Author Archives: CFAMNEB

Liquidity Risk – What Investors Need to Know Now

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Presented by Michael Bird, CFA, Senior Fund Manager, Money Funds, Wells Capital Management and Steven R. Malin, Ph.D., Director, Investment Strategist, US Capital Markets Research & Strategy, Allianz Global Investors

– Lucas Baker, CFA, Wells Fargo

Michael Bird, a senior fund manager for Wells Capital Management’s money market fund strategy and Steven Malin, formerly with the Federal Reserve Bank of New York and currently a director and investment strategist with Allianz Global Investors, discussed liquidity risks in the market, client concerns, regulatory and market factors affecting liquidity and potential sources of liquidity issues in the future. During the interactive discussion moderated by Tyler Carrington also of Allianz, Mr. Bird discussed some of the challenges of managing money funds in a post-2008 world. Alternatively Mr. Malin, leveraging his central bank experience, presented a macro tilt to the issue of liquidity risk and provided attendees with a glimpse into the Fed’s perspective.

Clients have exhibited increasing concern over liquidity risk and have taken a more direct interest in their portfolios questioning the composition of their portfolios to determine if they should diversify into alternative products such as an ultra-short bond fund instead of MMF.

With investors increasingly moving towards investment grade corporates instead of Treasuries, Mr. Malin questioned if the structure of the market had changed and described a seemingly barbell view on liquidity. He said liquidity issues have become more focused on Treasuries on one hand due to programmatic trading and one-way bets, and HY on the other hand due to a smaller universe of investors and higher inherent volatility. In the middle, high grade corporates have exhibited greater liquidity given the large size of deals and significant number of natural buyers.

When asked if and how they were being compensated for liquidity risk, both presenters said that liquidity was addressed during the security selection process. Mr. Bird added that he is currently seeing wider bid-ask spreads and more bid-wanteds driven in large part by the disintermediation of banks.

The discussion turned to regulations and their impact on liquidity. While Mr. Malin, citing his Fed background bias, noted that the financial system was unequivocally safer now than in 2007, Mr. Bird questioned the effectiveness of the SEC’s most recent amendments to prevent runs on money market funds. One unintended consequence has been the significant decline in the repo market due to the disintermediation of banks. Currently, the repo market is half the size it was prior to the financial crisis, requiring money funds to expand the universe of counterparties that funds repo with.

One of the more important discussion points centered on the evolution of trading and its impact on liquidity. Mr. Malin noted that the trading universe is much broader and dominated now by algorithms that move in the same direction, exacerbating price swings during times of increased volatility. Investors attempting to limit risk by “avoiding it” with a passive strategy such as an ETF or “outrun it” with a momentum strategy can find themselves in negative feedback loop as correlations increase along with volatility forcing portfolio managers to sell winners to raise cash and holding onto losers. To manage that risk, Mr. Bird’s company stress tests its portfolios for redemption shocks in addition to the other stress tests it conducts.

Going forward, Mr. Malin sees the continued evolution of trading – i.e. an expanding trading universe with more traders and faster execution – as a potential source of liquidity risk particularly in light of a heterogeneous market vis-à-vis companies, countries and currencies.

Finally, when the Fed finally decides to liftoff, the primary polity tool it will use to raise interest rates will be reverse repo, which could be problematic given current limits to that program. Mr. Bird expects the Fed to remove the current cap on the program to effectuate its policy.

Building Extraordinary Teams with Liz Uram, the Coach & Mentor Group

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-Chris Kelley, CFA

On Thursday, October 22nd Liz Uram presented on building an extraordinary team. Focusing on a topic different than the usual brought an eclectic group of leaders to the presentation, all of whom were interested in the soft skills of people management and leadership. Liz’s expertise in the industry as both a practitioner running teams at Wells Fargo and other financial institutions as well as her strong academic background resulted in a vibrant presentation that was very interactive with all the participants. Liz’s expertise in the industry as both a practitioner running teams at Wells Fargo and other financial institutions as well as her strong academic background resulted in a vibrant presentation that was very interactive with all the participants.  She touched on a variety different topics and industry research that showed a consistent level of employment dissatisfaction, even though billions of dollars has been spent trying to engage employees.

Liz touched on three basic take-aways that can eliminate the majority of the indecision and friction in most offices: 1) a 3 step process in setting goals that eliminates the noise of corporate bureaucracy. 2) Components for keeping performance feedback stress free and rewarding. 3) Surefire way to gain employee buy-in on strategic goals and direction of any firm large or small. Though not explicit in her presentation, my key take away is a classic 80/20 example. Taking a little more time and thought (20% more) can alleviate and eliminate 80% of your office and team issues and produce a more streamlined and well-run team. The presentation was informative and educational to all participants and I gained a great amount of value from it.

 

– Ildiko Hildreth, CFA

Liz shared the results of a 2014 Gallop Poll which found that 51% of workers are disengaged, 18% are actively disengaged, and only 18% are engaged. And, that this statistic has not changed much in recent decades. Wow! If that is not a reason to think that there is room for improvement in our work environments, I don’t know what is. After all, the more effectively we communicate, the better our teams function, and the better our performance.

So how does one foster more employee engagement? Liz discussed the importance of communicating goals and strategies to the team. Also, how listening is a key to employee buy-in. She laid out how a simple goal setting process based on a few key performance measures and behavioral standards can be tailored for each individual. And that when you let people know what is expected on the front-end, giving and receiving performance feedback can be less stressful.

I found the meeting to be thought provoking. In our profession, we all work and communicate with clients, portfolio managers, analysts, “the street”, and support staff. And, most, if not all, of these are teams in some shape or form. The trick is how to improve investment outcomes by building an extraordinary team.

If you are interested in a handbook that describes what Liz discussed and more, she invites you to request a copy by e-mailing her at liz@coachandmentor.net with the subject line ‘CFA handbook’. Additionally, Liz expects to release a book soon called Connected: Bridging the Gap Between Strategy and Execution.

2015 Financial Compensation Survey Results

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CompSurvey2015_LargeWe’re excited to release the results of our 2015 Financial Compensation Survey, the 3nd Annual in-depth look at compensation levels in Minnesota and the Dakotas, conducted by CFA Society Minnesota.

Click the image at right to download, at no charge, this white paper summarizing high-level survey findings in an easy-to-read format. In return for the white paper or for deeper data requests, please complete the contact form below. Your feedback is welcome and appreciated.

This year we expanded the survey across the entire Midwest region to include the Chicago, Cincinnati, Madison, Milwaukee, Nebraska and St. Louis markets. Coming soon will be a consolidated survey report for all these markets, providing you a directional benchmark not only against other financial and investment professionals in the Twin Cities, but also across the region.

Thanks for your interest!

 

Performance & Valuation Prime: Decision-Changing Analysis, From Arcane Accounting to Economic Reality – Event Recap

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by Robert Boucher, CFA

Valens Credit Strategist Joel Litman presented to the Society on the topic of adjusted fundamental analysis and discussed some of the unique tools Valens Credit applies in their analysis. Mr. Litman began by taking the audience through a number of examples of how, in his view, GAAP, IFRS and IAS accounting—both in design and because of management’s discretion—fall short in consistently providing measures useful for fundamental analysis.  Specifically he identified pensions, rents, R&D, acquisitions and divestures as areas an analyst should focus on and should consider analytically adjusting to arrive at adjusted cash flow and income measures. Importantly the adjustments have implications for valuation of both equity and fixed income securities, as equity analysts project growth and apply earnings multiples or discounted cash flow models; and as credit analysts focus on coverage and cash flow leverage metrics. Mr Litman also described how differences in incentive structures help to explain some of management’s accounting choices, with earnings per share incentives driving different choices than a cash flow incentive or a return on assets incentive. Unfortunately for the analyst looking for a quick fix, Mr. Litman says the only realistic approach is to roll up the sleeves and start digging.

In addition to performing the time-consuming work of digging into individual company financials, releases and other printed material, Valens also attempts to glean important nuggets from earnings calls and other recorded presentations using audio forensics tools. Mr. Litman describes Valens’ use of electro audiogram scanning technology to “listening” for cues in the tempo, timbre, tone etc, and that, for example, depending on the context, a management team signaling confidence and excitement in its cues can give Valens added confidence in growth prospects.

Mr Litman closed by framing the current credit cycle relative to historic measures through the lens of adjusted fundamentals, showing similarities to market signals from a century ago. Valens’ research suggests the U.S. is in the back half of a first stage bull cycle, with strong corporate profits, easing credit conditions around the world, credit demand that hasn’t yet moved into the important new-investment stage, and strong asset returns. On an adjusted basis, forward price-earnings multiples are still shy of prior peaks and capex is supportive of additional growth.

Joel Litman was an energetic and deeply knowledgeable speaker and, judging by the level of engagement throughout the presentation, the topic was an important one to attendees.

ESG Investing 101 – Event Recap

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Submitting by Amy L. Jensen, CFA, Investment Director, Northwest Area Foundation

On Thursday October 2nd the McKnight Foundation hosted a presentation by Mercer and Mellon Capital titled ESG Investing 101.  McKnight President Kate Wolford opened with a discussion of McKnight’s efforts to achieve greater alignment between the Foundation’s mission and values and its investments.  Laura Kunkemueller, Principal at Mercer, reviewed the vocabulary associated with ESG Investing, various methods that investors have to achieve better integration of values and asset class level opportunities and risks.  Exclusionary or negative screening has become much less of a focus, with investors showing more interest in positive screens, thematic investing, ESG integration into investment strategies as well as increased engagement.

Karen Wong, Managing Director and Head of Equity Portfolio Management at Mellon Capital, described how Mellon worked with McKnight in the creation of more carbon-efficient version of the Russell 3000 index, after the existing index was identified as the greatest carbon contributor in the portfolio. Although some advocate for divestment of companies that are owners of carbon assets, Mellon partnered with McKnight to develop a solution that reduces exposure to companies that produce more carbon per unit of sales than sector peers, minimizes tracking error to the benchmark and still allows opportunities for engagement with public companies. For more information on how McKnight is engaging companies you can go to http://blog.mcknight.org/2015/06/elizabeth-mcgeveran-fighting-climate-change-one-step-at-a-time/. The resulting Carbon Efficiency Strategy is a much more thoughtful approach than would be achieved through simple negative screening.

It was clear from the discussion that the creation of the strategy took time and required careful analysis and reflection on the Foundation’s true priorities as well as quantitative analysis of the index. McKnight’s hard work and collaboration with Mellon laid the groundwork for the creation of an investment product that is now available to other institutional investors. You can learn more about the strategy at https://www.mcm.com/web/mcm/carbon-efficiency.