Vault Series: Cambridge Associates

Gender equality in the investment profession has been a hot topic in the industry lately, and it was addressed in detail during a January 10, 2019 Vault Series talk from Dierdre Nectow. Her firm Cambridge Associates, a large institutional investment consultant, is an outlier in the profession with half of its executives being women. Nectow discussed why her firm has much higher female representation than average, and what the state of women in finance is today.

To start, some good news: the number of women in finance is growing, yet as a percent of the workforce, women are still underrepresented. The United States is also a laggard when it comes to gender equality in the workplace, coming in at a dismal 51st place globally. One of the worst places for gender equality in finance can be seen in venture capital, where just 9 of the top 100 VCs are female. In contrast, the hedge fund industry has the best female ownership numbers, with 2% of AUM managed by women-owned firms.

Cambridge has been a bit different than its peers in hiring and promoting far more women than average in large part due to the philosophy of its co-founder Jim Bailey. His mother was a strong woman that had inspired him, and he saw women as an untapped resource. Hiring them could lead to outperformance in the industry. The firm has also spent time training workers on unconscious bias and has sought to make it safe to have those kinds of conversations while fostering more thoughtful attitudes around encouraging women and minorities in the workplace. Additionally, Cambridge has a mentorship program, a CFA women’s group and a new initiative called Prevail, which is designed to bring women at asset management firms as well as Cambridge clients and prospects together to talk about investing and issues.

Gender equality is becoming increasingly important for financial firms because pensions are using women and minority representation as a means to hire managers (or not hire ones with inadequate representation). Many companies have been hiring diversity officers to address this trend.  Cambridge is also scouring the landscape to find female and minority-owned managers due to demand.

Following the introduction, David Baeckelandt, senior investment director at Cambridge Associates, took the stage to give us a brief history of women in financial markets, beginning with ancient firms. While by day Baeckelandt is a salesman at Cambridge, in his free time he is a history buff and has done extensive reading on the subject of women in finance.

Beginning in ancient Egypt, Baeckelandt said that Cleopatra was the first women to coin her own currency and put her image on it, which was an important step in modern finance. Another famous woman in finance milestone came with Queen Isabella funding Columbus’s voyage to the new world. Baeckelandt said that you could argue that Isabella led the most successful venture investment of all time, as the exploration of the Americas led to vast wealth for Spain. Another milestone took place in the coming years, with the Dutch East India Company being perhaps the world’s first IPO, and it had a number of women investors involved.

An interesting story of women in finance came from Abigail Adams, wife of John Adams. She made a small fortune trading bonds, which she turned into a small farm that she used to convince her husband to return to from Europe. Victoria Woodhull was another luminary who spotted an arbitrage opportunity between gold bullion and US dollars and used it to make a substantial profit. She then ran a financial firm with her sister, and her story is the subject of an upcoming TV series. Baeckelandt mentioned Hortense Friedman, a story familiar to many charterholders (there is an award given out annually in her name). A number of other women firsts took place in the late 1800’s, with the first women CPA’s and the first women investment bankers in the US.

There are a number of positive signs with respect to women in finance, yet there is much work to be done, particularly with respect to compensation. Public pensions and other large investors will continue to put pressure on firms to ensure adequate female and minority representation, and the march towards gender equality will likely continue to grow in the investment industry.

Tips and Tricks for Negotiating for Yourself

“So much of life is a negotiation – so even if you’re not in business, you have opportunities to practice all around you.” – Kevin O’Leary

When we think of negotiations, we tend to restrict our thinking to business situations like deals, compensation, office location etc. However, we negotiate in our daily lives starting as early as toddlers when children hold their parent’s hostage to have their way. To talk about some tips and tactics to help us amp up our negotiation game in every walk of life, the Society’s CFA Women’s Network hosted Laurel Bellows on November 27, 2018, at The Standard Club.

Laurel Bellows, founding principal of The Bellows Law Group, P.C. is past president of the nearly 400,000-member American Bar Association, past president of The Chicago Bar Association and past president of the International Women’s Forum Chicago and The Chicago Network. Bellows is currently serving on the Executive Committee of the InterAmerican Bar Association.

Bellows began the event with a short video clip of a comic which was aimed to explain how brains of men and women work. It was good humor that shed light on how men and women think differently and hence negotiate differently. Overall, it was a great event with simple yet important takeaways we all should focus on while negotiating. Some key themes to discussed during the event are briefly described below.

Know your opposition

Knowing how the opposition thinks and anticipating their goals and their best alternatives for the negotiation can help you strategize your efforts.

Determining the goal of negotiation

By determining what constitutes a successful negotiation to you can help you decide what works for you and how flexible you could be during the process. It is important to think about what kind of relationship you would like to have in the future with the counter party and how their non-performance could affect you. At the end of the day a successful negotiation is when you have a viable deal for both parties.

Preparation is Power

Key is to Prepare, Prepare and Prepare. Do not negotiate with your gut! Determine authority of the person you are dealing with and make sure they can sign off on the negotiated terms at the end of the conversation. You do not want to waste time negotiating with a person who would need approval from a higher authority which almost every time leads to a counter offer to your best negotiated terms. Gather knowledge, know your opposition and visualize your deal. This process will help you figure out motivation of the deal for yourself/client, define finite priorities and be able to articulate your position succinctly in 5-7 words. If you are dealing with a difficult person, be firm and don’t be afraid to walk out! If on the phone, respectfully let the other person know you are not comfortable with their behavior towards you (especially if they are shouting) and hang up. Deciding on where to hold the negotiations, your place or theirs? Your office will enable you to take control, their office would give you the ability to walk away. Whichever the case may be, own the room you walk-in!

Build a working relationship

Clarify your position, propose creative options and be consistent to establish trust/reputation with the opposition. Never lose sight of your reputation and listen closely to your opposition. Do not plan your response while listening to them, the brain can only focus on one!

Do not have more than one best alternative to what is on the table at any given time during a negotiation. The best alternative may change constantly as you may choose one over the other but avoid having more than one at any given time. If the BATNA is no deal you walk out! Make sure you are aware that walking out could be for good.

Control the Agenda

By controlling the agenda, you will be able to focus on objectives, control information exchange timing and who makes the first offer.

Persuade the Opposition

Be patient and listen to your opposition. Your tone of voice matters depending on who you are against. Mirror your opposition to engage with them and build trust and be prepared to have uncomfortable conversations. It is ok to be fearful, but you may be able reframe the situation with optimism and further the conversation with curiosity.

Conversational Techniques

Use accurate facts asserting informed certainty. Do not be afraid to interrupt to take control of the conversation but do so respectfully. It’s a good idea to have a default expression like a light smile to be unpredictable and be sure to practice a few default moods ahead of time. Power language is important. For example, using more ‘ands’ (positive) in place of ‘buts’ (negative) can make a difference. Try recording your ending sentence to see whether your statements have a hint of a question or uncertainty and address that. Use open questions to gather more information and use ‘blocking’ technique (answer with another question or refuse to exchange information at the time). Try to avoid impasses by talking past a ‘o’ by either stating facts or moving on to another subject.

Communication

Avoid negotiating on email unless you really must. It is easy for the opposition to say ‘no’ not leaving much room to negotiate. During team negotiations make sure you know ‘who is who’! A telephone negotiation can happen from time to time. Be prepared and have an agenda as small and simple as conveying a deadline or timeline or a mood. If you get a call suddenly, ask them call back in 5-10 minutes to make sure you are prepared and have an agenda. There is no excuse for not being prepared!

Reaching an agreement

Leaving a little bit something on the table sometimes during negotiations may help build long-term relationships. Attend carefully to the dates and time concessions. After the deal, the opposition party may come up with minor changes like a week or two early delivery dates or a minor design change in packaging. It is best to either refuse outright or ask something in return. It could be a small ask even if you don’t care much about the change but if not done at that time, expect many of such nuances down the road. Just be resilient!

Factor-Based Investing

The CFA Women’s Network hosted a lively and vibrant event featuring Patricia Halper, CFA, partner and co-chief investment officer at Chicago Equity Partners. Halper spoke to a room full of engaged members on the topic of factor-based investing which coincides with the popular topic “Smart Beta” investing. The subject is more relevant than ever as investors question the worth of fundamental active stock-pickers in search of both better performance and lower expenses. As a brief introduction, Halper has been working at Chicago Equity Partners for over twenty years as both a member of the quantitative research team and a portfolio manager.  Prior to CEP, she worked at Paine Webber on the institutional futures sales desk. Halper holds a bachelor’s degree in mathematics from Loyola University Chicago, a master’s degree in financial mathematics from the University of Chicago, and is also a CFA charterholder. Currently at Chicago Equity Partners, Halper utilizes factor-based investing strategies to support the firm’s equity decision making processes.

Simply stated, a “factor” is a characteristic of a security that explains its investment return. Factor investing in its most simplistic form can be described by the traditional CAPM equation: E(r) = rf * B(Rp-rf) where beta represents the single factor. In examining how a factor can be used towards making investment decisions, the question an investor must then ask is twofold: “Is this factor a good predictor of future price movements?” and then secondly “Which side of the factor (high beta or low beta in this case) will outperform the index?” Expanding upon a tradition single-factor model, Fama and French introduced the three-factor model in the 1990s which included beta, size and value.  In the late 1990s, quality factors came into light such as balance sheet quality, earnings quality, and quality of the management team. Today, there are hundreds of factors that investment professionals analyze to explain investment returns. Bottom line: factor investing is a known proven strategy that has been around for many years.  If you get the direction of correlated factors correct, you will likely outperform your benchmark.

Some of the most common factors used today include:

  • Value:  Low price/earnings, low price/sales, low price/book value
  • Quality: Strong management team, high earnings quality with lack of one-time items, low balance sheet leverage
  • Momentum: Both price momentum and earnings momentum generally provide outsized returns.
  • Size:  Smaller companies have outperformed larger companies over a long period of time
  • Volatility: Less volatile stocks provide higher expected return over the long term.

There is a key asterisks to the factors noted above. High value, high quality, positive momentum, small market cap, and low volatility have all shown to be positive factors of price performance…  over a 20 YEAR period. Often times, clients don’t have the investment horizon (or patience) to stick with a strategy that doesn’t work over several years, or even more commonly over several quarters.  In fact, the opposite of what is true in the long term (20 years) can be true in the short term (several quarters to even years). The key to understanding which factor is the most relevant to excess return is to understand what cycle of the market we are in. Halper described three market cycles:

  • Expansion: Most often markets are in expansion mode as markets generally trend higher. Momentum factor outperforms the most in expansionary periods (5%+ excess returns) and tends to work because investors tend to chase winners.
  • Downturn: At the end of the expansion period, you see a shift to Low Volatility and High Quality names with strong balance sheets that provide the best excess returns. This period can be considered recessionary with negative GDP growth.
  • Rebound: Finally, the rebound period doesn’t last long between when the downturn ends and when the expansion cycle begins—typically 2-3 quarters.  During this short time period, Value outperforms best.

Taking our single-factor observations above one step further, there is empirical evidence that If you know how to combine multiple factors into a model, a multi-factor portfolio will outperform a single-factor portfolio with less risk. There is a cyclicality in any one factor  and the cyclicality of factors increased during the global financial crisis.  It is best as an investment manager to pick at least two factors to structure your portfolio. That being said, you have to use two factors that are moderately correlated, otherwise one factor will tell you to buy and another to sell and you will naturally be holding the indexed market.. or cash!  How you combine factors, how you weight them, and how you allocate each factor is the name of the game for outsized returns. It is also critical to highlight that another key to successful factor based investing is having high quality data. High quality data has both a wide breadth and a long time horizon and without high quality data, your model will give false signals into which assets to buy and sell.

The analysis of factor based investing begs the question how is it related to the popular term in the industry right now “Smart Beta” investing.  Smart Beta strategies have shown tremendous AUM growth largely due to a general dissatisfaction with traditional equity asset managers. Asset allocators ask of Smart Beta products, “Can you perform better than a traditional passive index at a rate that is cheaper than active equity managers?” To put figures around the growth, in 2008, there was $100mm invested in Smart Beta strategies. Today, there is over $1 Trillion, a ten-fold increase in the last 10 years.  The largest smart beta funds, largely run by Vanguard and Blackrock, trade based on growth and/or value, what is otherwise a very traditional style-based factor investing that has been around for 20 years. When you take a closer look under the hood, even though these products are called “Smart Beta”, it is really the same principles just repackaged with a sexier word for the times. It’s not quant analysis, and if the product is only focused on a single factor, it’s not multi-factor investing either. If the Smart Beta product is only using a single-factor approach, it is simply “Quant 101” that has been around for over 20 years. Multi-factor Smart Beta products are a very small portion of the market which undoubtedly will grow over time. Investors should note that if they plan on buying a smart beta product, be aware of the sector exposures, as some have very high sector exposures which can overwhelm your factor exposure if you are overinvested in an industry that has sector specific issues.

What does the next 10 years look like? What factors will outperform in this current market environment? The Fed is now raising interest rates and ending its 10-year quantitative easing program.  How will turmoil in foreign markets and currencies impact our domestic equity and bond markets here at home? Only time will tell, but what is clear is that factor-based investing should be in every investment manager’s tool chest as they evaluate market trends and the price movements of its underlying securities.

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.