Medieval knighthood was a coveted status not easily attained. Fundamentally, being a knight meant having mastered the skill of fighting on horseback whilst wearing chain mail or armour and wielding a lance. This took several years. Indeed, boys aspiring to be knights received their first riding lessons soon after they had learned to walk. And originally, by undergoing the ritual by which they were created knights – the so-called ceremony of dubbing to knighthood – they were simultaneously identified as grown men.
Being knighted thus was a rite of passage: it meant being accepted into the society of adult males. It generally brought with it the rights apper- taining to that status, such as being able to inherit, and take a wife (which could mean taking control of landed estates, if the wife was an heiress or widow). Knighthood also opened up other economic opportunities: knights were allowed to participate in tournaments, where horses, arms and armour could be captured and sold, and vanquished opponents ransomed. Furthermore, tournaments were knightly job fairs: great lords – counts, dukes and kings – also fought in them, and invited the knights who had covered themselves in glory there to join their retinues. Knighthood, then, was among other things a professional qualification, the stepping-stone to a career.
If knighthood brought with it opportunities, it also entailed obligations. Already before the First Crusade got under way in 1096, knights from different parts of Europe thought of themselves as members of a sort of ‘international’ order – not a religious one, but one with its own rite of initiation and standards of conduct. That is to say, there was a widespread notion that knights, wherever they were from and whoever was their lord, should behave in a certain way because they were knights. Status was linked to standards. And squires, when they came to be knighted, were reminded of this because each part of the ritual they underwent, and each of the gifts they received, symbolised one such standard: their new sword, above all, evoked the knight’s duty to protect the defenceless from oppression. For those who failed to live up to the code of chivalry, there were penalties (including having to eat on their own during banquets, or in more serious cases being ritually degraded from their knighthood by having their spurs cleaved from their heels). In short, knights were not necessarily expected to be loyal only to their lord – in preserving and enhancing their reputations, they were expected to aspire to an ideal that went beyond serving the interests of their employer.
D!oes any of this sound at all familiar?
This article by Max Liebermann CFA first appeared in the September 2014 issue of The Charter. Dr Max Lieberman, F. R. Hist. S. completed a research project on the medieval history of knighthood and is now preparing a publication on the perception of risk in the middle ages.
Comprehensive update to standards adding relevance for alternative investment strategies and pooled funds
CFA Institute has released the 2020 edition of the CFA Institute Global Investment Performance Standards (GIPS®) following a public comment period. The 2020 GIPS standards will take effect January 1st. The GIPS standards are a set of standardized, industry-wide ethical principles that guide investment managers and asset owners on how to fairly calculate and present their investment results, with the goal of promoting performance transparency and comparability.
Christian Dreyer, CFA, CEO of CFA Society Switzerland: “We are proud of the new version of GIPS, which is supported in Switzerland by the Swiss Funds & Asset Management Association (SFAMA). Setting industry standards is one of the most important tasks of our organization. We expect the new version of GIPS to receive even greater recognition from institutional investors such as pension funds and insurance companies thanks to its extended scope of application.
Industry veteran will assume leadership of the global association of investment professionals on September 2, 2019
CFA Institute today announced the appointment of Margaret Franklin, CFA, as its new CEO and President, the first woman to hold the position in its 73-year history. She will assume the role on September 2, 2019, taking over from Paul Smith.
Marg Franklin has been a leader in the investment management industry for 28 years, most recently as President of BNY Mellon Wealth Management in Canada and head of International Wealth Management in North America. Her deep practitioner experience has been gained at firms ranging from large, global asset managers to start ups, including Marret Private Wealth, State Street Global Advisors and Barclays Global Investors. Her work has included advising individuals, families, pension plans, endowments, foundations and government agencies.
Marg’s experience with CFA Institute also runs deep. In 2011, Ms. Franklin was chair of the Board of Governors of CFA Institute, which is a volunteer position, and is a member of CFA Society Toronto, where she has also served on its board. She is a founding member of the CFA Institute Women in Investment Initiative, a past recipient of its Alfred C. Morley Distinguished Service Award in 2014, and a member of its Future of Finance Content Council.
CFA Institute Report Identifies Skills Needed for Career Success against Backdrop of Disruption
Investment Professional of the Future, a new report by CFA Institute, explores how investment industry roles, skills and organizational cultures are evolving in the face of disruption.
Survey responses from more than 3,800 CFA Institute members and candidates globally reveal that 48% expect their role to be significantly different or nonexistent within five to ten years. Among financial advisers, the rate is 58%. Developing new skills will be essential to be competitive; investment professionals must adapt, or risk obsolescence.
Paul Smith, CFA, president and CEO of CFA Institute said: “In a disruptive and complex environment, knowledge decays more quickly and skills must be deepened. The ability to see opportunity in disruption is vital for today’s investment professionals. This report offers valuable insight into how employees and employers in the industry can adapt and thrive”.
To help investment professionals think about their career adaptability, CFA Institute has created an online assessment tool. This short questionnaire allows them to see where they stand relative to other CFA Institute members and candidates globally.
250,000 Candidates Registered to Sit the June 2019 Exams in 348 Exam Centers Around the World
More than 250,000 candidates have registered for the upcoming Level I, II and III CFA® exams administered on June 15th and 16th, 2019. This is an increase of 11% over last year. The number of test centers also significantly increased from 286 to 348 in 95 markets around the world, reflecting growing recognition of the credential in emerging markets where finance plays such a vital role in building strong economies.
On 21 May 2019, CFA Society Switzerland welcomed David Ranson of HCWE & Co. back to the Confederation to hold a lunchtime presentation at Hôtel Alpha-Palmiers in Lausanne. Mr. Ranson is an independent market research analyst and spoke on the topic of the connections between relative currency valuations and subsequent equity market performance. The title of his talk was “International Country Bets Based on Currency Instability”.
Choosing where to invest
Relative currency valuations are leading indicators of stock market performance. By analyzing them carefully, we can make educated bets on which equity market to choose for an upcoming investment cycle.
This idea comes from a detailed analysis presented by Mr. Ranson. Looking at the currency and stock markets for both developed and emerging economies, he discovered a pattern that held over many economic cycles: as currencies lose value (with respect to some reference like the CHF or gold) the local stock market, priced in the reference currency, gains value. After all, if the assets of a firm have real value (property, plants, equipment, trademarks) then they should maintain that value despite losses to the value of their reporting currency.
Although the idea makes good sense, Mr. Ranson stated that it goes against standard economic theory. He pointed out that because currency markets move very fast they make good leading indicators. Changes in both inflation and interest rates move slower, as these take time to catch up with currency repricings.
An “expected currency surprise”
According to Mr. Ranson, equity markets price in expected currency behavior. That is, if a currency has been appreciating for some time against some benchmark, that information is already contained in stock market valuations.
However, an unexpected move in a currency – a surprise – causes stock markets to react: if a currency for example appreciates unexpectedly in value, the local equity market reacts by moving in the opposite direction. To take an example, we can think here of the Swiss flash boom-slash-crash of January 2015. The Swiss National Bank (SNB) had for several years been printing nearly unlimited quantities of Swiss francs to try to depress the valuation of the currency and keep exporters competitive. With newly created Swissies the bank bought mainly Euro assets onto their growing balance sheet and thereby kept the local currency at a level of around 1.20 per Euro.
On 15 January of that year, however, the SNB unexpectedly dropped this peg, and the ever-in-global-demand Swissie instantaneously shot up in value by 40%, taking it well past parity with the Frankfurt-based currency. (It settled back down to around a 20% gain by the end of the trading day, still a huge one-day move in any currency.) The SMI (main Swiss market index) reacted by dropping 12% in a single trading session. As the SNB subsequently backpedaled on their rash announcement, the Swiss franc dropped back in value and the equity market made back its losses over the next months. (Please refer to the graph below. In grey is the sudden appreciation of the CHF versus the Euro, accompanied by a sudden drop in the SMI.)So, to predict equity performance it is these types of currency surprises that we seek. But how is it then that we can “expect” a currency surprise? Well, we can’t really. But by looking at the relative valuations of all major currencies together, we can see where likely currency surprises might manifest. And deploy our capital accordingly.
A rolling investment strategy
So, the strategy here is to ask the question: which markets have the greatest scope for a positive currency surprise? Since currency valuations tend to mean-revert over time, we could look to currencies that have lost the most value over a given previous period (say the trailing year) and choose to buy equities in the markets of those countries.
Even better, we could implement this strategy on a rolling basis. For example, we divide our equity allocation into 12 pieces. At the end of each calendar month, we look at which currency has lost the most relative value over the trailing year, and allocate to the corresponding equity market.
However, note that this idea contains within it an embedded assumption: that an investor wants to be in any equity investment at all on a given period. In some periods, most or all of the major world equity markets contract and investors in any of them end up with less capital than they began with. In these cases, this model will merely help an investor to choose the least-lossy equity parking places for his cash. The model should therefore be deployed as part of a broader asset-allocation strategy.
Outlook for 2019
The four weakest currency performers in this model in 2018 were Australia, Canada, Sweden, and the UK. On that basis, the model expects these countries’ equity markets to outperform their counterparts in the US, the Eurozone, Switzerland, Japan, and China in 2019.
There are around another 50 countries that could be added to this model, to add to the richness of choice for allocations.
On 9 May 2019, CFA Society Switzerland invited Andreas Weigelt and Samuel Meyer, CFA of Veraison Capital AG to hold a lunchtime presentation at Saxo Bank in Zürich on the topic of activist investing in Switzerland’s small- and mid-cap sectors. Veraison is a CHF 300M long-only activist fund that takes 6 to 12 positions in these sectors.
Activists: friends or foes of the broad market?
Spoiler alert: activist principles and passive or index investing make natural allies, according to the presenters. After all, these two investor groups have a very strong alignment of interests. Interests among all shareholders of a firm are generally more closely aligned than between any given shareholder and firm management, including the board of directors.
In fact, today’s much-trumpeted passive investing strategies only work at all because of faith that markets are efficient; that is, markets make best use of all information. Some market participants, like activist investors, play a key role in bringing new information to the market, for the benefit of all shareholders. Markets require high-information investors in order to remain efficient.
In general, activist investors today are minority investors. This means that in order to effect change in a given firm, they must convince the other shareholders of the validity of their views. Without a convincing idea, the activists will go nowhere. For this reason, it is also important for activist investors to build credibility in a given market over time, demonstrating a clear track record of clear ideas and added value.
Portrayal in the press
Despite the value they can provide to markets, activists have historically and even today been the recipients of bad press. The media often accuse this group of owners of taking a short-term perspective. This idea may stem from the era of corporate raiders in the 1980s, who gutted target companies for short-term profits. Contrast this with the idea of “engaged shareholders”, who must hold minority stakes over a medium or long term in order to profit. The presenters believe that the discussion should be rather focused around ideas: do these outside investors bring new ideas that can benefit a firm, and thereby all its owners?
The trend towards passivity
Globally, markets have become ever more dominated by passive investment strategies over at least the past decade. Between 2007 and 2018, about USD $1.5 trillion has been realigned out of active investment funds and products into passive vehicles. Black Rock, Vanguard, and State Street are the biggest managers of such vehicles and because of the growth in this space today they wield tremendous influence. Today 18% of the American S&P 500 is held by passive funds, with other big markets racing to catch up to this trend.
The passive malady
While passive holdings can be beneficial for each investor, making up the core of a well-designed portfolio, the trend towards more of this type of investing also carries with it some negative consequences for the market as a whole, among them:
- increasing herd behavior and with it market overreactions,
- increased risk of moral hazard,
- decreased efficient allocation of capital, and
- decreased operational efficiency.
For an individual firm, the negative consequences of having an increasingly passive investor base are:
- decreased fundamental analysis on the firm and with it less transparency,
- decreased direct feedback to the board and management,
- increased “checklist-approach” to annual general meetings,
- increased concentration of influence and power, and
- decreased insight into principal-agent risks.
A silver lining
These market inefficiencies do however provide opportunities for engaged shareholders to make good use of valuation gaps, to perform time-horizon arbitrage (taking a long-term view in a short-term market), and to make impact via engagement. Indeed there has been about 9% annual growth in activist engagement globally since 2013, with around 900 such investments in 2018. There is however still lots of opportunity in Europe, where engaged investing has not penetrated markets to the degree it has in North America.
How does Veraison Capital invest?
Veraison scours the market of small- and mid-cap Swiss companies for firms that are a good value, and then rather than the buy-and-wait strategy typically favored by value investors, tries to actively improve the target company to unlock the inherent value of the firm.
The fund typically takes stakes of between 5% and 20% in a target company, making them “big enough to get in the door” for meetings with management and the board of directors. Veraison favors a constructive (as opposed to hostile) investment strategy and prefer to create value through strategic and operational improvements (as opposed to financial engineering).
The fund enters investments that meet three criteria:
- the firm is undervalued by at least 30%,
- there are clear steps to take to realize value, and,
- they feel adequate support (from other shareholders, the board, and management) to act as a catalyst for change.
What to expect in an activist investment
Investing in this way is not for the faint of heart, or of wallet. Each engagement brings with it new challenges. Some management teams react with openness to new ownership and engage in constructive discussions, but other times the process becomes confrontational.
The engaged investor can expect staff to dedicate significant time to each position, including for face-to-face engagement with the company management, other investors, outside advisors, and media.
In the event of a public proxy contest, an engaged investor can expect lots of upfront cash costs for legal advice, proxy solicitors, and communication support. In addition, the activist can expect wide exposure, as ultimately the argument for change in a public firm needs to be made publicly. A website is both a valuable and necessary tool here, as information about the activist investor’s intentions must be openly available so as not to be considered inside information. The investor can also expect to be attacked in the media.
Finally, an engaged investor should not expect a level playing field in a game where the rules are made not by owners, but by management. Access to communicate with the other owners is often difficult, as many vote before the annual general meeting (AGM) via proxy. In Switzerland, the engaged investor must even guess even the names of his fellow shareholders to try to reach out to them in time, as there is no public access to the shareholder registry. Meanwhile, company management maintains long-established communication channels with all the shareholders, plus the media. Company management also maintains sovereignty of information: only it has access to all the operational data from inside the firm. On top of that, management alone sets the date, makes the agenda, and prepares the documents for the AGM. The media and the other owners generally at first give company management a “credibility advantage” as well: the burden of persuasion is placed on the shareholder wishing to effect a change.
With all of this said, it is possible to have a positive impact once other shareholders become convinced that a proposed change is in the best interests of the firm.
The nuts and bolts of the fund
Veraison Capital launched in 2015. It invests without leverage, and looks at companies in the range of CHF 150M — 3B in market capitalization. About 45% of the fund’s assets come from pension funds, 30% from family offices, and 25% from individuals, boutique asset managers, banks, and the management team. The fund has to date exited 7 investments, 6 of those successfully.
On 15 May 2019, CFA Society Switzerland invited Iikka Korhonen, Head of Research at the Central Bank of Finland to hold a lunchtime presentation at Saxo Bank in Zürich on the topic of China’s current model for growth. Mr. Korhonen heads a research group of 10 economists that specializes in both China and Russia.
China’s post-2008 growth model
Since the last global financial crisis, China has embraced a growth model of ultra-high domestic investment. Currently almost 45% of GDP is plowed back into production facilities, infrastructure, and residences. This is a very high fraction by historical standards; even during the height of their growth phases, Japan and South Korea only reinvested between 30% and 35% of GDP. And currently Poland and Estonia invest around this fraction, and no other economy of size is anywhere near the Chinese level of investment.
This high level of investment is financed by domestic debt, both in the form of bank loans and shadow financing. Before 2008, China’s debt-to-GDP ratio was considered fairly low at around 120% but today it is nearly double that number. Since that time, the “Big Five” Chinese state-owned banks increased their balance sheets by almost a third, as the debt ratio has climbed in several spurts over the past decade. Most of this new debt is yuan-denominated.
The current economic situation
China is in a transition, as its government now emphasizes growth in private consumption over investment growth. In 2018, Chinese growth overall decelerated, but the official growth numbers out of Beijing did not. Dozens of authors attempt to estimate true levels of Chinese GDP growth, both real and nominal. Nominal GDP numbers seem to fluctuate “a lot” from period to period, but since China prints real GDP growth, that number can be smoothed by appropriate choice of a GDP deflator.
Currently, Q1 2019 official real GDP growth is 6.4% annualized, whereas the correct number is estimated at closer to 4.9%. (Mr. Korhonen stated that the official number is these days consistently about 1.5 percentage points above the true number.) In 2019, imports of raw materials like copper and iron ore are declining, as are overall imports from the EU, USA, and Japan. Based on these facts, there is little chance China can be growing as fast as the official numbers claim.
Looking deeper into the new trade war (that some are calling a new cold war) between America and China, imports from the USA into China were down by one third, and that was before the latest round (May 2019) of tariffs and threats. According to a Bank of Finland model, the USA could lose 1.0 percentage point of GDP growth due to this trade war, and China could lose 1.0 – 1.5 percentage points, but the rest of the world would see only a tiny effect.
Based on 2015 data and a global model of final demand (final sale point for goods and services), about 4% of the total Chinese GDP is dependent on the USA, whereas 1.2% of US GDP is dependent on China. So perhaps the US has an advantage in the current dispute.
Risks to China’s growth model
Rapid increases in debt (even from a relatively low level) have often ended badly, in historical scenarios elsewhere. China’s overall level of debt is not so bad when compared to the Euro area, the UK, or Japan. But the speed at which it has grown these past 10 years is a cause for concern, according to the presenter; there is abundant research to show that fast debt growth causes economic instability. On the plus side, this new Chinese debt is almost exclusively domestically held. Many banks and other lending firms are also state-owned. So is it perhaps a case of a state writing checks in its own currency that it can always cash?
What might the next 2-3 decades bring?
They seem to bring a lot of questions. Today China’s per capita GDP at purchasing power parity (PPP) stands at around 40% of that of the USA, and it is growing. Japan and South Korea experienced similar trends, and their GDP at PPP capped out at around 70% of the American level. Is China on a similar trajectory?
The working-age population of China is today declining, the same as it is in the EU. Even with incentives, it is “very difficult to get the birth rate up”. So in order to enable continued growth, China will need to increase its productivity. That means innovation, and innovation means research and development. China is currently allocating 2-3% of its GDP straight into R&D. Will this be enough to keep Chinese growth on target?
- The team of HEC Lausanne represented Switzerland at the Global Finals of the CFA Institute Research Challenge in New York on 25 April 2019
- Strong performance of the team in their presentation and overall performance
- Second Swiss team to Global Finals reflects strong track record of Switzerland
After the team from HEC Lausanne taught by Prof. Dr. Norman Schürhoff representing CFA Society Switzerland won the EMEA Regional Finals on 11 April 2019 in Zürich alongside Russia (State University of Moscow), it attended the Global Finals which took place on 25 April 2019 in New York.
Team presenting buy-case on Landis+Gyr
The HEC team (John Cody Zimmermann, Alexandre Axilais, Henri Enguerran Badoux, Karine Chammas und Nicolas Bregnard) competed against 5 other teams from Russia (State University of Moskow), Philippines (Ateneo de Manila), Mexico (Instituto Tecnologico Autonomo de Mexico) and United States (Canisius College) and delivered an excellent performance. Congratulations to Ateneo de Manila who performed best and was named Global Champion of the CFA Institute Research Challenge 2018/2019.
Picture of the winning team
Special thanks go to Giorgio Pompilio, Deputy Consul General of Switzerland in New York, who paid a special visit to the team as well as Paul Smith President and CEO at CFA Institute who encouraged them to defend their title. Thank-you also to all the supporters and partners being Asset Management Platform Switzerland (EMEA Regional Final), Credit Suisse (CFA Institute Research Challenge in Switzerland), Finanz und Wirtschaft as well as the countless volunteers who supported as well.
CFA Institute Research Challenge on large screens on Times Square
On 25 March 2019, the Swiss CFA Society hosted the Generations Conference 2019 at the Swiss Re Center for Global Dialogue in Rüschlikon. The conference is an independent forum for family offices and asset owners. For this year, the theme was private equity investing.
Marius Holzer CFA kicked off the conference with a welcome address. Private equity investments could provide a useful tool for family offices to diversify their holdings. Most wealthy families struggle to hold onto their fortunes, with 90% of them losing that wealth by the third generation. There are many reasons for this. Family disputes and lack of governance lead to poor investment decisions. Some family members are stewards with a fiduciary mindset, seeing wealth as something to be preserved for future generations, whereas others are Brewster’s Millions-style consumers, with the goal of burning through a fortune in this lifetime. Finally, families often grow exponentially, and a big fortune gets spread across large numbers of descendants.
Prof. Claudia Zeisberger of INSEAD delivered the morning keynote address, Mastering Private Equity in the Family Office Environment. The presentation gave the lay of the land for private equity as it relates to family office investing.
Family offices currently allocate around a quarter of their capital to private equity, but 2/3 of that money today is so-called “dry powder”. This is money set aside pending a capital call from a private equity fund, but sitting on the sidelines and not deployed in an investment. David Swensen, the famous manager of the Yale University Endowment, by contrast allocates 44% to private equity and venture capital. Given the high level of dry powder and the low level of PE allocations by family offices, there is perhaps room to expand allocations to be more in line with those of Yale.
Private equity used to be a cottage industry, but today there are as many as 8,000 PE/VC firms globally. The growth in the industry is around 8x since 2000, including funds dedicated to real estate and infrastructure. Regional differences persist in the nature of private equity investment: in the United States, big buyouts and venture capital dominate, whereas Europe is focused on mid-market buyouts. Asian funds focus on “growth equity”: helping private and profitable companies for example expand into Europe by taking straight equity (no leverage) in minority stakes.
Private equity has a much greater return dispersion than public equity markets. These days, mega funds ($2-5B) dominate, as they are paradoxically easier to raise than $500M funds. This is perhaps due to the Starbucks effect (herd mentality). Also, as pension funds cut back their number of general partner (fund) relationships, the largest funds tend to benefit.
Limited partners (investors) in private equity funds tend to be “employees”, managing capital on behalf of their employer but without their own money on the line. In general, LPs seem to love co-investment deals, whereby they pay in additional capital (above and beyond their commitment) to access additional investments alongside the fund, but these deals also tend to underperform the fund returns. The amount of money allocated to such co-investments is termed “shadow capital” and it is hard to estimate: it is not counted along with the “dry powder”.
As the private equity industry further matures, there is declining persistence of returns, meaning that past returns are less predictive. There’s also the phenomenon of the “exit supercycle”: private equity managers always wear two hats: they try to exit their investments at high valuations, but taken across the industry this means that they need to then buy at higher valuations in their next fund.
Adj. Prof. Dr. Martin Haemmig of CeTIM held a presentation on global venture capital investing. There are currently big regional differences in venture capital: VC is currently in a boom in Asian markets, while U.S. VC firms in “myopic Silicon Valley” are currently sitting on large piles of undeployed cash. Europe consistently represents around 10% of the global VC market, but lacks late-stage funding. Late-stage “unicorn” firms have meanwhile grown huge in the States: the top 10 such companies represent close to half of the valuation of all VC investments there. Along with this trend, exits are coming slower than ever before: companies are having IPOs after around 10 years, and most of these new issues are now losing money in the public markets during their first year.
European VC exits from 2018 are outperforming those in the U.S., and IRR in all European quartiles outperforms their American counterparts. Europe has been comparatively underfunded in this space, and “stunning” numbers are coming for the sector. European investors have traditionally been big players in U.S. technology deals, but “sleeping” when it comes to their own backyard. At long last, this may be changing. European start-ups are more likely to be globally focused than those in the U.S., and global players tend to have stronger and faster revenue growth.
CVC, or Corporate Venture Capital, is capital allocated internally by companies (such as Novartis or Roche in Switzerland) in some cases towards innovations in process or business models. The returns on these types of projects are typically not measured. Sometimes CVC refers to spinoff funds that corporates aim to have managed separate from their daily business. Sector-wide, however, CVC multiples are much lower than comparative VC multiples. Meaning: corporates are far worse at deploying valuable innovation than small firms. Perhaps this is not terribly surprising.
A “keynote mashup” featured seven panelists. Boris Bernstein discussed the movement of HNWI (high net-worth individual) capital to PE. Dr. Hans Kuhn and Guido Bühler discussed digital assets like cryptocurrencies as investment opportunities. Steffen Wagner pointed out that VCs, ever-keen to level judgements at their portfolio companies, are themselves not reinventing their own business aggressively. Nicolas Brand stated that blockchain is both totally overhyped and totally underestimated. Valerio Roncone presented the new SIX Digital Exchange. And Dr. Lidia Bolla CFA described digital real estate assets.
Prof. Dr. Peter Lorange presented on the topic of investing in shipping and logistics. Several key innovations drive profitable investments in this sector, among them regulatory changes (carbon scrubbing and low-sulfur fuel), climate change and new Arctic sea routes, technical developments (propulsion, composite materials, underwater coatings), and IT-driven (enhanced tracking, storage at sea, fleet management). Corporate management approaches around the world such as integrated supply chains, just-in-time manufacturing, and zero inventory drive changes in the shipping world. There are several effective strategies for investment in this sector. Short-term players buy a “standard” ship such as a Panamax-class vessel and hold it for 2-3 years, reaping cashflow from its operations. Longer term players source a ship for charter and lease it back to the operating firm. The largest players in this space, such as Moller-Maersk, are diversifying and now view themselves as integrated information and logistics providers.
After lunch, Dr. Bertold Mueller of Christie’s discussed investments in art, purchases of collectibles that are a store of value. Positives for these investments: art is a tangible asset, it can be a passionate investment, and carries the chance of big potential upside. On the negative side, there are concerns with provenance and looting, questions about the condition of pieces, and often a high correlation between art prices and stock market valuations. He advised that “blue paintings sell the best”.
Aiping Gao of the China Mergers and Acquisitions Association made a mid-afternoon presentation on the topic of Asian private equity. She pointed out that 30% of businesses in this region will go through a generational change in the next 5 years. For the Chinese government, the biggest technology focus areas are today artificial intelligence, smart manufacturing, and telecoms. Manuel Salvisberg CFA presented on the practical challenges of investing in Chinese businesses from Switzerland.
Justin Rockefeller, co-founder of The ImPact and Board Member of the Rockefeller Brothers Fund, delivered the afternoon keynote on the topic of impact investments by family offices. He led off with: “Everything we do with money has moral implications.” He’s a latter-generation Rockefeller, the American family originally made wealthy by the Standard Oil fortune. The family is now focused on impact investing, with two goals: 1) financial returns, and 2) measurable social benefits. Today the Rockefeller Brothers Fund seeks to do good not just with the money that it distributes, but with the way it invests its endowment: up to 20% of the portfolio is today impact invested, but without a significant change in the risk profile; the managers make use of an “impact overlay” to replicate market-like exposures. The endowment is also in the process of divesting from fossil fuel companies. Two example impact investments are Source, maker of hydro-panels to deliver clean water, and Modern Meadows, a producer of lab-grown leather. Mr. Rockefeller stated that his personal goal is to maximize the total positive impact of his life on others, including those not yet born.
The conference rounded out with an apero. Thank you to partners 100 Women in Finance, CAIA, the Lorange Network, AIFO, VQF, IMD, the Swiss Association of Asset Managers, and the University of Zürich. Special thanks to Swiss Re for the beautiful venue and catering. Photo by Jakub Gorajek on Unsplash
Swiss CFA members fielded a fierce 14-person team for the 46th annual SOLA race in Zürich on 4 May 2019.
The race itself is an epic Big Z institution: a 14-segment relay totaling over 114 km in length and 2.6 km in vertical gain, in the city and foothills of Zürich. 1000 teams take part, and we were honored to be part of this spectacular all-day endeavor.
Team 431 “CFA SOLA Power” got underway at 07:30 on a rainy and cold morning, with Mary Cait’s fiery start from Bucheggplatz. Timo brought it all home for us just around 10 hours later at the packed and soggy finish line at Irchel. In between lay 12 handoffs of the baton, the stones of countless footpaths, and even more uncountable raindrops. The team convened inside for spaghetti and strawberry shortcake at the conclusion. Despite the puddles, there were smiles all around.
Special thanks go to Swiss CFA for sponsorship, and Shanshan Zhang for being our fearless leader and organizer!
CFA Society members had the opportunity to see a very interesting presentation from Daniel H. Rosen, founder of Rhodium Group. This presentation was organised in cooperation with CFA Society Switzerland.
Shortly after being nominated as the China’s president, in November 2012, Xi Jinping has launched some initiatives to reform the Chinese economy. The Asia Society Policy Institue and the Rhodium Group have launched in 2017, an interactive dashboard to track China’s progress toward its economic reforms around 10 goals and track on a quarterly basis.
The dashboard track the following economic reforms:
- Financial system
- Cross-Border Investment
- Fiscal Affairs
- State-Owned Enterprise
According to the latest assessment made, Innovation and Environment are two sectors China is making significant progress. Nevertheless, the country is still lagging on the other reforms, specially State-Owned Enterprise and Labor. You can find more information at the following link: https://chinadashboard.asiasociety.org/winter-2019
We also had the opportunities to ask Mr. Daniel Rosen
How the current “trade war” between China and the US could impact the decisions made during the Third Plenum plan? Could it accelerate/postpone some reforms? If yes which one would be the most affected?
Current US-China tensions are likely to clarify whether China intends to address a slowing economy with a more reform-oriented policy response, or, rather, with less. Washington is insisting that China make its structural reforms more clear, and implement them. That is a reasonable requirement.
Is the current economic slowdown susceptible to push China to make any adjustment to the the plan released by Xi Jinping, by pushing more on some aspects and dropping others? What would be the political consequences of a longer than expected timeline to deliver plan?
The trade-off President Xi confronts is between economic efficiency and stability: the reforms China must undertake will bring some domestic disruption. This is natural, but there is never a good time for that. After deferring implementation of many elements since 2013, the option to delay further is coming to an end. The consequences of waiting longer is rising risk of an economic crisis occurring that Beijing cannot control.
Daniel H. Rosen has twenty-six years of professional experience analyzing China’s economy, commercial sector and external interactions. He is widely recognized for his contributions on the US-China economic relationship. He is affiliated with a number of American thinktanks focused on international economics and is an Adjunct Associate Professor at Columbia University. From 2000-2001, Dan was Senior Adviser for International Economic Policy at the White House National Economic Council and National Security Council. He is a member of the Council on Foreign Relations, and board member of the National Committee on US-China Relations. A native of New York City, Dan graduated with distinction from the graduate School of Foreign Service of Georgetown University (MSFS) and with honors in Asian Studies and Economics from the University of Texas, Austin (BA).
On 10 and 11 April 2019, CFA Institute hosted the EMEA Regional Final of the CFA Institute Research Challenge in Zurich, and CFA Society Switzerland was the local co-host. The best 43 teams with a total 197 students out of 60 countries (with 400 universities and 2100 students) travelled to Switzerland. Brian Stype, Director of the CFA Institute Research Challenge and Christian Dreyer, CFA, CEO of CFA Society Switzerland, opened the EMEA Regional in the evening of 10 April 2019 and welcomed all participants to Switzerland. In the morning of 11 April 2019 the 43 teams attended the semi-final the best of them advanced to the EMEA Regional Final A and B respectively in the afternoon.
Dublin City University representing CFA Society Ireland, BI Norwegian Business School representing CFA Society Denmark and CFA Society Norway, Moscow State University representing CFA Association (Russia) and University of Cape Town representing CFA Society South Africa sat for the EMEA Regional Final A. And Kyiv National Economics University representing CFA Society Ukraine, University of Lausanne representing CFA Society Switzerland, ISEG Lisbon School of Economics & Management representing CFA Society Portugal and RWTH Aachen University representing CFA Society Germany sat for the EMEA Regional Final B.
Picture of opening ceremony with Mark Temnikov and Jeroen Zandbergen
Label: Mark Temnikoff (Mirabaud) and Jeroen Zandbergen (Credit Suisse), last year’s global champions sharing their experience
The winner of the two regional finals were finally University of Lausanne and Moscow State University who delivered impressive presentations and quality research reports about Landis & Gyr and Norilsk Nickel. Those two champions will travel to New York to attend the Global Finals on 25 April 2019. Impressed by the performance of all 43 teams, CFA Society Switzerland is proud that its University of Lausanne team – John Cody Zimmermann, Henri Enguerran Badoux, Karine Chammas, Alexandre Axilais and Nicolas Bregnard – taught by Prof. Dr. Norman Schürhoff who is also an SFI Senior Chair has been named one of the two EMEA Regional Champions for the second year in a row.
André Frei, CFA, Co-CEO and Partner of Partners Group delivered the key note speech at the closing ceremony, speaking about excellence in private and public markets, explaining his important step to become a CFA charterholders and stating that in private markets “we are responsible for our dreams”.
Picture with two winning teams
Label: EMEA Regional A and B Champions from Switzerland and Russia
We are grateful to Asset Management Platform Switzerland for sponsoring the EMEA Regional Final, and to Credit Suisse for sponsoring the Swiss local finals since 10 years. We are also indebted to all our countless volunteers who helped by mentoring, grading or teaching students at the local level as well as all the judges that helped with judging at bot the local and the EMEA Regional Final level.
Asset Management Platform: https://www.amp-switzerland.ch/de-ch
Credit Suisse: https://www.credit-suisse.com/careers/en/career-opportunities/students-and-graduates.html
Link to livestream B of the winning presentation: http://cfainstitute.gallery.video/rc19-emea-b/detail/video/6025537489001/2019-research-challenge-emea-finals-room-b?autoStart=true
Olivier P. Müller, CFA and Mirjana Wojtal, PhD
On 20 February 2019, the Swiss CFA Society invited Sandra Miller of the Royal Academy of Dramatic Art (UK) to lead a workshop on Executive Presence. This event took place at the Zunfthaus zur Schneidern in Zürich, and was the first “soft skills” class offered by the Society. Ms. Miller is a trained actor with a powerful presence and led the packed room in what became an increasingly enjoyable evening.
Ms. Miller has worked extensively as a communication skills consultant, trainer, coach and role-player for over twenty years. She trained at Manchester University (BA Hons in Drama) and at RADA. She has performed extensively in the West End and in repertory theaters throughout the UK.
The stated aims of the evening were to develop communication skills, develop awareness of our body language, and to learn how to build rapport with an audience. At first each of the roughly 25 participants had to walk to the front of the room, introduce ourselves and our profession, and talk about something we were proud of, followed by something about which we were embarrassed.
The Seven Ingredients of Executive Presence
After some open discussion about what worked and didn’t in our introduction speeches, Ms. Miller walked us through her system for developing effective executive presence.
1. You (at your best)
We have between 8 and 13 seconds to make a first impression, and the key here is being relaxed and confident. Walk calmly to the podium and speak only after arriving, aware of our posture and eye contact. Dress professionally, and don’t forget about color: a single block color in the mix tells the audience “I am here”.
2. Structure and story
Ask ourselves: what’s the objective for this talk in 20 words? (And give ourselves an objective for each meeting we attend!) Know the story well and take the audience on a journey with us. Limit presentations to an ideal length of 20 minutes. Use humor as appropriate, but if in doubt, leave it out.
Make friends with our voices, and make use of a rich and varied manner of speaking. Singing each day (even alone in the shower or in the car) helps a lot: the voice is a muscle. Most people use 3-5 tones in conversation, but even beginning singers are able to command a far wider range of tones, even automatically in their speech. Paint pictures with our words!
“Some people have something to say, others have to say something”: people who choose when to speak often have more presence. One on one, if the other person seems uncomfortable, “name the resistance”. For example if the person sitting opposite has his arms crossed, say something like: “I notice that you seem uncomfortable.”
4. Eye contact and open body language
Slow down and connect with the room. Mentally divide the audience into a series of individuals. Stop and breathe, and make eye contact while breathing. (Staring is eye contact without blinking, so keep blinking!)
When we maintain open body language, we make for a commanding presence. Be aware of our feet on the ground, even while sitting. But standing gives automatic power and leads to more presence. Own the space where we are standing. Uncross our arms, and don’t hide them behind our back. Our hands and arms extend our personality. Send a physical message of confidence.
Pauses during speech add to our gravitas, and keep the audience interested. They also buy credibility, and are a courtesy to our audience, who may need time to fully assimilate what we are presenting. So, slow down. One on one, know when to stop talking and make the other person answer.
When we have passion about what we are presenting, that naturally comes through and invigorates our audience.
Combining the 6 factors above leads to an impactful presentation, the goal of executive presence.
Following the walk-through of the 7 elements of executive presence, we completed a series of exercises. First, Ms. Miller had us lie on the floor and guided us through 10 minutes of relaxation. Following that, she took us through a 10-minute “actor’s warmup” for both our bodies and our voices. And at last, we each had to again make a brief 60-second speech on something about which we were passionate. The improvement between the first and second speeches was palpable!
At the EMEA finals of the 13th CFA Institute Research Challenge two teams were awarded regional champion in Zurich on 11 April 2019: The team from the University of Lausanne, which represented Switzerland, and the team from the Moscow State University, representing Russia.
The students from these two institutions prevailed against 43 other teams of future investment experts. In total, more than 2100 students from 400 universities from 60 countries across Europe, the Middle East and Africa (EMEA) took part in the challenge.
The two “EMEA Regional Champions”, the teams from Lausanne and Moscow, will compete against the best teams from the Americas and Asia at the Global Finals in New York on 25 April 2019.
CFA Society members had the opportunity to see a very interesting presentation from Dr. Jan Engelke, Managing partner and Dr. Thomas Hofmann, partner, both working for Simon Kucher & Partners.
Why is Pricing Strategy important?
Over the last decades, the margins of the financial industry have decreased, this is a combination of lower revenues and higher costs. The pressure on the revenues is mainly driven by increase in competition, higher price sensitivity of clients (especially the youngest), alternatives to current expensive Wealth Management products (e.g. more passive managed funds, ETF) and abolition of country-specific advantages within the EU. The costs are also increasing du to upward pressure from regulators, and increasing technical support to fulfill regulatory requirements. In times of increasing interest rates, the effect will become even worse due to higher capital costs. A decrease in price is a dangerous strategy, as it can be followed by the competition and lead to a downward spiral. Moreover the contribution margin per unit sold is decreasing and there is no certainty that volume will increase.
Why is psychology important for pricing?
Smart pricing requires the integration of value and behavioural aspects. The financial services firms should not take only into account the “value” of the products/services based on a cost-driven/competitor-driven approach. It should also include the irrational aspects of client behaviour. Amongst behavioural patterns, we can highlight the followings:
- The compromise effect refers to the fact of always going to the “choice of the middle” to avoid a decision.
- The anchoring effect refers to the tendency to attach our thoughts to a reference point, even if it has no relevance to the decision we are making right now.
- The endowment effect is the bias and perception that the personal ownership of an object exceeds any listed market value.
- The framing effect is a cognitive bias that refers to the fact that we have a tendency to draw conclusions depending how the information is presented to us.
Analysing and understanding the behavioural effects can take cross-buying, which refers to the customer behaviour of buying more services from the same firm, to a next level.
What are key elements for success in pricing?
-Intelligent offering definition, by understanding client needs and making it easy for the client to understand, in a well-differentiated way.
-List price settings & discount management: Adapt price structure to the behaviour and needs of the clients and optimise the price structure to increase the “willingness to pay” of the clients. Private banking segmentation includes the following type of clients:
- Bargain Hunter (14%), focus on getting the best price
- Fairness seeker (41%), focus on the price sensitivity and pays attention to product quality
- Convenience seeker (18%), sensitive only to time taken and happy to pay for a quick service
- Brand & service seeker (27%), the price is not an important criterion
-Client centric sales approach by creating a “state-of-the-art” journey for the client and mix diverse digital tools to enhance the client experience by:
- Improving the product communication
- Improving price and discount management
- Improving sales effectiveness
To conclude, pricing excellence can be a powerful tool to offset the limit the squeezed in net margins that we have seen in the banking industry over the last years.
Jan Engelke is Managing Partner of Simon Kucher & Partners with full P/L responsibility. He has more than 20 years of consulting experience, mainly in the banking sector. He is a Partner in Simon Kucher & Partners’ Global Banking Practice, responsible for the Swiss and the Near & Middle East Banking markets, as well as for the Private Banking markets in Europe and North America. In this capacity, he has led numerous national and international projects and programs for universal, specialized and regional financial institutions.
Dr. Thomas Hofmann is a Partner at Simon Kucher & Partners’ Banking division and is the Managing Director of the Geneva office. He has already led numerous projects for private banks, universal banks and regional/cantonal banks in Switzerland, Germany, Austria, Luxembourg, France, Belgium, Netherlands, U.K., Spain, Asia, Middle East, North and Latin America.
Sources: Investopedia, CFA Insitute Level III program
CFA Institute and the Principles for Responsible Investment (PRI), an investor initiative established in 2006 in partnership with UN agencies, have reviewed the state of ESG integration in the investment process.
While the report on ESG Integration in the Americas was published last year, the results for EMEA were presented today. The new report ESG Integration in Europe, The Middle East and Africa: Markets, Practices and Data highlights the heterogeneity of ESG integration practices in eight major markets, including Germany, France, Switzerland, the United Kingdom, South Africa and the Arabian Gulf Region.
The reports’ main findings include the following points:
- There is no “one best way” to do ESG integration and no “silver bullet” to ESG integration.
- Governance is the ESG factor most investors are integrating into their process.
- Environmental and social factors are gaining acceptance, but from a low base.
- ESG integration is farther along in the equity world than in fixed income.
- Portfolio managers and analysts are more frequently integrating ESG into the investment process, but rarely adjusting their models based on ESG data.
- The main drivers of ESG integration are risk management and client demand.
- The main barriers to ESG integration are a limited understanding of ESG issues and a lack of comparable ESG data.
- Investors acknowledge that ESG data have come a long way, but advances in quality and comparability of data still have a long way to go.
- It would be helpful for issuers and investors to agree upon a single ESG reporting standard that could streamline the data collection process and produce more quality data.
- Many survey participants were concerned that ESG mutual funds and ETFs offered to investors may be driven by marketing decisions and may not be true ESG investment products.
Computer-based testing and digital learning platform among key offerings
After nearly 60 years administering paper-based testing for the CFA Program, CFA Institute will transition its Level I program to computer-based testing (CBT) starting in 2021. The transition helps CFA Institute keep pace with the evolution of global testing and credentialing practices and improve the overall candidate experience. CBT enables CFA Institute to offer a wider selection of test venues, more flexible scheduling, and expedited exam results delivery.
“Our highest priority is to uphold the standard of the CFA charter. Maintaining the security of the exam and the rigor of what is expected of candidates is critical to that process,” said Paul Smith, CFA, president and CEO of CFA Institute. “This is a natural evolution in how we design and deliver our programs. Offering computer-based testing is part of a larger digital transformation of the CFA Program that supports our mission to lead the investment management profession globally, increase our global relevance, and better reflect investment practice in today’s workplace.”
A one-stop digital learning platform, known to candidates as the Learning Ecosystem (LES), is now available for Level I candidates. The LES offers the entire Level I CFA Program curriculum, all existing study tools, and features that help candidates track and manage their learning through an online, personalized learning experience. The curriculum itself is evolving too, to include fintech topics such as artificial intelligence and machine learning.
On 22 February 2019, CFA Society in Switzerland held the swiss local final and the award ceremony of the CFA Institute Research Challenge in Switzerland. This was a special challenge since initiated by Florian Esterer, CFA, it is the tenth time, the CFA Institute Research Challenge is run in Switzerland, and we can be very satisfied that it has become an important and widely recognized element of the academic calendar over the autumn term.
This year, students from 7 different universities (Basel, Lausanne, Zürich, Neuchâtel, Lugano, St. Gallen and Liechtenstein) had to analyze Landis & Gyr, write a detailed research report and present their investment case in front of a jury consisting of senior investment professionals. University of Lausanne (taught by Prof. Dr. Norman Schürhoff) delivered the best presentation and the best research report and was thus local champion and will compete at the EMEA regionals on 10/11 April 2019. The jury also appreciated the team of University of Basel’s clear opinion and especially University of Zürich (Department of Banking & Finance) who delivered the best presentation that university’s team ever did.
We are thankful to our 7 judges, 28 mentors and 21 graders who supported their challenge through their dedication and work. We are also thankful to Credit Suisse (Experienced & Campus Recruitment Switzerland) for the sponsorship over the last 10 years as well as Finanz und Wirtschaft for their media partnership.
This year, the EMEA regional will take place in Zürich on 10/11 April 2019 (link: http://researchchallenge.cfainstitute.org/emea/)
The winning team of the 2019 CFA Institute Research Challenge Switzerland, John Cody Zimmermann, Henri Enguerran Badoux, Karine Chammas, Alexandre Axilais, Nicolas Bregnard (from left to right, © Carole Fleischmann), are students of Prof. Dr. Norman Schürhoff at the University of Lausanne.
Jury and volunteers:
Eugene Evgenii Skrynnyk, Peter Romanzina, CFA, Christoph Gretler, CFA, Olivier P.Müller, CFA, Christian Dreyer, CFA, Markus Matuszek, CFA, Pablo Amuchastegui, CFA, Peter Bänziger, Christian Wält (Head of Investor Relations of Landis & Gyr) and Florian Esterer, CFA (from left to right, © Carole Fleischmann)
Contribution from Olivier P.Müller, CFA
On 14 February 2019, the Swiss CFA Society invited Dr. Martin Liebi LL.M. of PwC to discuss upcoming Swiss regulatory changes under FinSA and FinIA. This event was sponsored by Principal and Saxo Bank and took place at the Saxo Bank Trading Lounge in Zürich.
What are FinSA and FinIA?
The Financial Services Act and the Financial Institutions Act are upcoming Swiss laws passed in 2018 by the Federal Parliament. These new laws may be thought of as the Swiss “children” of MiFID II, an EU regulatory framework implemented separately in each EU member state. The Swiss variants will each come into force on 1 January 2020, one year after MiFID II, but with a grace period for implementation.
There are two principal goals with FinSA and FinIA:
- Improved client protection; and,
- Swiss equivalence with EU regulation.
In addition, improved regulation of requirements for financial institutions, as well as financial products, services, and distribution are envisaged.
To whom do the laws apply?
Any firm providing execution, investment advice, portfolio management, or loaning cash against securities in any of the following financial instruments:
- Debt securities and bonds
- Shares in collective investment schemes / funds
- Structured products and structured investments
will fall under FinSA.
However, much about this definition remains unclear. For example: is a local bank that offers home equity loans included in this definition? There is no guidance in the law, so market standards are developing around these questions.
Swiss pension funds will become defined as “institutions” under FinIA, and will have more freedom to purchase unlisted investments. For the pension funds, this will represent a “regime change”.
How will the Swiss market change under these laws?
Many of the core requirements of these laws existed implicitly in the Swiss Code of Obligations but are now being made explicit in the new codes. The Swiss implementation of these principles is based on case law, in contrast with EU practice, which is generally based on statute law.
A principal feature of the new regime is the client advisor register. Any firm seeking to do business with Swiss-domiciled clients will need to be registered. For example, an asset manager in London looking to drum up business by cold-calling into Switzerland will need to first formally register herself.
Firms must record their interactions with clients and now they must also provide all of this internal information to clients on request. This includes recordings of phone calls to brokers, but likely applies only to business conducted after 1 January 2020.
Every financial services provider will also need to name an ombudsman. Banks can make use of their existing ombudsman, but other firms will require one for the first time.
In parallel with new EU rules, there will be more substantial prospectus requirements in Switzerland. The existing rules around prospectuses were crafted around “selling cows to each other”, with very limited disclosures, but under the new laws there will be many detailed requirements. In addition, each new prospectus will require independent review, and the sign-off will only be valid for a period of 12 months, after which time a new new review is mandated.
Firms will also have an affirmative requirement to demonstrate best execution, as regards both timing and quality of executed trades. They will need to perform suitability tests for client investments, but only at the portfolio level. And the new laws preserve their ability to receive retrocessions (kickbacks from investment fund providers) with disclosure, in contrast to the EU regime.