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Monthly Archives: June 2015

Standing Out in a World of Asset Management

22nd June, 2015 · Tom Brakke, CFA · Leave a comment
Tom Brakke, CFA

The CFA Institute Research Foundation Board of Trustees met in Minneapolis recently. In conjunction with the visit, CFA Society Minnesota hosted an event which featured talks by Paul Smith, the new CEO of CFA Institute, and Brian Singer, head of William Blair’s Dynamic Allocation Strategies team and a trustee of the foundation.

Smith spoke briefly about his first five months as CEO, focusing primarily on improving the value proposition that CFA Institute offers to its existing charterholders. He stressed the word “standards,” saying that the organization needs to be vigilant in protecting the standards that apply to the awarding of the CFA, CIPM, and Claritas designations. In addition, in his estimation, CFA Institute must continue to be outspoken in improving how the investment industry operates and how professionals meet the needs of their clients.

The latest event in the Distinguished Speakers Series, Singer’s presentation challenged the entrenched orthodoxy of today, which he said is due in part to the success of the CFA program. The foundation of that orthodoxy is Modern Portfolio Theory and related ideas, the assumptions of which Singer called “inherently yet quaintly stupid.”

He urged the attendees to consider the traditional notion of equilibrium versus the operation of a complex adaptive system. One is static, the other dynamic. One linear, one not. One characterized by complete information, no errors or biases, and no “endogenous novelty” – the other featuring incomplete information, plenty of errors and biases, and differentiation, selection, and amplification effects that cause distortions that aren’t immediately corrected.

When asked which they thought represented the market environment in which they work, audience members voted overwhelmingly for the latter. However, even though that is his thesis, Singer said both perspectives are important to understand if you are to be successful as a professional.

Singer disputes the notion that the fundamental value of an asset is reflected in its current price, but rather believes that fundamental value serves as a gravitational force for price over time. Therefore, he thinks that a short summary of a sound investment process involves three basic questions: Where do prices differ from fundamental value? Why do prices differ from fundamental value? How can those value/price discrepancies be captured?

While he talked about the hot topic of Greece to illustrate how his team uses game theory to assess the objectives of geopolitical (or market) players, perhaps Singer’s most interesting commentary concerned the structuring of his organization versus others.

He eschews the traditional approach, where analysts seek more and more information and then try to sell their ideas to portfolio managers, thinking that it leads to behavioral errors and a torturing of data in search of an answer. Instead, he wants his group to create “deductive frameworks” that don’t look like the decision tools that others use. For one thing, he says, in contrast to others, “We don’t need that much information.”

The key is to create a structure in which to organize information that focuses on the most important elements of a decision – and to staff the organization in a way that brings diverse points of view to the table. That means hiring individuals with different cultural, educational, and work backgrounds. Each puts forth his or her opinions privately, in advance of a discussion, so that the range of views within the group is accurately conveyed before debate is dominated by the loudest and most powerful voices.

Singer stressed the importance of being clear about the information at hand prior to making conclusions. What is fact and what is opinion? We can lose sight of the facts, because the rush to form opinions often overwhelms the process of thoughtful analysis.

In Singer’s eyes, the world of asset management as we know it has evolved on the basis of outmoded theories, no doubt reinforced by the career risk that keeps investment professionals from straying too far from the crowd and the organizational structures that haven’t really changed in decades.

It’s time, he says, to rethink your approach and “put a stake in the ground about what you believe.”

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Posted in Hot Topic Commentary, Local Charterholders | Tags: Asset Management, Brian Singer, CFA Institute, Dynamic Allocation, Game Theory, Paul Smith, William Blair |

What’s an SEC Review and Why Should You Care?

15th June, 2015 · John P. Gavin, CFA · Leave a comment

The first in our “SEC Basics” series, this video introduces you to

  • The SEC’s Division of Corporation Finance
  • What Goes into a Review
  • SEC Comment Letters

Let me know what you think or other topics you’d like videos on.

John P. Gavin, CFA
Founder and CEO
Probes Reporter, LLC
feedback@probesreporter.com
Or click here to use our online Contact Us form

 

About Us | Probes Reporter, LLC

Probes Reporter™ is an independent publisher of investment research.  We gather data and records on public companies, analyze them, and publish our findings.  Our focus is in the area of public company interactions with the Securities and Exchange Commission (SEC).

Probes Reporter, based in Minnesota, was founded by John P. Gavin, CFA.  Mr. Gavin is is a holder of the right to use the Chartered Financial Analyst (link is external)® designation.  He has over 30 years of experience as a professional investor & entrepreneur.

Probes Reporter’s origins date back to 2000, when Mr. Gavin started SEC Insight/Disclosure Insight. Disclosure Insight™ is now a trademark and research product line belonging to and produced by Probes Reporter.

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Posted in Hot Topic Commentary, Local Charterholders | Tags: Comment Letters, Division of Corporate Finance, SEC, SEC Review, Video |

The Hazeltine Indicator

12th June, 2015 · Tom Brakke, CFA · Leave a comment
Tom Brakke, CFA

Even before American Pharoah captured the Triple Crown, someone had looked back to see how the market had done historically in the wake of such a feat.  Bespoke Investment Group showed the performance of stocks in the years when a horse won all three races, and it wasn’t very good.  As is the case these days, the piece from Bespoke was tweeted and retweeted and pasted into blog posts and talked about by market pundits.

In a posting for Bloomberg, Barry Ritholtz warned against such dangerous connections between correlation and causation – including the most famous supposed relationship between stocks and sporting events, the Super Bowl indicator.  Nonetheless, come February, we will once again have it thrust upon us by those more interested in generating traffic than delivering enlightenment.

It’s in good fun, isn’t it?  Supposedly, but the problem extends into more serious corners of market discourse.  Anyone with a computer can plot two variables across time and, using different Y-axes, make it look like there’s something there.  In a manner of minutes the image can go viral and soon everyone is using some of their valuable time to talk about it.

Such methods are not just the province of amateurs touting their ideas online; reports and presentations prepared by professional investors often contain questionable charts and weak assertions.  The silliness of the relationships might not be as obvious as those of the Super Bowl indicator or the Triple Crown indicator (which is now destined to be tracked and reported on going forward), but the weaknesses in the logic are there just the same.

(One interesting sidebar.  Note that the Bespoke compilation did not include the results of the market in 1919, when Sir Barton won the Triple Crown.  No doubt that’s because investors are trained to think that history started in 1926, when the Ibbotson series does.)

These recent events reminded me of “the Hazeltine indicator,” which I first commented on in early 2008.  I was the historian of Hazeltine National Golf Club for many years and I wanted to write an entertaining piece for the club’s newsletter.  Hazeltine was getting ready to host the 2009 PGA Championship at a time when the first cracks of what became the world financial crisis were starting to show.  I had previously noticed that in advance of each major event at the club, there was a notable bout of economic trouble.

As you can see from the end of the newsletter story, which appears below, I gave a seven-year warning to the members to prepare for weakness this year, since Hazeltine would be hosting the Ryder Cup Matches in 2016.  If things start going haywire soon, remember:  You heard it here first.

Investment professionals are always searching for relationships in the past that they think will tell them something about the future.  A couple of years back, I hit upon one such indicator.  A sentence in a recent New Yorker article reminded me of it.

Talking about the current angst regarding the economy, it said, “It’s 1929, 1969, 1981, 1990, 1997, or 2001 all over again.”  Now think about when we have hosted men’s major championships:  1970, 1991, and 2002.  You can even throw in the Senior Open in 1983.

That’s right, each of those championships was hosted right on the heels of economic weakness.  Despite the difficulties that arose from the tight corporate and consumer spending following those slumps, Hazeltine has always managed to outperform expectations.  That is a testament to our members and other volunteers.

Right on schedule, the economy is now wobbly in front of next year’s PGA.  If you didn’t get your portfolio positioned well to take advantage of it, remember that there’s always another championship coming to Hazeltine.  Mark your calendar now to be prepared for the weakness in 2015.

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Posted in Hot Topic Commentary | Tags: American Pharoah, Hazeltine |

A Day in the Life: Investor Relations – Event Recap

9th June, 2015 · CFAMNEB · Leave a comment

–Austin Bogestad, Hill Capital Corporation, Level I Candidate

The Day in the Life event held on June 8th was led by Terese Wilke, CFA, a senior investor relations specialist at Capella Education Company.  Terese addressed the unique challenges associated with effectively communicating a public company’s story to a broad audience of investors. Terese described her career path and past experiences as a fixed-income and equity analyst, and how these experiences have helped her in her current role by allowing her to appreciate the perspectives of the investors and analysts she speaks with on a regular basis.

All in all, it was an enjoyable luncheon that provided many insights into a growing and increasingly relevant role that seeks to facilitate a meaningful dialogue with investors, improve investor decision making, and support the stability of capital flows.

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Posted in Hot Topic Commentary, Local Charterholders | Tags: A Day in the Life, Investor Relations |

The Portfolio Puzzle – A Defense of Active Management – Event Recap

9th June, 2015 · CFAMNEB · Leave a comment

Presented by Greg Stalsberg, CFA, CAIA Director of Capital Markets Research at Slocum and Scott Tonneson, CFA Vice President, Senior Research Analyst and Co-Portfolio Manager at Nuveen

A filled room heard from two industry experts on how the use of active management (vs. passive), in their opinion, is not a simple all or nothing decision. There are critical factors that go into the use of active (and passive) investment strategies that revolve around an in depth knowledge of the client, strategic vs. tactical asset allocation and the current market environment.

From Greg’s perspective as a consultant, there are certain asset classes/spaces that tend to be more efficient, and therefore difficult for a meaningful percent of active managers to consistently outperform. US large cap stock, for example, is a space that was noted as being relatively efficient. The excess return of the outperforming funds tends to be modest and perhaps not enough to compensate the investor for the periods of underperformance. This is a space where using passive investments and just capturing the low cost beta could be appropriate. Greg did mention that there are good US large cap active strategies, however you need to invest the time and resources into proper due diligence. The story is different for US small cap and international stocks. Research has shown that a greater percentage of active managers have been able to outperform in these spaces. Furthermore, the outperformance of the active (US small cap and international) strategies has been more substantial.

As the title of the event alluded to (“A Defense of…” not “The Defense of…”), it really is not possible to defend all active management with a single point. This is because there are numerous types of active management styles. So how does one sort through the universe of active investment strategies? Scott mentioned a few metrics to review when analyzing active strategies. First was active share. Academic studies have shown that funds with higher active share have in general been able to add more value. Secondly, it is also important to know if a portfolio manager invests personal money in the fund they manage. A manager that has “skin in the game” is important for alignment of interests. Lastly, the investment process should be transparent.

Scott noted the importance of patience with investment selection as it can take time for an investment thesis to pan out. Over the last several years, low market dispersion, Fed stimulus, and cash drag have weighed down the performance of some stock pickers. An active manager may underperform for a few quarters before periods of outperformance. Short term performance comparisons, although relevant, should not play a large role in decision making. Markets go through cycles and mean reversion is a powerful force. Some research has shown a strong correlation between active manager outperformance and rising interest rates, which could mean more active managers outperform in the coming quarters.

In a world with countless investment strategies, non-stop media outlets, and never ending distractions, both Greg and Scott agree that remaining focused and following your investment policy is important to avoid making the wrong decision at the wrong time.

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Posted in Hot Topic Commentary | Tags: A Day in the Life, Portfolio Management, The Portfolio Puzzle |
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