Author Archives: CFAMNEB

Intellisight 2020, from a Student’s Viewpoint

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By Jason Chen
Financial Math Graduate Student at University of Minnesota

Jason Chen

I went to the presentations of all three financial companies (Physicians Realty Trust, StoneCastle Finance, and Piper Sandler Companies). I chose these companies because I am a graduate student majoring in financial math, so I’m more familiar with this topic in general compared with consumer goods, industrials, etc. I wanted to learn more about these financial companies, what they do, and what information they would choose to make public. It was a great opportunity for me to know more about the industry and gain more experience. What I took away from these presentations was probably not as comprehensive as other audiences because I am not an investor, and the content of the presentation itself was not as useful to me at present. What was important to me was the experience: I learned how companies would introduce and present themselves, their concepts in the business, and how to handle questions and other unexpected things that can happen during a meeting. So, overall, that was a very interesting and helpful event for me.

A virtual conference is very different than an in-person one, and my overall experience of Intellisight 2020 was very positive. I’ll list some pros and cons on both sides from my perspective. Virtual conferences are very convenient and easier to organize. Audiences don’t have to physically go to the conference; they could simply log on virtually sitting in their office/home. Likewise, the organizer doesn’t have to set up the conference room/building, and there is not a lot of equipment needed. Theoretically, conference organizers would save a lot of time/energy preparing for the conference. But, speakers will deliver much better content in the in-person conferences. Speakers will have communications and interactions with the audiences and the audiences are able to participate more directly. It was very hard to stay focused on a screen to follow everything the speakers said all the way from the beginning until the last session in the afternoon. I believe audiences get tired easier and can be easily distracted in a virtual conference.

I think the organizers did a very great job preparing for the conference and made me feel like they had done it virtually many times. There were no mistakes or technical issues I experienced. But there were things I feel like could be improved. Each session was very short and limited from the company side that 35 minutes were not enough for them to finish everything. So, typically they went fast, and as a listener, it was very hard for me to catch and follow everything, especially when there was one session after another. We couldn’t see the speakers, so staring at the slides for the whole time was easy to lose focus and we couldn’t just raise our hands to ask questions, but instead needed to type in our questions. But the speakers would pause to wait for questions, and it would take a few minutes to just answer a question. So, after a few times, the audiences just didn’t ask questions.

I would participate in a virtual conference in the future. I believe the main reason that not too many people asked questions during the conference was each session was too short. Most presenters didn’t have enough time for Q&As. They only had time to answer 2 or 3 questions. So, if presentations were longer in the future, I would definitely participate. 

Milton Friedman Was Wrong About Everything

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By Susanna Gibbons, CFA
Managing Director, Carlson Funds Enterprise
Carlson School of Management, University of Minnesota

Susanna Gibbons, CFA

In 2013, Paul Krugman wrote an opinion piece titled Milton Friedman, Unperson, in which he suggested that the Nobel Prize-winning economist had essentially vanished from the scene of economic policy-making. He highlighted two key points: First, not only is monetary policy not sufficient for management of an economic crisis, the Fed cannot even control the money supply itself using monetary policy. Second, the link between unemployment and inflation is tenuous at best, rendering it less-than-useful as a policy tool. We are seeing this play out today, as the Federal Government (at least initially) unleashed unprecedented fiscal stimulus in an effort to minimize the downside economic impact of the coronavirus-induced recession.

There is, though, another area where Milton Friedman’s influence continues to be felt. In 1970, he wrote an essay titled A Friedman Doctrine: The Social Responsibility of Business is to Increase its Profits. This piece rested on the same free-market ideology upon which he built his economic theories, and essentially laid the groundwork for the greed-is-good generation. On this point, in spite of the steady march of the country towards incorporating ESG factors into their decision-making framework, policymakers from the Department of Labor continue to rely on the Friedman Doctrine. They have proposed new rules, which would impose burdensome requirements on anyone who dares to mention an ESG-based argument.

These rules display a real fear that this mysterious “ESG” is really a socialist plot intended to saddle pensioners with weak performance while simultaneously forcing corporations to provide chakra-reading reports instead of profits.  The rules require investment managers to prove that there are no non-economic considerations at play, imposing a new burden on those who have developed robust ESG integration policies to prove they don’t benefit personally, while strangely assuming that managers who do not integrate ESG are somehow engaged in a better fiduciary process because they ignore, say, the long-run economic risk of climate change.

The backstory for the proposed DOL rule is the Friedman Doctrine. The theory of shareholder supremacy really came into its own as a result of the initial LBO wave of the late 1980s, when entrenched managers were forced out of power by corporate raiders. I was fortunate to be sitting in Delaware Supreme court to hear the management of Macmillan explain why they could ignore Robert Maxwell’s higher bid for the sale of the company, and found their self-described actions to be such an egregious violation of their duty of loyalty. The Delaware Supreme Court agreed with me 😉 noting in its decision that evolving law required “the most scrupulous adherence to ordinary standards of fairness in the interest of promoting the highest values reasonably attainable for the stockholders’ benefit.” [1] So there it was, shareholder supremacy enshrined in law, and I agreed whole-heartedly with that decision.

That law, so seemingly straightforward, has become increasingly complicated to apply. In its decision, the Court did not say anything about ignoring the long-run consequences of legitimate business choices. It said that the Board and Management could not make decisions for their own benefit instead of the general shareholder. It is specific with respect to timeframe – this was part of an auction process, so there was no trade-off between the time preferences of different owners. This is actually a pretty narrow situation that has become broadly applied.

For a going concern, the concept of maximizing profit is beguilingly simple, but in real life, managers are constantly presented with complex trade-offs between short-term considerations (earnings this quarter) and the long-term health of the corporation (investing in supply chain redundancy to protect against loss of key products in a pandemic). And that’s really what ESG is all about: forcing all of us to think about the complexities of those trade-offs.

The only way to make sense of the Friedman Doctrine is to extend it well beyond the plain text of the original essay. The long-run health of the corporation, and therefore its ability to maximize profits, depends entirely upon the health of the system in which it does business. If it ignores the welfare of its employees, the health and safety of its customers, and the viability of land upon which it rests, its value will deteriorate. The corporation is a creation of the state – it owes its very existence to a political act. To have the little Adam of our labors[2] turn on is, claiming it owes us nothing, is preposterous on its face. If the corporate form does not serve society, then we can get rid of it.

But what the heck do I know? Milton Friedman was a Nobel prize-winning economist, and I’m just a middle-aged Mom sitting in the basement doing laundry.

[1] https://law.justia.com/cases/delaware/supreme-court/1989/559-a-2d-1261-5.html

[2] This is a reference to Mary Shelley’s Frankenstein, in case you never actually slogged your way through it.

A Letter from Our President

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Chris May, CFA

Thank you, is all I can say. As we close out the 2020 fiscal year (Sept 1 – Aug 31), I do not need to rehash all of what has transpired over the past 12 months (and continues to plague us daily). However, I do need to say thank you to so many people. While most of you do not think about CFA Society Minnesota (CFAMN) on a daily basis, or even a weekly basis, the staff and volunteers at CFAMN do and continue to make this organization thrive. Like most organizations, we had to unexpectedly shift the way we operate in March 2020. While we are still working on the best way to deliver content and meaningful connections, we have made some serious progress in these endeavors.

Recently, Intellisight was switched to an entirely virtual conference, on top of transitioning to a new platform vendor. At the beginning of the shutdown, the annual Putting Investors First event was both moved to a virtual format and the discussion was changed to reflect what was happening in the world.  We also had near-record attendance at the socially distanced golf outing. The staff worked hard to deliver these events, and many others, while battling the Zoom fatigue that we all have come to know so well.

I’d like to thank several individuals and groups, beginning with the staff:

Mark Salter – joined as our Executive Director in 2012 and has led the CFAMN team successfully since. We are lucky to have him guiding the organization while remaining calm and positive despite the challenges faced.

Diane Senjem – As she entered her ninth month of pregnancy, she was still hard at work preparing events and leading volunteer committees. Her ability to work ahead, gave everyone some breathing room when she went on maternity leave in April. She is now back, and we are grateful for that!

Megan Millett – The newest member of the team and likely the least well known as a result. Megan joined in a part-time capacity in 2019 and then stepped up in a big way (Intellisight 2020) as she moved to full-time earlier this year. She has delivered under pressure with grace and humor despite being the new kid on the block.

Additionally, I’d like to thank all of our volunteers. Whether you have helped at an event, contributed to the blog, served on a committee, or on the board, your contributions are critical to our success. While I won’t name all those that have contributed meaningfully, I did want to thank two individuals.

Sam Somuri, CFA, CFP, CAIA and Mark Traster, CFA both completed their terms as board members after serving eight and seven years, respectively. Thinking back to where our organization was at the time when they joined, we have made incredible strides and they were significant contributors to that success. Thank you both – although neither of you are off the hook yet entirely J

Another component of our success is the support that we receive from our sponsors. While this may not have been the year that any of us were expecting, we appreciate that you have stuck it out with us while we are doing our best to continue to deliver a positive experience for our members. Without you, we would have to cut back on many of the things that our members enjoy most. Thank you for your partnership.

To conclude, I want to thank our members. This has been a wild year and we appreciate the incredible patience that we have received from you all. We know that in many ways we weren’t able to deliver some of what you expected from us this year. We continue to try out ways to provide engaging content and offer opportunities to develop meaningful peer relationships. The latter has been particularly tricky thus far. However, on a positive note there has been a significant acceleration of our plans to offer more digital content (a special thanks to CFA Institute for providing us access to Zoom). This was the swift kick that we needed to get over a few hurdles. Thank you for bearing with us while we continue to refine this. Check out our archived webinars here.

In a year when everyday things were so hard, it feels good to think back on the positive aspects and to fully appreciate them. Be sure to check out our 2019 Annual Report to catch up on other activities. In a world of polarization and division, inclusiveness and gratitude are in short supply. Please join me in spreading the latter by thanking someone mentioned above.

Again, thank you all. We are looking forward to an even better year ahead.

Sincerely,

Chris May, CFA
Society President

PS – If you have not yet completed our short membership survey, please do. I get it, no one loves filling out surveys, but it helps inform our plans and we would greatly appreciate your feedback. Thanks!

Musings from My Laundry Room

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By Susanna Gibbons, CFA
Managing Director, Carlson Funds Enterprise
Carlson School of Management, University of Minnesota

Finishing my 15th week of WFH (Work From Home), I feel an urge to reach beyond the bounds of my new home office, just to see if anyone is still out there. Friday afternoon in the laundry room is a uniquely great setting for thinking about the world in a relatively unbound way. I am not exactly unplugged, but I am somewhat insulated from the chattering of the Street, so I thought I might start chattering a bit myself.

Like many of you, I have been amazed at the resurgence of equities since March (past few days notwithstanding). The market is placing a significantly higher probability on a V-shaped recovery than I am, so I have been trying to unpack the data here and there, since I don’t really want to be right. And the retail sales number from June 16 is the perfect place to start, since it was a surprisingly strong number – up an eye-catching 17.7% compared to expectations of +8.4%.  Yes, I am aware that if you are down 14.7% and then up 17.7% you are right back where you started. The number was still a really positive sign and clearly leaned in favor of a solid v-shaped recovery.

I am also aware that Autos were by far the largest part of that number, followed by Furniture. I know we don’t go out buying cars every day, or furniture, and that it was heavily promotional, but it was still a positive sign. Americans have not forgotten how to spend money! The V-shaped recovery might be within our grasp.

There is also one little tiny category that was not only up strongly in percentage terms, but actually exceeded spending from 2019: Sporting Goods, Hobby, Book, and Music Stores. This category of retail spending sounds like a boomer throwback category if there ever was one….I mean, music stores? It’s one of the few categories of retail sales that has seen virtually no growth since 2008. And yet there it was, popping up out of nowhere. Naturally, I had to talk to someone younger to figure this one out. Was everyone really buying CDs from newly re-opened record stores?

Nope. According to my sources, people-younger-than-I have realized that going to a gym for a group fitness class might not be fun for a long time. In what I am labeling the Peloton Effect, it seems they have swapped their gym memberships for Pelotons, NordicTracks, Mirrors, Bowflexes, bikes, and in what surely is an act of sheer desperation, golf clubs. I asked my source, who was recently furloughed, how it made any sense at all to purchase a $2,000 piece of equipment at this time. Apparently, this particular household had been spending $250 a month on yoga memberships, $150 a month on studio cycling, and another $50 on an ordinary gym. Those have all been canceled, and they are now left with $70 a month to finance the Peloton for the next two-plus years, and $30 a month to join their online classes –zoom-for-bikes. (They also had to get a new couch to make room for the bike, so maybe that helps explain the furniture sales numbers.) Significant monthly savings.

The important point here is that large numbers of people are shifting their behavior in dramatic ways. They are swapping monthly studio payments (bad news for commercial real estate owners) in favor of equipment ownership. To me, that minimizes to some degree the bounce we saw in retail sales. Shoppers are back, but their behavior has changed, and it would be a mistake to extrapolate sales growth right now because we are caught in the middle of this seismic shift. We are seeing this shift in other ways, too. Nobody needs nice pants anymore, we only need one nice jacket, we don’t go to the dry cleaners, we don’t get our hair cut. We do need a new router or laptop. Retail businesses may be re-opening, but many of us are re-thinking how we engage with the world, and how we allocate our resources. There is some up-front capital cost to the shift, but that short-term pop might be the front end of a long-term down-shift in overall spending.

Or not. The reason my laundry room looks so nice right now is because I could finally renovate after getting rid of the 25-year-old Heavy Bag that was part of our mid-90’s boxing-for-fitness routine. It’s been on the floor for most of its existence. I’m not going to get sucked down that hole again. Plus, it’s 12 weeks right now to get a Peloton.

2020 Annual Dinner Recap

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Written by: Tharaniitharan Panchalingam, Junior studying Finance and MIS at the Carlson School of Management and Fixed Income Analyst at the Carlson Funds Enterprise

The 2020 CFA Society Minnesota Annual Dinner featured Rick Rieder at BlackRock, with questions moderated by Society volunteer Susanna Gibbons, CFA, Carlson School of Management. Rick Rieder is BlackRock’s Chief Investment Officer of Global Fixed Income, Head of the Global Allocation Investment Team in the Multi-Asset Strategies Group, a member of BlackRock’s Global Operating Committee and Chairman of the firm-wide BlackRock Investment Council. In addition to this, he is a member of the Borrowing Committee for the U.S. Treasury and is currently a member of the Federal Reserve Bank of New York’s Investment Advisory Committee on Financial Markets.

The presentation got off to a humorous start with Rick sharing how his multiple flight delays in New York had him running around the Downtown Minneapolis looking for our venue! After he gathered his breath, he went into what his day was like. In the morning, he presented to the New York Fed on his outlook of the global economy and the policies that ought to be implemented. After this Rick mentioned how he was on a call with Elon Musk to give his thoughts on Tesla’s expected share sale to raise capital. Rick concluded by saying that Elon Musk is probably the smartest person of our generation.

We then went into conversations about Fixed Income; Rick believes that debt is far too cheap and that we are in an environment where spreads are unbelievably tight but, there is still a massive demand for US based fixed income assets, which further puts pressure on the US and global economy. He also stressed that due to the nature of the market, Fixed Income managers must not “stretch in 2020” and that hitting five percent would be an accomplishment.

He also touched on technology and how companies that have significant investments in R&D are creating this “incredible growth paradigm,” while those that don’t invest aren’t experiencing much growth, if any.

This led to one question that caught my attention. Susanna asked Rick, “what do you think of Negative Interest Rates and what are commercial banks’ alternative?” Rick immediately responded with “I think that negative interest rates are the dumbest invention of all time.” He went into why and stressed that it breaks down the traditional investment paradigm and that in Europe, because of the way businesses operate, growth will be extremely hard to come by. Rick said that Europe needs to create “exogenous growth” by investing in innovation. Europe’s innovation is stifling and as a result, don’t benefit from the dramatic growth that it has the potential for. He also said that Japan is in the same predicament and that there may be a time in the future where Japan will default on significant portions of its debt.

We ended the night talking about equities being very cheap relative to credit and that we will see a turn or two in equity multiples over the next few quarters.

All in all, this was a tremendous night. Rick has such a wealth of knowledge and his ability to weave a coherent picture with the data he analyses is incredible. We had great food, great company and a very insightful hour-long conversation! We hope to have Rick back soon!