Written by Jeffrey Anhut, COO, CFA Society Switzerland
If repetition is the mother of all learning, then the master’s students participating in the Research Challenge bootcamp learned a lot. Hosted on 27 and 28 January 2020 in the Bern offices of Credit Swiss and in conjunction with the CFA Society Switzerland, students were offered a unique opportunity to develop softs skills which are vital to success, not only in the Research Challenge, but also for landing that all elusive first job or first client. With the expert assistance of a professional trainer, the aspiring financial analysts got a master class in presence and presentation skills.
“Stop, take a deep breath, do it again. You can do it, you got this.” These exhorting words were a repeated mantra for trainer Karen Cody who didn’t let students stop practicing until they had got their presentations right. With patience, wit and over 25 years’ HR experience developing talent, Cody International CEO, Karen Cody challenged the students to “check their egos and the door,” to accept feedback and learn how to give a great presentation. What became clear to the students was that it wasn’t so much about know-how rather the ability to communicate their message.
As part of the buildup to the Research Challenge Swiss finals, CFA Society Switzerland members and Research Challenge supervisors, Mirjana Wojtal, PhD, Olivier P. Müller, CFA and Florian Esterer, CFA reiterated this point numerous times to the students. “You all have the technical ability to be successful,” said Florian, “What differentiates the good from the great teams is your presentation skills.”
After two solid days of repeated practice and feedback, the students will show their polished skills 20 February, at the 2020 CFA Institute Research Challenge hosted by the University of Zurich. The winning team will represent Switzerland at the EMEA Regional finals in Jordan in early April 2020.
University of Lugano
University of Fribourg
University of Lausanne
University of Zurich
University of Basel
Zurich University of Applied Sciences
At the annual Bulls & Bears Members Dinner, diners offer their crowd forecast for a selection of market rates. This year’s special was the price of the Tesla stock.
The 2020 Bulls & Bears Dinner took place on 5 and 6 February in Zurich and Geneva, bringing together more than 120 market specialists combined for a sumptuous dinner and awarding of bottles of champagne to the best forecasters of last year who were present again.
Participants offered their forecasts for the end of 2020 values. For the Swiss Market Index (SMI), the median forecast of 119 is for 11’445, less than 2% above the SMI at pixel time. For the S&P 500, they were similarly conservative with a median & mode of 3400, although the average was slightly higher with 3594.
Whether the dinner presentations about McKinsey’s Wake up, Switzerland report might have anything to do with diner’s bullish view on the EUR vs USD is anybody’s guess: The mode for EUR/USD was 1.15 USD for a EUR, although the average forecast was for 1.1151, some 2% above the current rate.
On the 10 year US Treasury bond, Geneva based forecasters were distinctly more bullish than their Zurich counterparts: With an average of 1.4956%, they were a full 10 Bp below Zurich’s collective projection of 1.5937%. The combined average of 1.5657% is only slightly below the current yield.
Finally, Tesla bulls will hope that diners’ bearishness on TSLA will be proven wrong by market developments, unlike last year’s special forecast for WTI, which was spot on. On average, diners expect the stock to be over 20% lower (USD 593) than today. Given its recent volatility, the bulk of forecasts was within a relatively “modest” range (standard deviation of USD 314), so chances to win a bottle of champagne early next year may be higher for the outliers, be it the bull (USD 2000) or the bear (0).
The new certificate in ESG Investing, the first qualification of its kind, was launched by the CFA Society of the UK in December 2019. The certificate has been introduced to meet the increased demand for ESG knowledge and skills in the investment sector and is already seeing high uptake. CFA Society Switzerland has partnered with CFA Society UK to bring the certificate to Switzerland. In the UK, more than 1000 candidates have signed up to complete the course in the past three months. The launch follows a successful pilot programme in September 2019. Participants in the pilot programme represented a wide spectrum of the profession, including asset owners, asset managers, consultants and pension providers. Many were senior professionals, with 32% having already earned the CFA designation.
One participant in the pilot programme said: “The content is broad enough in scope to make it accessible to budding ESG practitioners, whilst also covering topics in sufficient detail to enhance the knowledge of those with more experience in the ESG space.”
By Steve Rodgers CFA
The 22nd staging of Switzerland’s largest financial fair was held on January 21st and 22nd this year. The Finanz’20 event is combined with the real estate focused IMMO’20 event and thanks to more than 170 national and international exhibitors and 3’800 visitors, the event organizers managed to surpass last year’s figures.
This is the first year CFA Society Switzerland decided to participate in the event and we were honoured to have Margaret Franklin CFA, CEO of CFA Institute serve as a keynote speaker for the event the afternoon of January 21. She was interviewed by Eunice Zehnder-Lai, a member of the board of Julius Baer Group, among others.
Margaret shared her views on several important themes facing the finance industry today as well as into the future: low return environment, the impacts of digitalization and artificial intelligence, Environmental, Social, Governance (ESG), as well as changes in diversity and inclusion, including important efforts to increase the number of women in positions of influence. Margaret also referenced and highlighted some of the excellent work done by the CFA Research Institute including the Investment Professional of the Future, and the ESG Investing Guide for Investment Professionals. Margaret’s thoughts and insights were very well received and appreciated.
On the second day of the conference, Jian Shi Cortesi CFA, CFA Society Switzerland board member, and an expert on the Chinese technology sector who works as Investment Director at GAM Investment Management served on a very engaging two person panel titled Chinese vs. US tech – Who will win the loser’s game? She presented the case for Chinese tech based on the enormous size of the Chinese market alone, as well as the rapid recent and potential growth of China’s largest tech firms, including other factors. Her counterpart Julien Leegenhoek, a U.S. tech expert from UBP, made the case for the very strong competitive advantages Silicon Valley has historically and continues to have, as well as the truly global presence of U.S. tech firms vs their Chinese counterparts, among other factors.
CFA Society Switzerland as a sponsor of the Finanzmesse, also had a booth at the large event facility which was held at StageOne in Oerlikon. The booth was staffed full-time both days 10am to 5pm by the society staff members Chris Dreyer, Jeffrey Anhut, Sabine Feierabend, Michelle Knecht, and Mirjana Wojtal as well as on a part-time basis by several society board members, committee members and other CFA members and volunteers. There were a great number of visitors to the booth, with tremendous interest in the CFA charter program as well as on all ESG-related topics, including CFA Institutes publications and the new Certificate in ESG Investing being offered by CFA Society United Kingdom.
For a first time participant in Finanzmesse, CFA Switzerland achieved its main goals of raising awareness about the society and the CFA designation as well as highlighting the very strong industry expertise CFA Institute has both in its leadership as well as in its leading publications. We’re looking forward to next year’s event!
42% of the 73,688 candidates who took the December 2019 Level I Chartered Financial Analyst® (CFA®) exam have passed. These successful candidates now progress to Level II of the CFA® Program, the second of three exams toward earning the CFA® charter, one of the most respected and recognized investment management credentials in the world.
Margaret Franklin, CFA, president and CEO of CFA Institute: “Congratulations to all of the successful candidates. They are well on their way to achieving an incredibly valuable credential that will attest to their commitment to professional excellence and upholding the highest standards of ethics in investment management.”
To earn the CFA charter, candidates must pass all three levels of the exam, which is considered to be one of the most rigorous in the investment profession; meet the work experience requirements of four years in the investment industry; sign a commitment to abide by the CFA Institute Code of Ethics and Standards of Professional Conduct; and become a member of CFA Institute. Fewer than one in five candidates who begin the program end up successfully earning the CFA charter. Successful candidates take an average of four years to complete the CFA Program.
The December Level I CFA exam was administered in 134 test centers in 87 cities across 46 markets worldwide. The exam was offered for the first time in two new cities in Asia – China, in Chongqing, and India, in Jaipur, attracting over 739 candidates between them.
The 10 markets with the largest number of Level l CFA Program candidates tested (Not based on candidate country of residence) were:
China, 22, 621
United Kingdom, 4,222
South Africa, 1,240
Hong Kong SAR, 1,110
In Switzerland, 479 candidates took the Level I exams, 7.6% more than in December 2018.
Level I CFA Program candidate representation from around the world remained diverse with 59% (43,659) of candidates coming from Asia Pacific, 23% (16,969) coming from the Americas region and 18% (13,060) from the Europe, Middle East and Africa region.
The CFA Program is tailored to professionals across the industry, and annual updates to the curriculum ensure that the CFA charter remains the global industry standard. The curriculum covers ethical and professional standards, securities analysis and valuation, international financial statement analysis, quantitative methods, economics, corporate finance, portfolio management, wealth management and portfolio analysis.
The impact of the digital transformation on the asset management industry
The asset management industry does not have a very long history. It has only quite recently emancipated itself from the insurance industry, in which it served the function of building an adequate capital buffer to fund the company’s risks. Just look at the vintages of two of the world’s largest asset managers: 1975 (Vanguard) and 1988 (Blackrock).
The asset management industry owes its explosive growth over the last few decades to the confluence of two factors: It benefitted from the growing differentiation and intermediation of the financial services value chains. Secondly, finance theory supplied the conceptual and methodological framework to scale the industry by making the tools of the trade teachable. It is no coincidence that the CFA program grew its global exam sittings from 284 in 1963 to well over 200’000 in 2019.
Despite its stellar success, the industry has managed to sustain a global average operating profit margin as a share of net revenue of no less than 35% (2018, according to BCG), defying both conventional economic theory that sustained surplus profitability attracts competition until it fades away, and the crisis talk of 2018, when the industry’s assets under management fell for the first time in years by 4% to USD 74’300 bn.
All this massive growth has been achieved whilst running constantly evolving, but nevertheless conventional operating models based on the securities industry’s traditional issuance, custody, trading and settlement value chain. Manual labour was constantly supplanted by the inclusion of technology as it advanced, but the operating model as such was never really at risk. Is it going to be different this time?
Jeff Bezos, the founder of online giant Amazon, thinks that what is still the same in 10 years’ time is the far more relevant and interesting question than to identify what will be different, because that’s what you can build strategy on. So let’s first try to answer that question for the asset management industry:
- Every successful investment strategy becomes commoditised over time as imitation sets in. Competition and passive replication will drive down fees while alpha slowly becomes beta in pursuit of Andrew Lo’s Adaptive Markets Hypothesis.
- Markets typically evolve faster than their intellectual penetration as academic finance mostly works in a rearview mirror mode.
- Every successful investment strategy will sooner or later be constrained by market capacity. Depending on the asset class and the segment involved, that constraint may be closer or farther away, but it always bites.
That tells us a lot about the market driven dynamics of the asset management industry, which is very much “business as usual”. Both the active vs passive debate as well as the recent explosion of demand for ESG products fall under that category. Which leaves us with the following question: what is likely to change materially for asset management in the coming years? I recognise the following four drivers of change:
- The big talk of town is securities tokenisation, of course – or moving the aforementioned securities value chain on the (or a) blockchain. This is largely a matter of back-office logistics, but the operating model implications would be monumental.
- While being the topic of much frenzied debate, the actual application of new technologies in investment decision making is quite limited. A recent CFA Institute report (“AI Pioneers in Investment Management”) has identified 3 types of AI / big data applications: 1) use of natural language techniques in processing of text, image and audio data, 2) use of machine learning to improve the effectiveness of algorithms used in investment processes, and 3) using AI to process big data, including alternative and unstructured data for investment insights. These applications will allow investment professionals predominantly in the quant strategy space to spend less time on routine tasks, but they have not been shown to displace human intelligence / expert judgment in investment management.
- The most widespread compensation model for asset management is an ad valorem fee expressed in basis points of assets under management. Although these fees tend to be on a downward trajectory over time, which seems to benefit investors, the model as such is open to criticism: It incentivises managers to constantly attract net new assets with little regard to the interest of current investors, whose return potential will be reduced by approaching capacity constraints. Since the cost of running an investment strategy tends to be fixed, revenues from additional assets will directly accrue to the bottom line. Thus, the ad valorem fee model is poorly aligned with investor interest, which is why sophisticated asset owners are beginning to ask for a combination of a fixed nominal management fee plus performance fees.
- The traditional interaction between private markets as incubators for public markets has run into some disturbance as of late. Many public markets have started to give back capital to investors (share buy-backs) on a net basis rather than to serve as a source of capital for enterprise. Privately held firms tend to stay private much longer than in the past, thus limiting the growth / return potential of public market investors. Investing in private markets is very different from public markets and requires different skill sets.
Of these four factors, the first one appears to be the most consequential in terms of its operational and business model impact, provided that it will be adopted on an industry-wide basis. Whether that will indeed happen is far from certain, however: To be effective, the distributed ledger will have to be a shared infrastructure, the control of which will be subject to strategic considerations. This can be thought of as a game-theoretical situation in which industry players need to decide on whether to compete in the status-quo or to cooperate in a transition to a new infrastructure. Whether a new Nash-equilibrium will manifest itself is quite open. If it does, a day in the life of an asset manager may well look like this in a few years’ time …
If it does manifest, however, there would be far reaching consequences. Not only would the asset management industry’s operating models have to be updated significantly to accommodate changing transactional procedures. The other three factors could be directly impacted as well: (2) by means of the much higher density of available information, (3) by new compensation models inspired by the Distributed Autonomous Organisation for instance, and (4) by the blurring of the line between public and private markets.
Clearly, the asset management industry has arrived at a critical stage in its young history.
(An abridged version of this article was published on finews.)
Marg Franklin assumes role of CEO and President; New Board Members Announced
Margaret Franklin, CFA, begins today as the organization’s new President and CEO. Diane Nordin, CFA, becomes Chair of the Board of Governors, and Daniel Gamba, CFA, now serves as Vice Chair of the Board of Governors.
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.
Diane Nordin assumed the role of Board Chair on Sept. 1, 2019, the start of the new fiscal year at CFA Institute, succeeding Heather Brilliant, CFA, who will continue on the Board. Diamond Hill Capital Management recently named Brilliant its new CEO.
- Record global participation illustrates strong interest in the CFA® designation as a differentiator for individuals and employers across the investment profession
- Candidate growth in Australia the highest year over year across the top 10 markets
- Early signs of gender balance among Level I candidates in some markets
Of 38,377 candidates who sat for the Level III CFA® Program exam in June 2019, 56 percent have passed, completing their final CFA® exam and becoming eligible to become CFA® charterholders pending verification of professional experience. All candidates will be notified of their results today. Currently more than 167,000 investment professionals worldwide hold the CFA® charter.
Level I and II CFA Program candidates received their results on 6 August. Of 83,656 candidates who sat for the Level I exam, 41 percent passed. Of 74,735 candidates who took the Level II exam, 44 percent passed.
Global markets present early signs of a more gender balanced profession
The CFA Program continues to grow in all regions, reflecting strong interest in the CFA credential as a key differentiator for individuals developing long-term careers in the investment profession. Among the top 10 markets, Australia has recorded the highest increase in candidate growth, with number of test takers up by 23 percent on the previous year.
Participation of women worldwide is rising. Over the past five-year period, the number of women test takers in the CFA Program has more than doubled, and now accounts for 39 percent of candidates. For Level I candidates—a key contributory signal of future trends—female participation in some markets, notably Australia and the United Kingdom, has reached or surpassed parity.
This is the method I used to pass each CFA exam on the first try each year for three years. As I was living in Iceland, I had very limited access to test prep seminars and extras, so it was necessary to really knuckle down and make it happen all on my own.
I’ve since advised other candidates on how to pass, and one of them inspired me to write this down as an article. (He also gave the method its name.)
So here goes:
- Start your studying process at the beginning of September for the test the following June.
- Take out a calendar and count the number of weeks between your start date and the end of March. Give yourself 1-2 weeks off for December holidays and maybe a week off for your birthday if it falls in this window. Account for other vacations as well. Now you have the total number of study weeks.
- Tally up the total number of LOS (with sub-parts) in the CFA curriculum. So, 23a-j would count as 10 LOS “quanta”, for example.
- Divide by the number of weeks. Now you have the number of LOS quanta you need to cover each week.
- At the beginning of each week, make a study plan for how you will cover that week’s allotment of LOS. 2-3 hours after work each day, plus all-day Saturday at the library (and some of Sunday) usually was sufficient for me. Make sure to plan time for exercise and breaks, like on Sunday afternoons for example, too!
- Buy a big stack of notecards at your local stationery store.
- For each part of each LOS, make one notecard.
- At the top of the notecard, write out the LOS in your own hand. (e.g. “23a. Explain the three factors of …”)
- Below that, answer/demonstrate the LOS in your own words. If it’s a list of items to memorize, write them down. If it’s a formula write it out and explain the components to yourself.
- Third-party study guides, like Kaplan Schweser, can help get you faster to the kernel of each LOS, but beware: sometimes they have errors and the CFA curriculum itself is always the master source.
- Each notecard is now your personal reference: once you have it made, it will be your working knowledge base. You can let go of all the books.
- At the end of each week, you will have added to your stack of notecards. You should also complete enough example problems for each LOS during the week that you feel good about it.
- At the end of March, you will have a notecard for each part of each LOS, in your own words!
- Now the fun begins: on each Saturday morning in April and May, take a half mock exam (3 hours). It’s time to train your brain to take the exam, and don’t worry if you feel shaky on some of the material.
- On Sunday, grade your exam and highlight the questions you didn’t know or want to review. Each question will link directly to one LOS.
- The following week, return to the corresponding notecard for each question you highlighted. Revisit it and see what you didn’t get, do some new practice problems and update the card with your new understanding.
- Keep going like this, a half mock exam a week and then notecard revision during the evenings the week after. Turn the crank.
- By the time June comes, you will have a really solid feeling about most of the LOS. And taking exams each Saturday will be old hat.
- Spend the final week before the exam reviewing the areas you know are most problematic. And making sure you know the formulas by heart. But also rest a lot during this week: you are ready. Take some walks in the nature and fresh air on the days before the exam. This will serve you better than cramming.
- In the actual exam, skip areas where you know you aren’t as strong, based on what you learned about yourself in the practice tests. Focus first on what you know you do well, then come back for the other stuff.
And now, for some testimonials:
“The CFA program is daunting. It requires candidates to learn and apply thousands of pages of materials in three six-hour tests. To tackle this material, I found the Battering Ram method to be extremely useful. It encourages discipline with a set plan that has enough flexibility to account for breaks and unexpected curveballs. Writing notecards and problems in my own words ensured a deep understanding of concepts and problem-solving capabilities. They were also great for reviewing. And prepping with practice questions and exams reinforced my command of materials. I passed each exam on the first try.” — Meghan Orie, CFA
“When written out like this, the process gave me confidence: it looked doable and sounded simple. However the power of putting it into practice is hard to overstate. I sailed through my second level CFA exam after using this method.” — Jeet Das, CFA Level III candidate
That’s it! Batter away … and good luck!
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!