Starting my Midwestern Goodbye

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Executive Director Mark Salter enjoying a spare cake (or two) at the 2022 Annual Dinner.

I’m sure you’ve experienced it. You’re at a gathering of some sort (a Society social [1] perhaps?) when someone announces, “Welp, I have to get going” – and they’re still talking 45 minutes later. [2]

This is my official “Welp, I have to get going.”

I’ve had the pleasure of serving as your Executive Director for the past 10 years, and it’s been the best gig I’ve ever had. But it really is time for me to get going, so I will be retiring at the end of this fiscal year (August 31).

This “welp” has been in the works for a while. I told our Board of Directors back in the summer of 2019 that I planned to retire this year. Since that time, we’ve diligently worked our way through the succession planning process, examining where we’ve been, where we want to be, and how we plan to get there. We’re now at the final step in the process – finding and onboarding our next Executive Director.

This last point is why I wanted to start saying goodbye now and shift the focus to where it needs to be – on the future. The Board has formed a search committee and posted the opening in several places (see and share our LinkedIn post). Our goal is to have the new Executive Director in place and ready to go before I walk out the door. So, please engage with your network and tell us if you know of someone who might be a good fit for this opportunity.

Plus, there’s one more thing I’m asking you to do:

Get re-engaged.

This Society has done some amazing things in our 70-year history, and there are plenty of amazing things yet to do. And that takes people like you.

We’re finally able to start meeting in person again, and we need to continue that trend. So, please participate. Register and show up. Volunteer for something. Network. Do whatever you can to re-engage with one of the most extraordinary communities on the planet, and make it even better.

Welp, that’s all for now; more to follow.

Mark Salter, CAE, ABC
Executive Director

[1] Speaking of socials, join us at our Putting Investors First event (it’s free, by the way) in Saint Paul on Thursday 4/14 and stick around for the April Society Social!

[2] The “Midwestern goodbye” is a real thing with 9 identifiable stages to this process – check it out and see how many you recognize!

Face-Off

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By Susanna Gibbons, CFA

Ah, Lake Wobegon. Where all the women are strong, all the men are good-looking, and all the children are above average. Sounds a lot like the pursuit of active management, doesn’t it? The belief that we can find investment managers that are top performers drives everything. In a 1991 article, The Arithmetic of Active Management, William Sharpe basically chides us for acting as though we can all be above average. He notes: “Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.” (Sharpe, 1991)

Most of the academic research on the performance of investment managers is completely consistent with this notion and demonstrates that there is very little persistence in performance over time. There is some variability in results when viewed over the short term (generally less than a year), but by and large, performance is strongly mean-reverting. (Luckoff, 2010) This should not come as a surprise to anyone in the active management world – it is extraordinarily difficult to consistently beat a benchmark, let alone remain in the top quartile or even the top half.

Using a broader range of quantitative measures for selecting asset managers does not really provide additional hope. The Sharpe ratio is among the most widely used measures, and it adjusts historical performance for the excess risk in the portfolio relative to a benchmark. Theoretically, the higher the Sharpe ratio, the more skill the manager has.

Except that the skill purportedly measured by using historical numbers does not translate into future performance. Just as prior period Alpha is not predictive, high Sharpe ratios are also not predictive of future performance. In fact, they aren’t even predictive of continued high Sharpe ratios.

Why, then, do we continue to use these frameworks as a way of identifying which managers to hire? Investment Consultants put enormous effort into managing their approved lists, conducting “searches” for new managers, and in general acting as gatekeepers for asset owners. Recommendations will not include managers without strong three-year track records at a minimum, in spite of the fact that we know these results have little bearing on expected performance going forward.

In fact, it’s even worse than that. There has been some research on the performance of emerging managers, and it consistently shows strong performance – primarily in the first two years. (Aggarwal & Jorion, 2008) (Preqin, 2013) (Liu, Ma, Shi, & Wang, 2017) According to Aggarwal, “each additional year of age decreases performance by 48 basis points, on average”. The best performance from these managers comes before consultants will recommend them. We are knowingly, willfully leaving performance on the table.

And all of this begs the question: where did the three-year track record come from in the first place? I stumbled across an article recently that suggests that, essentially, the investment business-backed into it because it needed enough data points to calculate Alpha and Sharpe Ratios. In “Are 3-Year Track Records meaningful?” Corey Hoffstein argues that in statistical analysis, 30 samples is the minimum needed to rely on a normal distribution – a requirement for meaningful Alpha and Sharpe calculations. A 3-year track record gives investors the bare minimum required for a (theoretically) meaningful calculation. (Newfound Research LLC, 2016)

The problem, though, is that monthly data should not really be annualized as most consultants do – to multiply by the square root of time. This method would be fine in the absence of serial correlation, but stock returns have a great deal of serial correlation (momentum), so the calculation actually overstates the Sharpe ratio by as much as 65%. (Lo, 2002)

Okay, so we have to have a three-year track record because that’s the minimum amount of data needed for a calculation we know will be wrong, using time series that we have determined have no ability to identify which managers are going to outperform in the future. We then take the three-year requirement and establish a barrier to keep out managers who actually do have a likelihood of outperforming. That’s our framework for identifying excellence. Yikes.

The tools that have evolved over the years to help asset owners make really complex decisions are actually working against their best interest. These tools have had a disproportionate impact on women and people of color. The barriers to starting a new investment fund are high, and the likelihood of being able to keep an emerging business going for three years if you do not already come from a position of privilege is discouragingly low. Those three years have nothing to do with manager performance; they serve only to keep “the unwanted” out of the business, and asset owners are paying the price. Dismantling any entrenched system is hard, particularly when it has been wrapped in complex formulas and years of accepted practice.

We are well past due to escape from this fanciful world, this Lake Wobegon of investing that never actually existed. However risky it feels to step into the real world, it is time.

References
Aggarwal, R., & Jorion, P. (2008). The Performance of Emerging Hedge Fund Managers (draft). Unpublished.
Hendicks, D., Patel, J., & Zeckhauser, R. (1993). Hot Hands in mutual funds: Short-run persistence of relative performance. Journal of Finance 48, 93-130.
Liu, S., Ma, J., Shi, H., & Wang, C. (2017). The Performance of Emerging Managers and Funds. Minneapolis: Carlson Finance & Consulting Lab.
Lo, A. W. (2002). The Statistics of Sharpe Ratios. Financial Analysts Journal Vol. 58, No. 4, 36-52.
Luckoff, P. (2010). Mutual Fund Performance and Performance Persistence: The Impact of Funds Flows and Manager Changes. Gabler Verlag.
Newfound Research LLC. (2016). Are 3-Year Track Records Meaningful? Boston, MA: Newfound Research LLC.
Preqin. (2013). The Performance of Emerging Manager Funds. Company Website, Hedge Fund Spotlight.
Sharpe, W. F. (1991). The Arithmetic of Active Management.


The Madding Crowds

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By Susanna Gibbons, CFA
Managing Director, David S. Kidwell Funds Enterprise
Carlson School of Management, University of Minnesota

Susanna Gibbons, CFA

One of the things we constantly remind students of as they evaluate different stocks is the need to understand what the market has priced in. It’s a ridiculous question, really. If a stock is trading at $20 a share, is it because everyone thinks it is worth $20? Or because half of the world thinks it is worth $15, and the other half $25? Or any of an infinite number of combinations? How would we even know? Equity markets in the United States are sufficiently large to balance a really wide range of views, and that is the whole point of market efficiency. This understanding has driven most investors into passive investing strategies, particularly where markets are deep and liquid. There is collective wisdom even in the madding crowds, and sophisticated investors choose not to defy it.

It is fascinating to see how quickly we abandon that discipline when it comes to thinking about the market for U.S. Treasury Bonds. Certainly, there is a great deal of market segmentation that might lead to inefficiencies, but no one really makes that argument. The discussions have, for decades, centered on “how low-interest rates are right now”. Why would anybody buy bonds when interest rates are so low?

In a recent piece published by Morgan Stanley, “A Borrower Not A Lender Be”, Andrew Sheets argues precisely that. Economists at Morgan Stanley believe that economic growth is accelerating, and this justifies borrowing at current levels, but certainly not lending. The growth opportunities cited all provide excellent support for the faster growth scenario – increased spending on combatting climate change, higher infrastructure spending, higher levels of capital investment across all sectors. But there is a flip side to each of these coins. These investments all entail significant economic transitions, and unless we consider the losses that might also result, we have no context for judging the growth.

If you believe that capital markets are efficient – and Treasury Markets in particular – then you have to consider the possibility that there are a range of negatives which the upside-only view is missing. What could detract from the economic growth driven by these opportunities?

A lot. Just a few examples:

  • The climate transition involves lots of new spending on wind and solar power, utility scale battery, and new delivery mechanisms. The faster this transition occurs, the more quickly our existing infrastructure is displaced. Stranded assets in the coal sector have already become a problem, and this will ripple through to other fossil fuels based largely on the cost of extraction. 
  • Corporate Office Parks, an innovation of the Disco era, remain largely deserted. Executives are starting to crow about how excited people are to “return to work!” (as though employees have not been working all along…) but many remain reluctant for reasons both personal and pandemic. Hybrid work looks like the direction we are headed, rendering much of our existing infrastructure obsolete – but investment in the future appears premature. We don’t really know what the hybrid model looks like, so we don’t know what type of real estate we should be investing in. Increased spending on 5G and other forms of connectivity are paired with stranded real estate investments.
  • Municipal infrastructure needs are changing. Given the increased number of drought-impacted areas, it seems likely that we will need to completely rethink our model for water and sewer management. There are a wide range of technological solutions more suited to drought prone areas, and existing systems may need to be substantially abandoned or re-tooled.
  • It seems likely that in 5-10 years, automobiles will have shifted to an all-electric fleet nationally. Think about the impact on gas stations around the country. All of this existing infrastructure will be obsolete, even as new investments in charging stations ramp up.
  • Demographics are shifting in complex ways. The baby boomers are retiring, and moving out of their income producing years into their savings-depleting years. They are dis-investing. At the same time, Millennials are delaying or rethinking child-bearing. Population growth is unlikely to support increased economic activity.

More than at any time in my career, growth opportunities are abundant but paired with equally abundant opportunities for losses. The range of potentially stranded assets is breathtaking, as we re-think fossil fuel dependence, work modality, and the very structure of our families and personal lives. Capex cycles are usually driven by replacement, expansion, and secular shift – and today, it looks like we are facing some massive secular shifts.

What are markets pricing in? To repeat, it is a ridiculous question, but it seems more ridiculous to assume markets are wrong, without considering all the possibilities being captured by current prices. I happen to think we will see extraordinary growth in some areas, balanced by stranded assets, outdated infrastructure, and climate-related property damage in others. On balance, the outlook for economic growth is both rosy and grim, and probably close to zero over the intermediate-term – which is precisely what markets are implying.

When thinking about whether or not to invest in bonds in the current market, the issue is not how low-interest rates are. The issue is entirely around what level of growth we can expect, in the aggregate, going forward. The decision to borrow or lend should be based on what level of growth we expect in the future. Unfortunately, our expectations are likely predicated on a world that no longer exists. Nominal GDP has trended lower since 1980. In the 1990s, we dreamt of the nominal growth world of 8% from the 1980s. As the new century dawned, we assumed that the 5.5% of the 1990s was the new normal. Then 4.3%. In the last decade, growth was 3.9%. We believe ourselves to be looking forward but have always assumed a return to a yesterday just out of reach. Why should we believe at this juncture that we will finally, finally, recapture the past?  

Collectively, we continue to believe in the efficiency of markets. Individually, though, we each have the hubris to believe in our own non-consensus forecasts, even as we are proven wrong time and again. Things do change. Maybe this time will be different. Yes. Maybe this time.

And so once again, Charlie Brown lines up to kick the football…

About Susanna Gibbons, CFA

Susanna has over 30 years of industry experience across multiple asset classes – equities, alternatives, and fixed income; and multiple roles – analytical, portfolio management, asset allocation, and educational. She serves on the Investment Advisory Council for the Minnesota State Board of Investments, the Editorial Board for the CFA Society of Minnesota, and as chair of the Investment Committee for the Girl Scouts River Valleys. She is currently exploring the integration of Environmental, Social, and Governance (ESG) principles into decision making, is passionate about teaching sustainable investment practices, and is a fellow within the Institute on the Environment, University of Minnesota. She earned an MBA in Finance from the NYU Stern School of Business and is a Chartered Financial Analyst.

NDSU Presents: Navigating the Financial Markets

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Recap by David Camacho, CPA

Watch the Replay

I had the pleasure of attending North Dakota State University’s virtual Navigating the Financial Markets event. NDSU partnered with CFA Society Minnesota (CFAMN) in hosting three distinguished professionals in the asset management industry: Lisa Erickson, CFA (US Bank), Mark Simenstad, CFA (Thrivent), and Robert Thompson, CFA (Mairs & Power).

Lisa Erickson, CFA
U.S. Bank

The presentation kicked off with Lisa Erickson providing an overview of where she sees the economy today and some opinions on where we are going in the near future. In general, she recommends a glass-half-full portfolio orientation, where she is optimistic about the economy and markets but concerned about inflation. I certainly share her inflation concerns and so did the rest of the speakers, as it became one of the most prominent themes throughout the event.

Mark Simenstad, CFA
Thrivent Financial 

Mark Simenstad followed Lisa’s presentation by focusing on the dramatic reduction in economic stress that we are currently seeing in the US market. Factors such as resilient consumer demand and strong manufacturing production, additionally the booming housing market provides him with optimism for the market’s short-term performance. However, he also identifies inflation concerns on the horizon. I was interested in his view of the rapid economic recovery we experienced in response to the Coronavirus restrictions. Mark pointed out the “K” shaped economic recovery we are seeing – where certain sectors are taking off (tech, industries that facilitate working from home), while others are struggling (service, non-work from home industries). I certainly agree with him in identifying this as an area of concern and have also heard others refer to it as a “Y” shaped recovery – potentially accelerating industry trends that were already set in motion pre-pandemic.

Robert Thompson, CFA, CIC
Mairs & Power

Our final speaker was Robert Thompson. I was most interested in his comments regarding permanent asset growth resulting from the Fed’s actions post-COVID. In addition to touching on inflation, he mentioned my other great concern for the US economy – maintaining the dollar’s position as the world’s currency reserve. Certainly, we experience many benefits from this status and would face much steeper challenges were this to change.

The presentations by our three speakers concluded with a Q&A from the audience, with questions ranging from inflation to housing to monetary theory. I was quite impressed by all three speakers and want to express my sincere gratitude to Lisa, Mark, and Robert for sharing their experiences and knowledge with us all. Included below is a bullet point summary of some of their speaking points throughout the event. In general, we have a variety of reasons for optimism in our economy as we emerge from this long un-vaccinated stretch. However, some of the solutions the Fed implemented to cure our sudden recession have the potential to become ills in the future.

Lisa Erickson, CFA, US Bank:

  • Upfront conclusions
    • Recommend a glass-half-full portfolio orientation (optimistic on economy and markets)
      • Interest/Inflation a concern
    • Vaccination and Testing progress are key
    • Policy remains a key focus area
  • Despite early challenges, vaccination progress is accelerating
  • Financial Markets =/= economics
    • US moving towards expansion
  • Domestic earnings are projected to trend higher in 2021 and 2022
    • 21/20 YoY EPS Growth avg 28.3%

Mark Simenstad, CFA, Thrivent:

  • Dramatic Reduction in Economic Stress
    • Resilient Demand – Retail Sales (Gov Support)
    • Rebounding Employment – Claims Data
    • Resilient Manufacturing – Supply chains?
    • Housing – Boom times
  • Recovery Pulling Yields Higher
  • Bond Market and Inflation Expectations
    • Fed still buying 120B bonds / month
    • 10-year breakeven rate climbing, at 5 year high – market pricing in 2.5%
  • Earnings Need to Validate Market Surge
    • Forward 12M P/E Ratio vs Price – growing divide
  • Asset Class Universe – Returns and Yields
    • Treasuries taken a beating over 1 yr
  • Building Diversified Portfolios (MPT)
    • Optimal portfolios, efficient frontier
  • Market “Balance Sheet”
    • Vaccination effort in US asset, effort rest of world liability
    • Rapid economic recovery, k shaped economic recovery
    • Earnings/profit margins, supply chain issues
    • Unprecedented Fed Support, rising interest rate/inflation
    • Market breadth, historically very high valuation
    • Surging Fund Flows, Significant signs of speculation (BTC, SPAC, Coinbase)
    • Massive Fiscal Plans (Infrastructure), Potential Tax Hikes

Robert Thompson, CFA, CIC, Mairs & Power

  • The Fed and Federal Debt
    • Permanent Asset Growth
    • US Debt 21.7 T, 4.8T held by the Fed
    • Since 2/26/20, federal debt increased by 4.3T, 55% of that inc. Fed financed
  • Outlook
    • Economic Growth Post Pandemic
      • Fed Reserve (must maintain our currency reserve status)
      • Stimulus, Real Estate Outlook, Geopolitics, Global Debt Levels (unsustainable?), Crypto and SPACS (worried about SPACS being a bubble)
    • Market Outlook
      • Inflation (biggest concern), Interest Rates (chasing riskier assets seeking higher yields), Corporate Bond Spreads (should do well in current environment), Equity Market

CFA Society Minnesota Members Spotlight #4

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Samir “Sam” Murty, CFA
Principal, Senior Relationship Manager
Orgel Wealth Management LLC, with offices in Altoona, WI and Minnetonka, MN

Samir “Sam” Murty, CFA
Samir “Sam” Murty, CFA

Samir “Sam” Murty’s lifelong passion for music shines through whenever he performs in the Eau Claire Male Chorus or attends plays, symphony performances, operas or rock concerts in the city he calls home.  But it’s Murty’s pairing of that love of the arts with his expertise in fundraising and wealth management that is transforming Eau Claire, Wisconsin.

Since 2013, Murty has served as one of the lead fundraisers for the community’s 1,200-seat performing arts center that provides rehearsal, teaching and performance space for both the community and music and theater students at the University of Wisconsin-Eau Claire. The concert hall opened its doors in the fall of 2018, and Murty continues serving on its board and will soon begin his term as president.

“I was one of the first people to donate — sight unseen,” Murty said. “I just believed in the performing arts center’s transformative powers and what it could be for this community.”

Murty grew up in western Wisconsin, raised by a mother who was a physician and a father who worked as a chemical engineer for Pillsbury and General Mills. After graduating from the University of Wisconsin-Madison in 1999, Murty took a job as a consulting associate with Jeffrey Slocum and Associates, which encouraged him to seek and earn the Chartered Financial Analyst (CFA®) designation.

In 2004, Murty met Mark Orgel through his work with the Bethel University Foundation investment committee. Orgel was looking for a junior consultant to join the Mark Orgel Investment Group, which then was a brokerage practice under RBC Dain Rauscher with about $1.1 billion in assets under management. Murty shared Orgel’s vision of serving clients with integrity and excellence and ultimately joined Orgel’s practice.

Orgel, Murty, and several other partners went on to form Orgel Wealth Management in 2013 as a Registered Investment Advisor serving primarily high net worth and ultra-high net worth individuals, business owners, retirement plans, and non-profit organizations. Orgel Wealth Management has since grown to employ 61 people managing some $5.6 billion in assets as of December 31, 2020, and recently expanded by adding an office in Minnetonka, Minnesota. But Murty is most proud of the firm’s long-term relationships with so many clients.

“We don’t measure our success by our asset base,” he said. “We measure our success by the number of people we help and by the lives that we have changed.”

Murty serves as a principal and senior relationship manager at the firm while leading its foundation and endowment practice. He remains passionate about his community and getting involved, and he often works with non-profit organizations to teach them about fundraising.

Orgel Wealth Management, which recently opened a Minnetonka office to help it meet client demand, is patient when growing its workforce to ensure it hires the right people who embrace the firm’s client centric focus, Murty says. Its partners seek out people who inherently want to do the right thing, go the extra mile, ask those extra questions, and take the more difficult path if that’s the one that needs to be taken. Its relationship managers don’t allow calls to go to voice mail during business hours, and when a call or email needs to be returned, it’s returned that same day. Senior managers make sure they’re available for their clients on nights and weekends for urgent needs.

“If you lead with the right intentions and with excellent service, good things are going to happen,” he says.

The firm has also worked to expand its team and deepen its service offerings. Currently, clients have access to estate planning specialists who can help them understand the estate planning process and partner with clients’ attorneys to develop estate plans and tax mitigation strategies. In addition, the firm has added tax professionals who can assist with forward tax planning, identify tax-efficient ways to structure business deals, and analyze and develop complex tax-management strategies in concert with clients’ outside tax counsel. All of these services and professionals, with specialists located in both the Altoona and Minnetonka offices, are available to clients at no charge beyond the firm’s advisory fee.

“Our firm strives to provide truly comprehensive service,” he said. “In addition to our tenured investment professionals, we have legal experts, tax experts, and financial planners. Our goal is to be the first place that our clients call for any manner of question — financial sure, but also for anything in their lives. We consider ourselves problem solvers first.”

Orgel Wealth Management is 100-percent employee owned with no private equity investment, and the firm’s goal is to remain independent. Its growth is primarily through word-of-mouth referrals from clients, with zero dollars budgeted for advertising.

“We’ve had many, many opportunities to sell, but we want to remain independent,” Murty said, “because we think it’s that independent, entrepreneurial spirit that allows us to make the investments to continue to put our clients first, which in turn encourages their willingness to tell a friend.”

Orgel Wealth Management has seven CFA Charterholders, including Murty, and additional employees working toward the CFA designation. Murty feels it’s important to support those efforts much like Jeffrey Slocum and Associates did in the early days of his career.

“I really do feel that it is our duty as members to continue to promote the designation as the highest standard and highest designation in the industry,” he said.

Samir Murty, CFA, holds a Bachelor of Arts in economics and history from the University of Wisconsin-Madison, graduating with Honors.