingly prefer
less regulation—no matter the size of the company. He pointed to the current
political landscape saying it is no longer as supportive of deregulation due to
the democratic party’s representation in the House of Representatives. Thandi
offered the final thoughts on this topic by stating that deregulation has only
had a small impact. He explained that there were short term gains from
deregulation but they were muted due to tariffs resulting from the U.S.-China
After the deep dive into recent developments in the US the
panel transitioned to discuss the future of globalization, both in the US and
across the globe. Thandi started off by discussing the recent protectionist
rhetoric not only in the U.S. but across the globe citing Brexit as a major
example. He explained that such policies will lead to consolidation in equities
as large companies seek growth through acquisition instead of organically.
Ultimately, Thandi believes these policies will lead to a lower growth
environment. Lafferty agreed that protectionist policies appear to be growing
in developed markets and will lead to a lower growth environment. Further, this
lower growth environment will lead to stunted performance in passive investment
strategies. He also expects these protectionist policies to cause more
volatility in markets. Lafferty’s final point on the matter was that with the
combination of low growth and higher volatility investors will allocate more
capital to active investment strategies.
Finally, the panelists concluded the evening with their
The trade war is not about prices but about
national policy, specifically the U.S. is targeting the “Made in China 2025”
Regarding monetary policy, backtracking on
Quantitative Tightening is actually bad for equities because it signals the Federal
Reserve doesn’t have faith in markets’ strength.
The dollar will be stable or bearish in 2019.
Reforms and policy decisions in Europe will be
more influential than the media is portraying.
Assuming a soft landing for the U.S., emerging
markets already had their correction and are due for a rebound.
Alternatives such as private equity are an
Passive investment strategies generally
outperform hedge funds in the long run.
After the discussion was concluded Moberg opened the panel
Does it matter who
Trump’s Economic Advisor is?
diversification out of date?
Thandi: No, however correlations have
lowered with globalization. Currency risk still plays a big role.
Lafferty: No, however Emerging Markets are
no longer as attractive in the long run because growth has slowed. Low
correlations have become much rarer due to an interconnected global economy.
Sargen: No, but benefits of international
diversification are not as attractive. Additionally, investors should be wary of
diversification into bonds as the Federal Deficit continues to grow.
What is the big thing
the general consensus is missing?
Lafferty: Bubbles in the capital markets.
Sargen: Global leaders are running out of
policy ammunition to deal with crises.
What will volatility
be in the next 6 months?
Lafferty: Low 20s as opposed to low teens
(referring to the VIX Index level).