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Monthly Archives: November 2017

Spatchcocked

21st November, 2017 · Susanna Gibbons, CFA · Leave a comment
Susanna Gibbons, CFA

Always on the lookout for a better way to prepare a Thanksgiving dinner, I recently came across what I believe to be the latest and greatest method: Spatchcocking. By removing the backbone of the Turkey, you are able to lay the Turkey flat on a cookie sheet, and roast it in a little over an hour. According to my research, the bird will cook thoroughly & evenly, and the shortened roasting time (not to mention height in the oven) makes preparation incredibly efficient.

Interestingly, it appears that spatchcocking is also the rage on Capitol Hill. After a year with few achievements to show for it, there are many members of Congress who appear to have very little left in the way of a backbone. As a result, the current tax plan is being rushed through the legislative process at an incredible pace. Whether this level of efficiency is as desirable in re-writing the tax code as in cooking turkeys seems highly questionable.

As investment professionals, how can we make sense of this process, and incorporate the proposed changes into our analysis? I don’t think we can. There seems to be overwhelming agreement that the tax code is too complex, and needs to be simplified, and that taxes (especially corporate taxes) are too high, and need to come down. The headline grabbing number of reducing the statutory tax rate from 35% to 20% suggests that a lot more money will be dropping down to the bottom line, and this belief has fueled the continued rally in equities.

However, if you look at what corporations actually pay in cash taxes, the Companies in the S&P 500 are, in the aggregate, paying an effective tax rate of – you guessed it, 20%. If the deductions and tax breaks that currently riddle our system are eliminated at the same time, there shouldn’t be any drop in taxes paid. Instead, you will see a shift in the winners and losers. Some companies that currently pay next-to-nothing will have to start writing checks, and others will likely get some relief.

It is virtually impossible to anticipate all of the implications of such a significant structural shift in the tax system. The Commonwealth of Puerto Rico provides a cautionary tale as to the dangers of such dramatic shifts. In the 1970s, Congress passed Section 936 of the tax code to encourage manufacturing companies to locate on the island, which spurred growth. When the tax break was eliminated in the 1990s, it kicked of a long cycle of deterioration from which Puerto Rico has yet to extricate itself.

Now, I am not arguing that we ought to use the tax code to achieve such narrow policy objectives. In fact, I think it is a terrible idea. I mean – Section 936? That’s a lot of sections of code.  I do think that simplification is good idea. But unwinding this mess will be hard. Our entire economy has evolved alongside this current tax system over years, and companies have structured themselves, made investment decisions, and planned for a future based on that system. A complete and sudden shift will be economically jarring. There is enormous complexity to simplification, and the risk of unintended consequences will be high.  Before running off spatchcocked to push through this turkey of a bill, I really hope Congress slows down a little. Instead of ending up with a tasty roast, the long-term impact of hasty tax reform could be pretty foul.

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Posted in Hot Topic Commentary, Local Charterholders | Tags: Capitol Hill, Congress, investments, S&P 500, Section 936, Spatchcocked, Susanna Gibbons, tax changes, Tax code, tax reform, Thanksgiving |

Event Recap: “Inclusion in Investment Management: Beyond Checking the Diversity Box”

20th November, 2017 · CFAMNEB · Leave a comment

By Amanda Carter, CFA and Charles Hannema

The CFA Society of Minnesota hosted a panel discussion on the topic, Inclusion in Investment Management: Beyond Checking the Diversity Box on October 4, 2017. The panel was facilitated by Kim Brustuen, CFA, SVP and National Sales Manager – Corporate Treasury, US Bank with Colin Lundgren, CFA, Global Head of Fixed Income at Columbia Threadneedle, and Paul Smith, CFA, President and CEO of the CFA Institute, as panelists.

In response to questions prompted by Bruestuen and the audience, Lundgren and Smith articulated how Columbia Threadneedle and the CFA Society defined diversity within their respective organizations, how definitions vary across different global constituents, and how having a diverse talent pool has benefited the investment management community.

Kim Brustuen referenced a McKinsey & Company white paper, Diversity Matters , in her comments and questions. The McKinsey paper cited analysis showing a statistically significant relationship between a more diverse leadership team and better financial performance. Much of the discussion centered on gender diversity and why, although strides have been made at entry level for women, there are still significant concerns about gender diversity in senior management. Paul Smith noted that female candidates outside the United States comprise a much larger percentage of candidates in the CFA Program.

The discussion, in our opinion, prompted more questions than it answered, particularly with respect to diversity that is not gender related. The evening reinforced the value of deliberate inclusion of diverse thought and background while prompting the need to expand the discussion.

    

Additional event photos are located on our society Facebook page https://www.facebook.com/cfaminnesota/ 

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Posted in Local Charterholders | Tags: Ameriprise, CFA, CFA Institute, CFA Society Minnesota, Changing Perceptions, Colin Lundgren, Inclusion, Kim Brustuen, Lumber Exchange, Paul Smith, Women in investment management |

2017 Alpha and Gender Diversity Conference

20th November, 2017 · Teri Richardson, CFA · Leave a comment

Two months ago, I attended the third annual CFA Institute conference on gender diversity in investment management. What really stood out to me was how the conference has evolved since the inaugural conference two and a half years ago. The conference was initiated as a result of the Women in Investment Management initiative CFA Institute has embarked on. Many of the sessions at the first conference were focused on the experiences of women in the industry, and how they found success. The second conference was filled with substantive sessions on the research and data available to make the compelling business case for diversity in decision making. Overall, this year’s event was positive, uplifting and intriguing enough to make me think about attending the next conference.

This year, the agenda built on the success of the earlier conferences with valuable sessions on effective strategies for improving gender diversity. Topics included: an update on gender diversity research, how firms can improve their competitive edge with gender diversity and insights from the C-suite regarding career advancement. In addition, Paul Smith, CFA, President and CEO of CFA Institute discussed his expectation that the lessons learned from the initiative to increase gender diversity will be used to improve other types of diversity in our industry.

I honestly cannot tell you which session was the most informative as most were. There were more than a few interesting surprises.

The first session was an update on new gender diversity research.

Heather Brilliant, CFA, Vice Chair of the CFA Institute Board of Governors and Managing Director of First State Investments session was titled “Improving Diversity: What Really Works?” She began with statistics from the CFA Institute Research Foundation:

  • 45% of investors believe gender diversity does not matter for managing investments
  • 66% of women in the industry have most of the dependent care responsibilities

Could these realities be holding women back?

She then discussed why diversity is not the answer. A 2016 Harvard study found mandatory training leads to disengagement and backlash, and biases can be difficult to train around as we are not aware of those biases.

The researchers from Harvard found that engagement, exposure and accountability do work. In practice, college recruiting programs are effective, task forces and rotation programs are effective ways to provide exposure. You can find the Harvard study and several other relevant articles here.

Heather made two recommendations that were surprising to me. First, she recommended a structured process for talent acquisition – no panel interviews (which I used to like because I did not have to answer the same questions several times with equal enthusiasm), keep potential vs. performance in mind for all candidates and employees and that, contrary to what many believe, formal mentoring works. And here is the most surprising comment: she recommended considering quotas because they can increase female leadership which leads to policy influence. Surprisingly, gender quotas do not lead to back lash among citizens. (I did ask her to define what “quota” meant to her and she indicated that targets tend to not have enough accountability, and she stressed you must not consider unqualified candidates). I should note a speaker from another session had the opposite opinion of quotas.

Brad M. Barber, Associate Dean and Professor of Finance as University of California, Davis continued the update on research with an overview of recent studies related to the impact of role models, and math training on young women choosing a career in finance, in other words, the pipeline issue. This might not be surprise to many of you, but I was surprised the research indicates that role models matter.  (I was oblivious to the fact that I did not have a single female math teacher in high school or college). Barber also proposed we develop mentorship programs for women.

I was not surprised to see Dana M. Emery, CFA, CEO of California based investment management firm Dodge & Cox.  Her leadership is no doubt responsible for the culture of the firm. A few weeks after last year’s conference, I had a due diligence meeting with several people from the firm at their office and saw firsthand that this firm has been operating for years (you could not create this culture overnight) with many of the practices that data and research indicate lead to better decisions and a better business. For example, diverse opinions are not only encouraged, they are expected in the decision-making process and team work is the norm. The performance of the funds speaks to the success of the business. (The following is a link to an interesting study “Top Performing Equity Teams: The Common Factors They Share.”

Two comments from a speaker named Colleen Morehead, Chief Client Officer at Osler, Hoskin & Harcourt LLP are worth mentioning. Her session was about purposeful leadership. She encouraged everyone to harness their authentic voice and use it to their advantage. And, she reminded us that biases are merely shortcuts we are built with – they are neither good nor bad. We just need to be aware of them.

The information from this year’s conference supports the direction of CFA Society Minnesota’s initiation, Changing Perceptions. We have evidence our approach to make gender diversity in our industry visible (role models, mentors, speakers) can have an impact, and more ideas for furthering our MN initiative locally.

The next conference will be held September 20-21, 2018 in San Francisco. CFA Society Minnesota’s Past President of the Board of Directors, Leyla Kassem, CFA is on the organizing committee for this event so we can expect another valuable conference.

Teri Richardson, CFA
Changing Perceptions Initiative Chair

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Posted in Hot Topic Commentary | Tags: Alpha and Gender Diversity, career in finance, Changing Perceptions, gender diversity research, investment management, pipeline, purposeful leadership |

The Evolution of Advice through Digital Technology

14th November, 2017 · CFAMNEB · Leave a comment

By Joseph G. Ogega, a student in Financial Mathematics at the University of Minnesota and CFA level I candidate.

The Evolution of Advice through Digital Technology

On Tuesday, November 2, 2017, CFAMN hosted a presentation by Randy Bullard, General Manager-Wealth Management for SIGFIG Wealth Management LLC- an online wealth advising company based in San Francisco, CA. Bullard shared his perspective on digital advising, and how likely it’s going to impact financial advising in the future.

How did it start?

Mr. Randy believes that, whereas there may have been some form of digital advising prior to 2007/2008, it is after this period that most start-ups sprang to life, providing digital solutions/advice to address the aftermath of the financial crisis. This space was later explored by Fortune-500 companies through acquisition of these firms.

Why is this happening?

Increase in digital consumption, adoption and technology advancement in robotics, systems integration vis-à-vis account aggregation, have accelerated switching to forms of digital advising. Bullard further believes, collapse of active asset management and introduction of passive indexed investing at a cheaper cost in most asset classes, may have been a catalyst as well. Also, the initiative to promote transparency to stampout bad practice and compress service fees (from 250 bps to 50 bps), significantly contributed to embracing digital advising. The success realized so far is believed to be anchored on the basis that, application data science on digital advising is easily quantifiable and measurable.

Which are the operating models?

He highlighted the following operating models that are applied in practice i.e.:

  • Self -service advice
  • Advisor led, digitally enabled
  • Hybrid on-line /call center
  • Local office experience

Perceptions of Financial Advisors towards technology

According to Bullard, FAs believe that advancement in digital technology provides a fluid way to interact, engage and educate clients as well as provide platforms through which firms can collaborate. Moreover, FAs have witnessed significant growth in business through leveraging social media to build brands and improve client experience (e.g., Client retention ↑ 77%; Assets under Management ↑74%; Client Interaction ↑73%).

Conclusion

Bullard predicts that in the near future, there will be fewer FAs who will primarily focus on adding value to high net-worth clients with some form of wealth complexity. He foresees that today’s traditional financial advising will evolve into a superior sophisticated full service, with capabilities of digital advice at a lower fee (<25 bps), and consequently wealth management firms will transition into digital advice as their primary source of service delivery.

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Posted in Hot Topic Commentary | Tags: digital advising, Digital Technology, SIGFIG Wealth Management LLC, wealth advising, wealth management firms |

EM Markets Outlook Event Recap: Solid Recovery Underway

7th November, 2017 · CFAMNEB · 1 Comment

By Andrew Carlson, a student at the University of Minnesota Carlson School of Management majoring in finance and history

Pronouncing the resumption of long-term growth in emerging markets (“EM”) bolstered by more structurally robust political economies, Jan Dehn, Global Head of Research at Ashmore, spoke to CFA Society Minnesota on October 31, 2017 over an investment climate he finds favorable to EM. Succinctly, his thesis leverages pro-growth dynamics in EM, from both economic and financial perspectives, in the midst of fading developed market QE trades to argue for allocation shift to the class.

Dehn has a wealth of experience in emerging markets, having served the Ashmore Group, a British fund manager, in research and strategic roles since 2005 and with previous EM background at Credit Suisse and the World Bank.

Core Thesis

Convergence, the principle of emerging market economies realizing their development potential after the Cold War, appeared fantastical as the Asian and Russian financial crises of the late ‘90s portended a volatile road to growth. The principle resided on a dearth of capital in emerging markets that, when mixed with the underfinancing of labor, would yield higher ROIC, but institutional investors instead took the EM trade as a proxy for risk-on/risk-off, selling the asset class wholesale even in unrelated crises.

Interestingly, the trade may be have returned. Since the ’98 Russia crisis, all +10bps VIX spikes came from developed market sources, while structural shifts in the EM economies made many less dependent on fickle commodity revenue with negative feedback loops involving currency depreciation and foreign divestment. Practically, as Dehn, notes, a roughly $100T fixed income market with only $20T being EM-issued does not match the 60% of global GDP yielded by emerging markets. Furthermore, the development of domestic pension funds smoothens potential fx crises and puts a floor to the risk-off trading behavior of the past.

Expectation

QE trades (longing USD, USD equities, German sovereigns) bet on the buying power of developed market central banks, distorting a global economy that now must slowly reallocate capital to the EM private sector where meaningful growth can be expected. Concurrently, fears of Chinese crises engulfing emerging market bonds may be overblown as the fundamental data demonstrates a greater importance of intra-EM trade for these sovereigns with China having a much more prosperous connection/tether to developed markets.

Summary

Ashmore lists a few key takeaways to understand the thesis and some possible iterations of the trade

  • “A longer-term EM recovery is now underway based on value, fundamental, and light positioning”
  • “Positioning in EM assets remains extremely light”
  • “Strong EM fixed income value proposition”
  • “EM equities – a structural growth play still priced as a cyclical story”
  • “EM currencies have significant upside after 5 years of decline”
  • “EM growth premium is back”
  • “EM is a safer bet as populism engulfs Developed Markets”

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Posted in Hot Topic Commentary | Tags: Ashmore Group, Convergence, Developed Markets, emerging markets, intra-EM trade, Jan Dehn, QE trades |

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