Monthly Archives: April 2019

On the Road to Fargo

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Did you know that our name CFA Society Minnesota only tells 90% of the story? While the bulk of our membership indeed resides in the Twin Cities, we have healthy and thriving communities in Sioux Falls, South Dakota and Fargo, North Dakota. This broad footprint provides great opportunities to put investor’s first around the region.

Carol Schleif, CFA, Diane Senjem, Mark Salter and I took a trip up I-94 to the City of Far More, spending a day and a half in Fargo with Society members, local investment industry leaders, and students from North Dakota State University (NDSU). The centerpiece of the trip was the second annual rendition of “Navigating the Financial Markets,” a joint event between NDSU and the Society. About 200 current and future leaders watched as Jim Bianco, CMT tried to convince all that expansions get murdered instead of dying a natural death, Matthew Finn, CFA reflected on current versus future state of the industry, and Carol Schleif, CFA discussed having a long-term focus and gave ideas on hard vs. soft skills.

Prior to the keynote event we were invited to a meeting between the NDSU Bison Fund and their advisory board. Students in the Bison Fund manage a series of multi-asset investment portfolios, spending most of their time on in-depth bottom’s up equity research. Sitting through the meeting I came away impressed by the commitment of the faculty, advisory board and students, and I found myself reminiscing about my own experiences in a student run fund … twenty years ago in Fairbanks, Alaska. I must say that these students are much better prepared than I was at that stage of life, and I made myself a note to see how I might be able to give guidance to my old fund now that I’m on the other side.

To wrap up the first night we were joined for dinner by members of the Bison Fund, faculty at NDSU and leaders in the investment community. The good food brought people together, as is often the case. As we settled in, we shared our experiences, provided thoughts on the future of the industry, listened to struggles of taking path A or path B, and harkened back to the day when we faced those same crossroads.

On the second day we invited a smaller group, comprised of CFA Charterholder members and candidates, to breakfast to discuss global, regional and local CFA Charter Initiatives. The group also touched on ways to further the CFA Charter in Fargo and Sioux Falls including additional program opportunities and efforts to increase awareness and the candidate pipeline.

To close our time out west, Carol met with a group of young women who started a Women in Business Club at NDSU hoping to get to 10 attendees. They blew away that initial goal and have 80 members; the future is bright!

Our mission – advance professional excellence while promoting ethical behavior and fellowship through development and engagement opportunities for our members – is critical no matter where CFA Charterholders reside. While it is challenging to connect across the vast landscape, we are always up for a challenge!

If any of the above commentary sparks an interest in you to connect with our friends in the Dakotas, or if you reside in any of these areas and would like to learn how you can help out, please send our Executive Director, Mark Salter a note at executivedirector@cfamn.org

-Tom

Active Indexing with ETFs: Disruption and Implications: Event Recap

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By Eric Jacobs, Economics Student at the University of Minnesota

On Wednesday, April 11th, 2019, the CFA Society of Minnesota had the privilege of hosting Joanne M. Hill, Ph.D. Dr. Hill has over 30 years of experience in leadership roles at investment banks and asset managers with an emphasis on index and quantitative products, derivatives, volatility and risk management.  She serves as Chief Advisor for Research and Strategy at CboeVest, an asset manager specializing in option-based strategies. Dr. Hill also has worked for Goldman Sachs, Proshares, and higher education. Currently, she serves as the Executive Vice President of the “Q” Group and heads the Research Committee of the CFA Institute Research Foundation Board.  She is also a member of the Financial Analysts Journal Advisory Council and editorial board and was a Founding Member and Co-President of Women in ETFs. In her presentation, Dr. Hill discussed how ETF’s have disrupted investing, trading, and active management.

So how do ETF’s fit into current environment investment strategies and markets? ETFs have continued to evolve as the market changes to serve investor’s needs. In this new market environment, investors have been gravitating away from discretionary, active products and have shifted towards transparent index strategies, lower fees, and strategy-based ETFs. Active management is not dead, it’s just more active within passive strategies. ETFs are being traded actively, and investors who buy and hold ETFs take advantage of semi-active strategy structures from managers.

So why do they appeal to investors? ETFs have a broad range of holding periods and serve a large portion of investor needs. ETFs have attracted significant flows from retail investors, financial advisors, hedge funds, traders, and asset managers. Some key reasons they have grown in popularity are:

  • Access, Liquidity, & Price Discovery
    • On exchange via brokerage account – Can be bought, sold, & shorted like a stock, so simple to initiate and manage exposure over time.
    • Creation/redemption process keeps prices in line with underlying holdings.
  • Lower Cost > Performance Advantage
    • Low cost comes from index structure. Management fee and turnover is lower than most fund products. Lower embedded sales fees. Visibility of strategies and fees fosters competition. Do need to pay commissions to brokers and exchanges.
  • Transparency
    • Daily disclosure of holdings by ETF managers facilitates performance attribution, due diligence, understanding of investment objectives and risks.
  • Variety of Product Choices
    • Asset Class, Sector, Thematic, and Factor Strategies. Wide range of choices with easy access to analysis to compare features from sponsors, exchanges, and ETF websites (ETF.com, Morningstar, FactSet.)
  • Tax Efficiency
    • Lower turnover and capital gains distributions than most mutual funds from in-kind redemption feature
  • Investor Protection
    • Meet regulatory guidelines for stocks, fund products, notes in the country where they trade.

What is the new investment landscape with ETFs? There has been a 25% growth annually in ETFs since 2003, equating to five trillion dollars of market value. Going forward, ETFs are here to stay. They are getting more complex as companies look to service any investor need that there’s enough demand for. ETFs have recently extended past equities and into new markets. There has been significant growth in alternative, fixed income, leveraged, and sector-based ETFs in the last 10 years. As the ETF space becomes more competitive, we are likely to see the accessibility, complexity, and services of ETFs continue to rise.

Breaking up is hard to do – Global Central Banks Struggle with Normalization: Event Recap

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By Eric Jacobs, Economics Student at the University of Minnesota

On Wednesday, April 3rd, the CFA Society of Minnesota had the privilege of hosting Marvin Loh, Senior Global Rates Strategist and Emily Weis, Emerging Market Strategist of State Street. Mr. Loh and Ms. Weis presented their ideas on central banks, global custodial flows, investor holdings, and more, in their presentation Breaking up is hard to do – Global Central Banks Struggle with Normalization.

They discussed how, for the first time since the crisis, central bank balance sheets are expected to shrink. However, in this new normal environment for central banks, balance sheets still remain historically high. The G4 bank balance sheet has increased 400% since the crisis. Of the major world banks, the Fed has made the biggest strides in reducing its balance sheet, while the ECB and BOJ still remain high. Yet, going forward, the Fed will begin to wind down its balance sheet selloff practice as they pivot more dovish. In 2021, Mr. Loh believes we will hit an inflexion point and the Fed will begin to expand their balance sheet again, to keep cash levels consistent with excess reserves.

What caused this shift? Market jitters can explain a lot. The volatility from the December 2018 selloff has not been seen since the crisis, and caution remains in the market as recessionary sentiment continues to grow. Also, some market charts may be signaling trouble. GDP growth begins to roll over after two years of gains, and global expectations are beginning to slow.

How did we get this environment? Trend productivity growth and wealth shifting help explain what we are seeing. Productivity has been continuing to fall among developed markets since the mid 1990’s, and when combined with declining aged population growth, this creates adverse effects on real GDP growth. The shift of wealth concentration can also help explain the new environment. In the current environment, labor income as a percent of gross domestic income is declining while corporate profits, as a percent of gross domestic income, rises. The lowest median household income earners are now seeing salary decrease annually. This leads to a decrease in developed market consumption growth. Given this effect, central banks are pushed to policy to replace income with temporary wealth effects, pushing assets into bubbles. Going forward, this leads to slow growth and longer business cycles. In the future, sector stagnation or stagflation may be the next challenge for central banks.

What are investors doing? In the emerging markets, investors are getting back into currencies, however we have yet to see flows back into EM stocks. In the equity market, most investor money is still sitting in domestic markets, and hasn’t made it back to emerging markets.

In fixed income markets, investors are still cautiously watching the yield curve. While inversions have predicted the last seven recessions, there is at least some reason to believe that this time could be different. In the last 7 inversions, 3m-10yr, 2y-10y, and 5y-30y spreads have all inverted before the recession. This has not happened yet, as only the 3m-10y has inverted. Additionally, in each of the last 7 inversions, the Fed continued to tighten the fed funds effective rate. The Fed is predicted not to tighten anymore, as they try to construct a soft landing. When State Street surveyed institutional investors on whether or not this inversion would lead to a recession, 33% didn’t see a recession, 33% saw one within 18 months, and the rest were mixed in the 3-12 month range. In short, institutional investors are still split on what this current inversion means.

Fixed income investors are buying U.S. treasury bonds across all maturities. From a holdings perspective, investors are holding the ends of the curve, possibly creating upside on the 3-7 year maturities. Emerging markets bonds are also seeing increased capital flows. In currencies, The US dollar is currently in a weaker position compared the DM currencies, but still remains one of the best risk hedges. The Euro remains on the low end of its average, but if Brexit goes relatively smoothly there is upside.