QE Postmortem

A review of the Quantitative Easing (QE) programs conducted by central banks around the world since the financial crisis of 2008-09 was the topic of a panel discussion before a full house at the Hotel Allegro on September 13th. Dr. Dejanir Silva, professor of Business at the Gies School of Business at the University of Illinois served as moderator. Dr. Dejanir focuses his research on unconventional monetary policy, financial regulation, and entrepreneurial risk-taking. His panelists included:

  • Roberto Perli, from Cornerstone Macro in Washington, D.C. where he heads global monetary policy research. Prior to moving to the private sector in 2010, Dr. Perli worked at the Federal Reserve Board, assisting with the formulation of monetary policy.
  • Nomi Prins, journalist and author with experience in international investment banking.
  • Brett Ryan, senior economist at Deutsche Bank responsible for high-frequency data forecasting for North America.

Dr. Dejanir kicked-off the event with preliminary comments starting with a quote from the former President of the Federal Reserve Board, Ben Bernanke:

“The problem with quantitative easing is it works in practice, but it doesn’t work in theory.”

More specifically, Dr. Dejanir explained that although empirical tests have shown positive effects of QE, we don’t have a clear understanding of the channel by which it works: the how and why of QE. This condition makes QE programs difficult to plan, execute, and, most importantly, evaluate after the fact.

The panelists then gave their general observations on QE as conducted by the Federal Reserve (Fed), European Central Bank (ECB), and the Bank of Japan (BOJ). Prins pointed out the huge size of the programs—the equivalent of $22 trillion. Even though the Fed has begun (slowly) to unwind its QE program, the ECB and BOJ are still accumulating securities. Prins called this an “artificial subsidy” which has encouraged investors of all types to take more risk than they otherwise would (or should) have. Perversely, this could end up having a destabilizing impact.

Ryan complimented the central banks for conducting QE claiming it helped avoid a long, global depression, and he added, they had learned a lot about how to use the tool in the future. He admitted surprise that the term premium in financial markets hadn’t returned to pre-crisis levels, and wondered what this might imply for the performance of risk assets in the future.

Perli, pointed out that, because the QE programs at the ECB and BOJ are still underway, conducting a postmortem is premature. Indeed, the ensuing discussion failed to reach many insightful conclusions about QE.

Dr. Dejanir then asked the panelists if central banks should conduct QE at all, in light of the risks it poses for them (by investing in asset classes beyond sovereign debt) and for investors (by reaching out on the risk spectrum further than usual). Ryan thought the risks were lower for the U.S. than for other countries because the dollar is the world’s reserve currency. That effectively removes a limit on QE for the Fed. He added that the increases in required bank capital enacted during the crisis counteracted the QE programs by requiring banks to operate at lower leverage ratios. This has led to the idea of flexible capital regulations allowing for their application counter-cyclically. The Fed is conducting research into this concept.

Perli, said that in a time of extreme crisis, central banks must take actions that go beyond standard policy, and the recent experience fits the bill. However, he questioned the separate nature of the various QE programs, and suggested a coordinated effort could be more effective in the future.

Prins, acknowledged the inherent riskiness of QE. She contended that a lot of the liquidity has found its way into equity markets, either from end investors, or corporate buybacks. She feared that future rounds might require further investments into equity markets by the central banks to be effective. She also noted that the lack of a clear exit strategy added to the uncertainty, if not the outright risk, of QE programs.

The next question put to the panelists was whether or not the central banks should (or would) seek to reduce their balance sheets to pre-crisis levels. All three were skeptical that they would. With specific regard to U.S. MBS, Ryan doubted the Fed could reduce its holdings significantly without a material impact on the market, which it would be reluctant to do. Banks invest heavily in agency MBS because of their low-risk weighting in determining capital requirements. Prins pointed out the Fed would be careful not to upset the MBS market and generate a knock-on negative impact on bank capital. Perli expected all central banks to continue with greatly expanded balance sheets for the foreseeable future. He also expects a slow transition to transactions-based policy rates rather than administered ones. Ryan seconded this opinion and endorsed SOFR (Secured Overnight Financing Rate)–essentially the overnight treasury repo rate–as an alternative to Fed Funds.

The discussion moved on to the topic of the increase in indebtedness since the crisis. Prins presented figures highlighting recent changes. Total household debt has barely budged since 2007, rising just $100 billion to $9.4 trillion. However, this masks a shift of over $1 trillion from mortgage debt to other types of consumer debt. Non-financial corporate debt has nearly doubled to $3 trillion (Ryan noted that ratios of corporate indebtedness have reached levels usually characteristic of recessions). Student loans have risen dramatically, in relative terms, from $500 billion to $1.4 trillion. When sovereigns are included, total global debt has risen from about $97 trillion to $247 trillion, mainly because debt remains very cheap for borrowers almost everywhere in the world. All panelists acknowledged, however, that emerging market countries, having to borrow in developed markets, will struggle to service their debt denominated in foreign currencies.

The debt question eventually led into the final topic of the event: inequality. Ryan noted that inequality has been rising since 1980 but has only become an issue more recently. Dr. Dejanir asked if central banks should take inequality into consideration in conducting QE in the future.  Ryan responded that central banks lacked tools to address the issue. Perli agreed, saying that in times of crisis, central banks had to act to help economies quickly, without consideration of side issues like inequality. In any case, inequality is a macro policy issue, not a monetary policy one. Prins thought inequality should be addressed with regulations all the time, not just during crises.

In the end the panel had no concrete conclusions on QE, but agreed on some broader points:

  • Despite uncertainty over the size, timing, and ending of their programs, the central banks in the largest global economies needed to act beyond monetary policy, to help their economies recover from the great recession.
  • Experience has shown that these programs entail risks that could prove to be larger problems in the future.
  • Central banks should learn from their experience with recent QE programs, share that knowledge, and plan now for more coordinated programs when they are needed next.

China Opens Its Doors to Foreign Investors

On May 17th, 2018, CFA Society Chicago hosted a program to address challenges and opportunities for the US and China. Patrick Chovanec, managing director and chief strategist, of Silvercrest Asset Management, presented his thoughts about the relationship between China and the US. His comments focused on the trade deficit and the effect of General Secretary Xi Jinping and President Donald Trump.

Chovanec noted that trade imbalances are not inherently good or bad. He stated that competitive advantages only address part of the reason for these imbalances.  Trade deficits and surpluses also result from differences in savings rates. In the 19th Century, the US borrowed from the UK to invest in plant and equipment, which resulted in a win for both parties. In contrast, Germany used its trade imbalance and relatively high savings rates to lend money to Greece, which used the funds for consumption, hurting both entities.

The trade imbalance between China and the US represents a significant challenge for both parties. The genesis for the trade deficit began with China’s desire to support capital investments with foreign demand for the goods it produced. This strategy can work for small and emerging economies. However, this plan does not work as well for the world’s second-largest economy.

The US supplied demand for goods produced in China until the 2008 financial crisis. China reacted to the decline in US demand with an investment boom to continue economic growth. China recognizes that it cannot rely on foreign demand and domestic investments. Growth in domestic consumption represents the long term path to sustainable growth.

Chovanec believes that higher trade barriers do not represent the solution for the US trade deficit. President Trump has focused on an unfair playing field, which presents a profound problem for the US. China should be open to a fairer system and continue its efforts to increase domestic consumption. However, lower trade barriers and increased consumption in China would cause the US to consume less and/or produce more. The biggest US problem is over consumption. The Federal budget deficit supports entitlement payments, which crowds out borrowing for investment. Borrowing for consumption versus investment underlies the US challenge.

In 2013, the third plenum of China’s Central Committee established a goal of opening capital markets. Xi has committed to this goal. The challenge for foreign investors has been a lack of economic reform and assessing valuation levels for assets. The Chinese stock market collapse in 2016 slowed foreign interest. The Chinese government heavily intervened to establish a floor of 3,000 for the Shanghai Composite by essentially ordering domestic owners not to sell.

China accounts for about 15% of global GDP, but just over 3% of global equity market capitalization. The world’s second-largest economy has long kept most foreign investors out of its capital markets. But as the country’s economic model undergoes a transition from export and investment-led growth, to one powered by consumer spending it is simultaneously opening its doors to foreign capital.

Nick Ronalds, CFA, founder and president of RhoFinancial, LLC, led a panel discussion about the opportunity for foreign capital investments in China. The panel included Christopher Balding, professor of economics at Peking University, Craig Feldman, global head of index management research at MSCI, and Sandy Li, senior vice president at Loop Capital Market, who discussed some of the more promising areas for investing in China’s future.

Fintech Part 2: Rise of Robo-Advisors

David Koenig, CFA

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Q&A

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

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

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

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

Fintech Part 1: Blockchains – Disruptor, Panacea, and Reality

CFA Society Chicago hosted Blockchains – Disruptor, Panacea, and Reality, the first fintech event of a three-part series, focusing on blockchain technology and its applications. The event was held at The Chicago Club on January 17, 2018, attracting a sold-out crowd of over 200 people. The afternoon started with a keynote address and was followed by a panel discussion with industry members working in the crypto space. Those in attendance participated in Q&A session at the end of the event.

Keynote Address

Wulf Kaal, the event’s keynote speaker and moderator, is director of the University Of St. Thomas Private Investment Fund Institute, a tenured associate professor of law at UST School of Law, a leading expert on hedge fund regulation in US and EU, and an industry expert in the cryptocurrency space. He initiated the event by gauging the audience knowledge and involvement within the crypto space, introduced blockchain technology and outlined the following event agenda:

  • Blockchain Technology
  • Smart Contracts
  • ICO Market – Best fundraising for start-ups
  • Case Study – Blockchain in Loan Industry
  • Panel Discussion
  • Q&A session

Kaal then continued to highlight the magnitude of growth possibilities within the crypto space. He displayed past year price data for Ethereum and Bitcoin (two of the most famous cryptocurrencies) and emphasized the fact that what has been seen to date can be thought of as linear growth and that exponental growth is expected by the industry. He also shared four years of ICO related market data showing a total fund raising of $6.4bn to date.

Kaal discussed how some market participants regard the rise of blockchain as a bubble; some audience participants share the same view. He went on to educate the audience with the crypto space, blockchain technology and its application beyond the talk-of-the-town cryptocurrencies like Bitcoin and Ethereum.

He described the core characteristics of people believing in the crypto space. The following key characteristics describe a “Crypto Purist”, such as himself:

  • Believes in crypto space
  • Believes in decentralization
  • Believes in a New Economy – a new way of thinking

Moving on, Kaal educated the audience on blockchain technology stating that it is similar to “having an internet” like event. With “Code being the Law”, blockchain technology is self-executing. It is a decentralized public ledger where each block (or node) in the chain can be thought of as a sheet with the footprint of a previous page along with its information. Blockchain could be referred to as a peer-to-peer (P2P) network based upon “Trust” and “Disintermediation” with a copy of the ledger stored in different computers all over the world. The result would be a transparent decentralized economy. Constant additions to the blocks in the chain would require higher computing power to modify past blocks/nodes making it difficult or next to impossible to cheat/hack this system. Lacking scalability in applications at the moment, Kaal believes that whoever can figure out a way to apply blockchain technology to enterprise facing solutions will be the next “Google” of today.

By not being physical in nature and anonymous over VPNs (Virtual Private Networks), the use of blockchain ledger faces issues concerning lack of legal remedies and/or recourse in contrast to what we have today with internet related solutions. However, legal groundwork is being carried out to deal with such issues.

Continuing the discussion on law and blockchain, Kaal geared the discussion towards Smart Contracts which are self-regulating and self-executing contractual obligations. These contracts are inexpensive, automated by code, take only minutes to execute and have automatic remittance versus 1-3 days for traditional contract execution at a comparatively higher price with manual remittance. This reduces the need for lawyers due to the nature of the contract. When a smart contract is coded, it will end with an execution and cannot be stopped by either party. However, this could lead to some issues where unexpected circumstances occur in normal business transactions requiring flexibility from parties to the transaction. Kaal also briefly touched upon the different use cases of smart contracts with varying level of complexities. The industry expects banks to spend heavily in blockchain based solutions in the coming years. He predicted that settlements may very well happen one day using this technology platform.

Kaal then steered the focus towards the funding landscape within the crypto world. He discussed venture capital interest funding blockchain based start-ups in various industries ranging widely from Finance, Government, Consumer and Media. Next, he touched upon ICOs (Initial Coin Offerings) and how they stack up against traditional Venture Capital and crowdfunding sources in characteristics for start-up funding. Kaal shared market data on how since September 2016, Ethereum was the most popular blockchain for ICOs’ assets globally. The US leads the industry with the highest number of crypto start-ups globally followed by Europe and Asia. Russia on the other hand is leading in government support for the overall technology platform with state funded academy formation and by creating a more favorable regulatory environment than the US.

Proceeding to the next agenda item for the evening, the Kaal discussed a blockchain case study of a Loan Securitization. He compared the blockchain process to the existing loan securitization process and identified the following key benefits of the former:

  • Lower costs
  • Increased Safety
  • Faster Payment Streams
  • Rise in trading volume

Panel Discussion

The second half of the evening featured a panel discussion moderated by Wulf Kaal with speakers Colleen Sullivan, Zabrina Smith and Biju Kulathakal. Each of the panelists introduced themselves and discussed how they engage with the crypto space for their clients.

Colleen Sullivan is co-founder and managing member of Sullivan Wolf Kailus LLC, a boutique law firm based in Chicago that specializes in hedge fund, private equity, venture capital, digital assets and other alternative investment products. She discussed blockchain from a legal standpoint clarifying that ground reality for the regulatory environment is very different than what has been observed in the media. She recalled being present in South Korea when a reported surprise government “crackdown” on the crypto exchanges was merely an examination by Korean tax authorities on the tax implications of the crypto exchanges. She noted that governments are looking to exchanges to self-regulate in these unchartered territories.

Furthermore, Sullivan discussed various cases she has been working on for legal solutions around asset servicing, asset management and wealth management. Her firm has been leveraging blockchain technology for asset safety of their clients, efficient transactional authority and transparency, proof of value assessments, etc.

Next, Zabrina Smith, vice president within Northern Trust’s Market Advocacy & Innovation Research (MA&IP) team, introduced herself and described how she was working on researching ways to incorporate block chain technology to add value for global clients. Her team has been working with use cases around contracts, wealth management and other creative uses within the organization to add value and/or improve existing customer solutions. Northern Trust has been proactive in trying to apply the technology and has been working in the space as a pioneer to bring better solutions to its customers.

Finally the last panelist, Biju Kulathakal, founder of Halo Investing – first independent multi-issuer technology platform, introduced himself and described how his organization utilizes the blockchain technology for structured loans with options contracts. Halo Investing packages products from sellers like JP Morgan, Credit Suisse, and Goldman Sachs, and sells it to advisors like Schwab and others.

He presented an example of a typical transaction based on blockchain to illustrate the potential benefits like less documentation, quicker execution, lower costs and flexible issuance sizes when compared to traditional structured notes.

Q&A Session

The session continued with questions from audience noted below:

Implications/application of blockchain for lending securities?
Blockchain can leverage various functions including the following aspects of securities lending:
• Digital Identity; and/or
• Settlements (similar to implementation by Australian Stock Exchange)

Implications of blockchain for auditors?
Blockchain could be applied to automate life cycle processes reducing overall audit times and increasing efficiency for the whole process.

Benefits of leveraging blockchain technology to CDS contracts?
Blockchain based CDS contracts would be expected to be of a lower cost as no counterparty would be maintaining a ledger.

Implications of blockchain on access to asset classes?
By being able to sell part of assets, blockchain implementation would lead to increased access to assets which would otherwise be known as ‘Exotics’.

Implications for Visa systems?
Viewing Visa as a huge notary, blockchain could result in reduced visa costs.

Where blockchain would not be a viable technology?
Blockchain would not be viable where actual enforcement is required, for example policing etc.

Corporate Governance in an era of Clawbacks, ESG, Mega-Managers, and Zombie Investors

Two expert panels came together at the Conference Center at UBS Tower on November 29th to provide insights to various aspects of board related corporate governance. The first panel, moderated by Eileen Kamerick, focused on Management and Directors. Kamerick is a current and previous board member of several financial and industrial companies and is an adjunct professor. The panel included Thames Fulton, managing director at RSR Partners (executive recruiting); Frank Jaehnert, member of the board of directors of Briggs & Stratton, Itron, Inc., and Nordson Corporation; and Todd Henderson, professor of law at the University of Chicago Law School.

Kamerick started with a question about board diversity – should investors care about diversity? Henderson believes board diversity is a top issue and gave the following example of why boards lack diversity. When adding board members it is typical to get one or two women and / or a minority on a board, and then the board stops diversifying. Boards go through a ‘we are diversified enough’ type of thinking. Boards also suffer from a bias by what traits they look for in a new board member, which is usually for a former CEO or an operating exec type skill set. The pool of women or minorities coming from this group is already small, so the odds of getting a diverse board pick is reduced. The lack of diversity in the C-suite carries forward to the board. To combat the small pool of current/former women CEO’s corporate boards should look for a skill set other than a CEO, looking at other non-corporate entities such as universities, foundation/endowments or the private equity world. While the panel was in favor of board diversification, they were against legislation for mandatory board seats for women – legislation of behavior is not usually effective.

The panel then considered the topic of executive compensation, which is under the prevue of a corporate board. How should the board determine reasonable compensation? Jaehnert advised that the alignment of executive compensation with that of the shareholders is crucial, and that compensation should not be mandated but it should be provided in a defined and appropriate manner. Henderson considered that boards and investors spend too much time on CEO pay, because CEO’s are underpaid relative to revenues.

Kamerick asked the panelists to elaborate on how to set executive compensation. The panel advised that even if peer compensation or quasi government mandated compensation is used as a guide, the compensation committee is still responsible for setting executive compensation. However, most of these committees lack the training or background that is typically required. To obtain the appropriate skill set a board should have a current or former head of HR as a board member. In practice a board is more likely to rely on the job training, gathering executive compensation skills in a disjointed manner. One area that should be considered to obtain expertise on management compensation is the private equity world, which is better suited to choose compensation packages.

Kamerick brought up claw back policies – should they be used, are they effective. The panel as a whole was in favor of claw backs for a variety of instances including fraud, and for reputational damage as a result of executive actions. The panel advised a downside of claw backs; provisions of this sort would increase CEO pay. If a CEO understands that he/she will continue to be responsible for claims against them, the CEO will mitigate that by asking for more compensation. To combat this behavior the panel suggested using disgorgement of earnings, which would work better than claw backs.

The last topic the panel discussed was that of board services. An example why board services make sense was provided; when a corporation needs financial or legal help, the corporation hires a CPA or law firm to get the needed expertise. However, when a corporation needs governance (via a board) they hire individuals who do not have the collective depth of governance knowledge required. Hiring for board services should be allowed, but is illegal in Delaware (which exclude corporations) as well as in the Investment Company Act of 1940 (which exclude investment companies). An area in which there examples of professional boards could be found in the LLC space.

The panel provided some final thoughts based on audience questions;

  • If you have been on a board for a lengthy period of time, you are probably no longer independent.
  • Search firms are not favored by boards when looking for new board members. The board will seek out people they know or have had a history with.

 

The second panel focused on topics related to investors and asset managers. The moderator was Bob Browne, CFA, executive vice president and CIO at Northern Trust. The members of this panel included Gillian Glasspoole, CFA, senior associate of Thematic Investing for the Canada Pension Plan Investment Board; James Hamilton, CFA, director at BlackRock; and Kevin Ranney, director of product strategy and development at Sustainalytics.

Browne started with a question about analysis of a corporate board governance – is good or bad governance worthy of investor analysis? Hamilton advised that as an investor engagement of a board is process oriented, meeting with the board as well as senior management. It is through these meetings where one can get a sense of if the board is adding value. Depending on the size of the corporation, some education of the board regarding governance can occur. Larger cap companies have ESG processes in place, whereas the middle and small cap corporations are more open to having institutional investors provide guidance on ESG good practices.

Browne then asked the panel to consider difference between corporate governance in Europe versus the United States. Europe is more tuned in to ESG and looks to meet or exceed international standards. In Europe board diversity and executive compensation are linked to ESG targets. From the asset owner perspective Europeans are more inclined to think about ESG and have specific goals to address them. However, Europeans do not try to link alpha to ESG as much as it is done in the United States and Europe considers ESG value unto itself, without the need to have a positive correlation to alpha.

Another cultural board difference between Europe and the United States is the holding of CEO and chairman role by the same person (common in the United States, frowned upon in Europe). Hamilton considered that holding the CEO and chairman position is an acceptable practice, but other strong independent voices are needed in the boardroom to offset that dynamic.

The panel closed the program with a discussion regarding board transparency. How does an investor know if a board is doing the job they were hired for, and they are acting in the best interest of stakeholders? The panel noted in practice it is hard to determine if a board is engaged, but there are ways to get an overall idea. Do all the board members go to all committee meetings, do they have onsite visits to offices other than the headquarters? Learn to ask the correct questions and then you will uncover issues that will impact the value of the company.

Water’s Impact on Investing

On September 26th, CFA Society Chicago hosted a panel discussion in the Vault Room at 33 North LaSalle on the implications of the worldwide scarcity of potable water. The panel was focused on how this water scarcity may affect future investing. The lack of usable water is an “obvious” danger that does not garner a lot of attention at the moment.

The moderator and three panelists brought their perspectives to this worsening condition.

Michelle Wucker: Wucker, moderator of the panel, is a Guggenheim Fellow and founder of Gray Rhino & Company. A Gray Rhino as defined by Ms. Wucker is an obvious danger that many people ignore. Her expertise is in strategy, public policy and crisis management. She is the author of the book “The Gray Rhino:  How to Recognize and Act on the Obvious Danger We Ignore”.

Dr. Dinah Koehler: Koehler has primary responsibility for the overall product positioning and development of Sustainable Equity Strategies and ESG database development at UBS Asset Management. She is a recognized researcher on corporate sustainability.

Dr. Bruce Gockerman: Gockerman specializes in the use of cross disciplinary analytics to understand and address complex issues and environments. In addition to his consulting work, he is a faculty member at Illinois Tech Stuart School of Business.

Lauren Smart: Smart is Global Head Financial Institutions Business with Trucost. She is an expert in sustainable finance and has advised money managers on how to integrate climate change into investment decision making.

Wucker began the panel discussion by stating that the demand for portable water is forecast to continue to outstrip supply. Current thinking is that 1. By 2030 demand will be 40% more than supply, 2. By 2050 global GDP may be reduced by 6% due to this shortage and 3. 43% of corporate CEO’s believe that their businesses will be impacted by this looming shortage.

The first panelist to speak was Koehler who presented four slides that geographically mapped out an investment opportunity set based on global water risk. The slides included:

  • Global Water Risk Map
  • Investment Challenges
  • Negative Impacts of Investment
  • Opportunities for Impact by Geography.

The slides illustrated that the greatest investment opportunities are located in densely populated areas with scarce water resources.

In response to a question from the moderator, Koehler stated that at the moment, most financing for water investment is coming from the World Bank. She expects the private sector to be taking a bigger role.

Gockerman, the second panelist, stressed six points that he believed has worsened the supply/demand equation.

  1. Governance is very weak (mainly local)
  2. Pricing does not include the cost of water (infrastructure only).
  3. Under investment has led to a deteriorating infrastructure.
  4. Needed capital must be focused on the “resilience” of any infrastructure.
  5. Investing impacts must include addressing increasing risk.
  6. Resulting opportunities

Gockerman pointed to the recent hurricane flooding in Houston as illustrating a lack of resilient infrastructure. Investments need to be made into better pumps, advanced technology and better designed large scale projects. He suggested that perhaps a “Marshall Plan” that included public/private partnerships may be a solution.

In response to a question by the moderator, Gockerman stated that current federal policy is mainly derived from the Clean Water Act enacted in the early 70’s. He reiterated that there is a need for the entire system to be rebuilt and expanded.

Smart was the third panelist to speak. She focused on the impact of dwindling water resources on agriculture and energy. Water stress with respect to crop production was illustrated on a slide she presented. The ratio of water withdrawal to supply can exceed 80% in areas where critical crops such as wheat and corn are grown.

In another slide, Smart illustrated that the price of water in most countries does not reflect actual supply or cost. Cities in arid countries like Cairo and Jeddah have much lower prices for water than cities like Copenhagen or Atlanta. These prices do not reflect true cost, are heavily subsidized and cannot be sustained.

After the presentation, there was a question and answer session. Some of the questions revolved around how regional or national solutions may help. Would a regional grid like an electric utility be workable? This is probably not doable since water resources are divided up into different aquifers across the US. Gockerman stated the Great Lakes aquifer region would resist water being diverted out of its aquifer to other states. The panel seemed to agree that Water Bonds might be a good solution and could be funded by pension funds and foundations. Finally the panel was unanimous in stating that de-salinization was not the answer to any shortage as it is currently prohibitively expensive and energy intensive.

The Active vs. Passive Debate

 

 

 

 

 

 

 

 

 

 

 

 

On Tuesday, June 13, approximately 400 people gathered at the Standard Club to attend CFA Society Chicago’s forum on trends, insights and case studies about active vs. passive investment strategies. An additional 200 joined the event via webcast. All of the participants agreed that the terms active and passive represent a spectrum. Nat Kellog, CFA, director of research at Marquette Associates, moderated the first debate.

 TRENDS & INSIGHTS

Joel Dickson, Ph.D., global head of investment research and development with Vanguard, began the conversation by stating Vanguard’s objective to generate market performance at the lowest cost. He noted that if one group has a persistent information advantage than another must be disadvantaged because the aggregate investment results represent a zero sum game. The discussion then focused on whether or not empirical data suggests that the winners can be identified in advance.

Brett Hammond, research leader at the Capital Group stated the firm’s strategy of increasing the number of analyst visits with company management to make superior qualitative decisions about business strategy and execution. Hammond estimated that 1,600 domestic mutual funds employ a factor based approach to quantitatively structuring portfolios. He notes that these strategies represent a form of active management. He also believes that they create opportunities for investment management firms with a long term perspective and superior fundamental analysis.

Aye Soe, CFA, managing director, Global Research & Design at S&P Dow Jones Indices, noted that Paul Samuelson’s 1974 article Challenge to Judgement, promoted the idea of a portfolio that tracks the S&P 500.

Since then, indexes and index funds have evolved to tilt toward factors in an attempt to enhance returns. This evolution moves the objective from market returns to alpha, which is the goal of active management. Soe suggested that the nature of the bond market and bench mark indexes provide more opportunity for deviations (i.e. exclude Treasury bonds) from the market to enhance returns.

The conversation addressed the impact of the rise of index funds on the price discovery role of the securities markets. The Bernstein article- Why Passive Investing is Worse than Marxism may overstate the impact. Although index funds now own approximately 25% of US equity capitalization, they only represent about 5% of trading.

KEYNOTE INTERVIEW

Bob Litterman then interviewed Eugene F. Fama, 2013 Nobel laureate in economic sciences and Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, to learn about the evolution of his thoughts over the past 50 years. Dr. Fama drew a distinction between active and passive approaches to factor tilts in portfolios. An attempt to time factor premiums or add an additional level of analysis produces an active approach.

Fama acknowledged the impact of micro-cap stocks noted in a May 2017 paper titled Replicating Anomalies. This paper concludes that the excess returns identified for most factor based strategies disappears when you adjust for the outsized impact of extremely small companies. Fama emphasized the need to adjust for this impact, a sound basis in financial economics and persistency in the results across markets and time. He noted the robustness of the value factor and the more limited effect of the size factor on portfolio returns. Momentum represents a factor that is evident in the data, but hard to exploit because of the extreme overweight required in illiquid, micro-cap stocks. Fama noted that momentum represents “the biggest embarrassment to the efficient market hypothesis” because it does not fit well into financial theory.

One trend identified over the past 50 years is the growth in the study of financial economics. In the 1960s, MIT and the University of Chicago dominated this area of study. Now, every major university devotes resources to data analysis for market anomalies.

Firms like Dimensional Fund Advisors and Vanguard devote substantial resources to fulfill their corporate governance responsibilities as shareholders. The firms also employ sophisticated trading strategies to obtain best execution. Fama noted that active managers who add value deserve to earn a return on their human capital. As a result, the excess return generally flows to the manager, not the investor in the fund.

The conversation concluded with comments about the future direction of the investment advisory industry. The movement from investment managers to financial advisors to wealth management may move the compensation model from a percentage of assets under management to an hourly or fee for service basis. The growth of “robo advisors” may create another tool for wealth managers to serve clients, versus a replacement for the advisor. The role of the advisor may shift toward a focus on the distribution of possible outcomes and the incorporation of uncertainty in financial plans.

CASE STUDIES

Lisa Haag, CFA, director of investment strategy with The Boeing Company, presented the case for active management of defined benefit and defined contribution retirement plan assets. The Boeing Company’s defined benefit plan has 25% of its assets invested in publicly traded equities with only 5% employing passive strategies. The remainder of the plan’s assets is invested in long duration bonds and alternative investments.

Jason Laurie, CFA, of Altair works with near 300 high net worth family groups. Passive strategies represent 10% to 15% of assets. Laurie noted the firm’s size provides them with the opportunity to negotiate low fees for clients. He emphasized the importance of patience with active managers by noting that over 90% of top managers periodically experience one to three years of sub-par performance.

Marc Levinson, chair of the Illinois State Board of Investments, outlined the transition from active management toward passive management of the State’s pension assets since September 2015. The $4 billion of defined contribution assets moved from 75% active to all passive. The $17 billion defined benefit assets moved to 70% passive. The state moved from near 100 managers to less than 20. Levinson lead the Board from the political nature of “who are you going to replace my guy with” to a market approach that did not require hiring a manager with a sponsor.

In conclusion, two of the three entities continue a commitment to selecting managers who can beat the market after fees. In contrast, two of the first three panelists and Fama presented a case that the financial markets efficient from a beat the market after fees perspective. The debate goes on.

FINTECH EXCHANGE 2017

Hosted by Barchart, the third annual FinTech Exchange held on April 27th at Venue SIX10 highlighted the latest in technology innovation for financial markets and trading firms. The 2017 event focused on methods in which data is delivered, stored, analyzed and visualized; as well as the new types of data in the alternative space. It featured 10-minute Lightning Round presentations, topic specific round table discussions, plus an all-day exhibit hall for networking that featured a Live DJ and Pro Ping Pong action.

Barchart’s CEO Mark Haraburda, delivered the opening remarks and highlighted the fact that Chicago was ranked among the top five FinTech hubs in the world by Deloitte. In Deloitte’s published report, Connecting Global Fintech: Interim Hub Review 2017, Chicago acts as the epicenter for all FinTech activity in the Midwest, representing well over 20,000 financial institutions.

The keynote speaker was Vaidy Krishnan from Tableau, a software company that helps people see and understand their data. He spoke about choosing an analytics platform that not only offers data visualization, but also can provide visual analytics that help you dive into the “why” of your data. Data visualization tools such as static dashboards are the start of the analytical process and not the end; while visual analytics software go a step further and provide interactive exploration of the data to its most granular detail.

The Lightning Rounds began with Maria Belianina from OneTick speaking about the power of integrating with a single point platform for tick data management and analysis. In addition to being a data warehouse, OneTick is directly integrated with R and MATLAB for quantitative analysis.

Julie Menacho from the CME Group spoke about the exchange’s market technology and data services. CME Datamine offers historical data via the cloud through a partnership with Amazon Web Services and software provider TickSmith. She then went on to discuss the CME’s initiative around Alternative Data, which she described as non-traditional data sources which can be leveraged as part of the investment process. One example was satellite imagery of where world oil tanks were being stored to give an idea of the current supply of oil. These new sources of untapped data can be a predictive indicator of market performance.

Sean Naismith from Enova Decisions talked about harnessing the power of predictive analytics. He spoke about their decision management system Colossus, which is integrated with multiple data providers to help produce optimal decisions in real-time. These predictive analytics are used to help detect fraud, minimize credit risk, and optimize operations in real-time.

Catherine Clay from the CBOE discussed how the CBOE is keeping its innovative mojo, through the two P’s, Process and Partners. She described the CBOE’s weekly development release cycle to push out code related enhancements. She also went over the CBOE’s technology partnerships that allow the exchange to expand their market data and product offerings.

In honor of National Bring your Child to Work Day, Jim Austin of Vertex Analytics decided to put his kids to work! They put on a fun re-enactment of a chaotic open outcry where all you heard was the fill order. Jim used this to highlight the amount of undocumented activity that can occur during trading. He then brought us into today’s world of big market data and electronic trading. Vertex provides a solution to capture, manage, and analyze this financial market data, currently collecting over 4.5 billion market messages per day. Firms can also use Vertex’s platform to supervise their own trading patterns and behavior, which can be used to mitigate compliance violations.

The final two presentations focused on how FinTech is disrupting retail trading. Tim McDermott of Nadex, highlighted the key issues that hold individuals back from trading. These key issues included margin requirements, fear of professional traders, time constraints, and an unclear path on how to begin. Nadex offers small binary option contracts with a floor of $0 and a ceiling of $100, limiting a trader’s overall risk. It’s also easy to open an account and begin trading if you pass all the checks, usually within 15 minutes. Michael Patak from Topstep Trader also believes there’s a lot of opportunity in retail. He believes that by combining education with games, you can attract new traders to the marketplace. TopStep Trader provides a path where you can fine tune your approach using real-time simulated accounts.

I attended one of the roundtable sessions led by Jason Henrichs and Lisa Curran, CFA, from FinTEx, a Chicago based nonprofit, and learned how they’re growing the FinTech ecosystem in the Midwest. Lisa went on to speak about how FinTEx is focused on promoting collaboration among their member firms and modeled their events to resemble those hosted by CFA Society Chicago. Jason discussed their partnership with FinTech Sandbox, a nonprofit group that provides startups free access to financial data and infrastructure. This partnership should provide a boost to Chicago’s already surging FinTech sector.

This was my first time attending the FinTech Exchange but it will not be my last. I wasn’t aware of the vast amount of innovation occurring right here on our doorsteps in Chicago, and I’m excited to see how these new sources of data impact the Financial Services sector.

Building Investor Trust Through GIPS

On May 9th, CFA Society Chicago members gathered to hear a panel of experts address the merits of adopting the Global Investment Performance Standards (GIPS) in the Vault Room at 33 N. LaSalle. The eminent panel comprised a service provider, a regulator, and an asset manager user and included:

  • Daniel Brinks, compliance examiner with the Securities and Exchange Commission (SEC) with a focus on investment advisors,
  • Richard Kemmling, CPA, CIPM, CGMA, President of Ashland Partners & Company LLC, a specialty CPA firm that was a pioneer in the GIPS verification business, and serves over 700 client firms in that area.
  • Matthew Lyberg, CFA, CIPM, Senior Vice President and Director of Performance Attribution with Acadian Asset Management.

DSC_3715Anju Grover, CIPM, senior GIPS analyst with the Investment Performance Standards Policy Group of the CFA Institute (CFAI) served as moderator. In her opening remarks she pointed out that 2017 marks the 30th anniversary of GIPS which she described as one of the CFA Institute’s most successful products. Despite the fact that adopting GIPS is completely voluntary, they are widely recognized as a best practice for reporting investment performance by asset managers, asset owners, and consultants all around the world.

The first question Ms. Grove put to the panel was why GIPS would be important to retail investors. Brinks responded that retail investors are just as demanding of a performance standard as are institutional investors, and GIPS fills the bill. Lyberg noted that the line separating retail and institutional investors is blurring. The decline in the popularity of pension plans in favor of defined contribution plans is a primary example. Retail investors are the end users of DC plans and are responsible for investment choices, but the plans are designed, managed, and overseen by investment professionals. So they serve both retail and institutional masters. GIPS also adds a layer of due diligence to a plan, a theme the panelists repeated throughout the event. Kemmling pointed out that GIPS compliance is a common requirement for listing products on the investment platforms that advisors (he specifically mentioned Morgan Stanley and Merrill Lynch) use for their retail clients.

As to challenges firms encounter in adopting GIPS, the panelists listed:

  • Lack of adequate data, or records; difficulty in handling unique accounts,
  • Changes in operating systems that occur during implementation,
  • Incomplete buy-in from all parts of a firm (marketing, accounting, compliance, etc.), and
  • Full support from senior management. The latter point is particularly critical to assure firms commit adequate resources to attain compliance.

Why should firms bear the cost of GIPS compliance? Kemmling answered that they provide a “best practices” process for client reporting and that the verification process provides insight into industry practices. Brinks stated that while GIPS compliance is not required by law or regulation, he considers it in the category of “nice to see” when he examines an asset manager. The verification process is a second pair of eyes –outside eyes–on results reporting. He added that he observes fewer serious problems in general when he examines firms that follow GIPS. The CFA Institute has been training SEC examiners on GIPS so they can understand what the standards mean to adopting firms and apply that knowledge during examinations.

In response to questions from the audience regarding difficulties in complying with GIPS, the panel noted challenges in applying them to more complicated strategies such as currency overlays and alternatives. They suggested that this be a focus of the next revision to the standards which is already underway and targeted for 2020. This revision should also make the standards easier to apply to fund vehicles and for internal reporting to management. The current standards are most easily applied to reporting composite returns to clients, which was their original intent.

Regarding the breadth of acceptance of GIPS, Grover said the CFAI is still gathering data but counts 1,600 firms around the world that claim compliance for at least a portion of their assets. This includes 85 of the 100 largest asset managers who account for 60% of total industry assets under management. Lyberg noted that investment consultants are expanding the adoption of GIPS by using compliance as a screen for including firms in management searches.

When asked how a firm should begin to adopt GIPS, Lyberg suggested starting out modestly by writing high level policies and procedures and making them more detailed over time with experience. He recommended attending the CFAI’s annual GIPS conference to build knowledge and to make contact with other firms that have already adopted the standards. Challenges a firm may encounter include clients who demand using a different performance benchmark than what the firms uses for a strategy, tension between various stakeholders at a firm (e.g., between marketing and compliance), and resistance from legal counsel which often advises against bold statements of compliance that might seem to be guarantees.

As to the benefits to the public from using GIPS, Brinks stated that increased comparability leads to better informed investment decisions and more efficient markets. He noted the decline in fraud tied to inflated claims about performance since the introduction of GIPS thirty years ago. Kemmling noted that measuring the positive impact of GIPS is difficult but they were created for the benefit of investors and are an indication of asset managers’ commitment of resources in support of investors. Grover stated that adopting GIPS for greater transparency and comparability was simply “the right thing to do”.

For final takeaways the panelists offered the following:

  • Lyberg said GIPS levels the playing field among managers, adding that compliant managers couldn’t compete with fraudulent firms such as Bernie Madoff’s.
  • Kemmling, acknowledged that while compliance is not easy, it isn’t expensive and is certainly achievable. Most of the 700 firms his company verifies have less than $1 billion in AUM, indicating the success of small firms at complying with GIPS.
  • Brinks recommended that adopting firms think very carefully about how to apply the standards, looking to the future when writing their policies and procedures to avoid any potential conflicts between them and their capabilities.

Investing for the Long-term: Productivity of Capital Markets Expectations, and Portfolio Management

DSC_3571CFA Society Chicago presented a two-part symposium on Investing for the Long-term on March 7th at the Standard Club. Approximately 150 members and guests attended to hear Robert Gordon, Professor of Economics at Northwestern University and Deirdre Nansen McCloskey, Emerita Professor at the University of Illinois Chicago present their perspectives on productivity trends. Francisco Torralba, CFA, Senior Economist, Morningstar, Robert Browne, CFA, Northern Trust Bank, and Rick Rieder, CIO Global Fixed Income, BlackRock, then presented their outlooks for the capital markets.

Gordon highlighted the sharp slowdown in US GDP growth from 3.12% from the 1974 to 2004 to 1.56% from 2004 to 2015. He said that this slowdown resulted from a reduction in productivity growth and the labor force participation rate. He noted the Kalman Trend Annualized Growth in Total Economic Productivity, which rose to 2.5% in the 1990s because of the technology revolution, but has recently fallen to near 0.5%. The labor force participation rate has been affected by an aging population, fewer 18 to 25-year-old people in the work force, and passing the peak rate of growth for women in the labor force.

DSC_3590Gordon noted that growth and productivity are probably under estimated, but have always been under stated. He sees no indications that the distortions are worse today. He expects that both lower productivity growth and labor force growth will produce slower economic growth over the next decade.

McCloskey acknowledged that the current level of productivity growth has fallen. She observed that “falling sky” DSC_3579forecasts always follow events like the 2008 financial crisis and noted the perils of trying to predict future enhancements in productivity. She also stated that global economic growth will be positively impacted by developments in countries like China and India.

DSC_3587McCloskey highlighted her work on the role a change in attitude toward capitalism in the 1700s that augmented the 1st Industrial Revolution. She noted the evolution in literature from Shakespeare to Jane Austin in the portrayal of capitalist and the return on capital that they earn. Changes in attitude toward capitalism could drive growth in emerging economies.

An area of agreement between Gordon and McCloskey is the role of minimum wage laws and other restrictions on the labor market that prevent economic growth in areas like the west side of Chicago. They also support efforts to stop the “war on drugs” and support a negative income tax for low income people.

Outlook for Investors

DSC_3591Rick Rieder, CIO Global Fixed Income, BlackRock, noted the aging population and its demand for income and the role of technology pressing down inflation. He believes that the US economy is exiting an investment & goods recession. He also believes that September 2016 marked a turning point away from expansionary global monetary policy. He sees better economic growth leading to higher interest rates, and the potential for higher stock prices because of sales growth.

Francisco Torralba, CFA, Senior Economist, Morningstar, supports McCloskey view that trends in productivity cannot be predicted. He also foresees a pickup in economic growth and cited a Financial Analyst Journal article that links the payout growth rate to the GDP growth rate. A higher level of economic growth could be a positive development for equity investors through higher dividends.

Robert Browne, CFA, Northern Trust Bank, suggested that forecasters begin with “what’s easier to forecast.” He believes that identifying what is cheap is easier that what is expensive. In contrast, much of the forecast has been centered on the expensive, low yield bond market. He also noted that anticipating a range over the short-term is easier. Here, he believes that the election of President Trump may pull forward economic growth, which would be a positive for equity investors.

The consensus outlook seemed to be that long-term real returns for equities would be in the 4% to 5% range. These analysts generally favor US equities, US high yield bonds, natural resources, and emerging markets debt.