Category Archives: Local Charterholders

One of These Things Is a Lot Like the Others

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John Boylan, CFA

Oddly enough, I remember the first ever Sesame Street way back in 1969. My kindergarten teacher sent a note with us home telling us about a wonderful new PBS educational TV show specifically for us rug rats. Back in those days Oscar the Grouch was orange and they used to play a game on that show called “One of These Things Is Not Like the Others.”

This taught me a lot about relationships. Some things are indeed like the others, while others are not. Frequently us on Wall Street forget that and classify things where things are surely not where they should be.

One thing that drives me nuts about this industry is the monolithic thinking it often gets itself into. Staples analyst are staples analysts. Health Care analysts would never understand tech and so on. In reality sector boundaries are completely artificial and ignore business realities on how managers run their organizations.

In my opinion analysts don’t follow companies, or even sectors. What we really strive to do as analysts is discern superior business models and business structures (i.e. how are they set up financially to support the business model) and invest in those that offer intrinsic value compared to their current stock price. Sector membership in reality is immaterial to how investors should view a company.

Therefore I find more investment cycle commonality among companies with similar business models than ones that are reside in similar business sectors—much like managers view their own businesses. Certain models are influenced more by consumer sentiment ebbs and flows, others by recurring revenues, and still others by fluctuations in the business investment cycle—things that transcend belonging in a particular sector. Investors can take advantage of those commonalities as each business model has similar investment cycles. There are many more types of models but many companies fall in to one of those three buckets—let’s use the Information Technology sector as one such example.

For instance most semiconductor companies have heavy cyclical components based on a predictable business investment cycle, not unlike most late-stage industrials—the semi cycle is just faster and tougher to time. You usually want to purchase those companies the same way you would with a stock like CAT; when absolutely no one believes anyone will ever buy one of their products for a long time. Software companies are essentially recurring revenue companies and can often be valued on those razor-razor blade revenue streams, e.g. not unlike some medical product companies. However, with the advent of cloud delivery of software, we can see a day when software companies become more cyclically driven like their semi brethren. Finally, some tech companies are primarily driven by consumer sentiment, usually driven by a product introduction cycle, as they are essentially consumer discretionary items—media content delivery and consumption devices. Herein lies Apple.

For example, I sometimes think one of Apple’s best comp companies in terms of the way it is structured, and the mind-set of the company as a whole is Nike. Both are highly innovative companies that have rabid followings in an oligopoly market structure. Distribution channels are crucial for both companies and their products are vitally important for their retailers to carry, but both Nike and Apple also utilize their own storefronts to satisfy the information needs of their “power users” and for promotional purposes. Both offer products that are performance driven, yet can be used as fashion accessories. Both companies have significant opportunities in emerging markets as newly formed middle classes strive for high quality western goods and brands. Finally, this is why new product releases are so crucial to both Nike and Apple—both companies need product refreshes or new product categories to satisfy changing trends with consumers and counter other product releases from competitors.

Would it not make more sense to organize a research division based upon business models? To an outside entrepreneur, I think it would. It certainly would force us to focus on those items that truly drive the business as opposed to simply the S&P sector it resides.

So perhaps one of these things is not like the others, at least the way Wall Street defines it.

Panel Discussion on Conscious Capitalism

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Mary Daugherty, CFA

FEI (Financial Executives International) and the Minnesota Chapter of NACD (National Association of Corporate Directors) hosted a panel discussion on Conscious Capitalism earlier this month. The panelists were Brad Anderson, former CEO and Vice Chair of BestBuy, Stephen Young, Global Executive Director of the Caux Roundtable and Christopher Michaelson PhD, Associate Professor of Ethics and Business Law at the University of St. Thomas.  The panel was moderated by Neal St. Anthony, business columnist and reporter for the Star Tribune.

The idea for this program began over a year ago at the 2013 NACD Annual leadership conference. Raj Sisodia was one of the keynote speakers. He discussed the book he co-authored with John Mackey, “Liberating the Heroic Spirit of Business: Conscious Capitalism”. He started his speech by highlighting the positives of capitalism; “No human creation has had a greater positive impact on more people more rapidly than free-enterprise capitalism. Capitalism is unquestionably the greatest system for innovation and social cooperation that has ever existed. In the past 200 years, business and capitalism have transformed the face of the planet and improved the complexion of daily life for the vast majority of people, allowing us to lead more vibrant and fulfilling lives.”

The panelists addressed the idea that companies are about more than making a profit. The benefits of capitalism extend far beyond the walls of individual businesses into the lives of the entire population. After centuries in which the vast majority of human beings lived on less than a dollar a day in today’s terms, worldwide per capita incomes have increased nearly fifteen-fold in constant dollars. Today, about 16% of the world’s population lives on less than a dollar a day. Adjusting for quality and affordability, it is estimated that the average American is 100 times better off today than 200 years ago.

The proponents of conscious capitalism hold these truths to be self-evident: business is good because it creates value, it is ethical because it is based on voluntary exchange, it is noble because it can elevate our existence and it is heroic because it lifts people out of poverty and creates prosperity. Free enterprise capitalism is the most powerful system for social cooperation and human progress ever conceived. It is one of the most compelling ideas we humans have ever had.

But in spite of all this change, capitalism is coming under fire.  Capitalism is now often synonymous with greed and power.  This change in attitude is at the root of the conscious capitalism movement. Clearly capitalism has gotten a bad rap lately. To quote Bill George, the former CEO of Medtronic and now a business professor at Harvard: “As a committed capitalist, I worry a great deal to see how capitalism has gone off the rails the past quarter century and acquired such a bad name, much of it deserved. We know that leadership matters. We need to be conscious leaders. With the enormous loss in confidence of our leaders in the past decade, developing conscious leaders is the best way to rebuild trust in our leaders and in capitalism.”

So what is conscious capitalism and why should we as directors and financial executives care? Conscious Capitalism is not about being virtuous or doing well by doing good. Rather, it is a way of thinking about business that is more conscious of its higher purpose, its impacts on the world, and the relationships business has with its various stakeholders. Conscious capitalism reflects a deeper consciousness about why businesses exist and how business can create more value.

As board members and corporate executives we recognize that every stakeholder is important, and that the business must seek to optimize value creation for all of them. You cannot have a conscious business without conscious leadership. We need to motivate the leaders around us to create value for all the stakeholders. The culture of a conscious business ensures that its purpose and core values endure over time ultimately creating value for all stakeholders.

With the theme of conscious capitalism as a backdrop, the panelists addressed the following themes:

  1. The theme of creating shared value for business and society is gaining currency among capitalists.  What practical advice do you have for leaders seeking to create share value?
  2. What elements are required to build a conscious capital enterprise?
  3. What are the duties to shareholders and stakeholders in conscious capitalism?
  4. Can you make a purely financial return on investment argument for conscious capitalism?

The takeaway from the panel discussion is the importance of having a conversation in the board room on how director’s duties intersect with conscious capitalism.

The Fall of the House of Usher

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Susanna Gibbons, CFA

Perhaps we started putting nails into the coffin of the corporate credit market a bit too soon. After last week, characterized by high volatility, modest trading activity with poor liquidity, and minimal new issue supply, both spreads and activity seem to have rebounded. Overall, corporate credit spreads have tightened by about 3 basis points since last week’s sell-off. This is still a far cry from June levels, and about even with the start of the year, but the market overall feels a lot less scary.

One probably should be cautious investing around one’s feelings, though, as they are rarely the best guide in decision making. While improved market sentiment allowed the corporate bond market to re-open, ushering in about $24 billion in supply (compared to $6 billion last week), performance has not been all that great. A lot of the deals we checked are flat to wider since new issue, like Ingersoll Rand’s new ten year bond, which priced at a spread of +135, and is now trading 137/133. Verizon’s new 10 year priced also priced at +135, and is also trading 137/33. Verizon’s 20 year fared even worse, pricing at+ 145, currently trading 150/147. Not as frightening as Lady Madeleine of Usher at the door, to be sure, but not exactly the picture of market strength either.

Last week, on the other hand, very few issuers braved the market, and those that did had to pay up for it, to the benefit of investors willing to step in. JPMorgan issued $2 billion of a 5 year bond last week at +100, and those bonds are now trading 88/84; General Mills priced a 5 year at +80, now trading 77/72. Apparently it is better to buy credit when the market is a little shaky.

This is not exactly a mystery insoluble – the notion that one should buy risk when getting paid to take risk. It is oh-so-hard to implement, however, as we are always tempted to let our bets ride just a little bit longer. Yet when we step back and look at the current market – how far it has come over the past few years, and the level of risk for which we are now being compensated – we are inclined to take less credit risk rather than more. We may still be a little early in declaring the corporate market dead, but it is surely past its prime. One way or another, we think this house will surely fall.

Battle of the Fed Clichés

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John Boylan, CFA

If you grew up in the 1970s or 80s, you probably watched “Battle of the Network Stars”. For those of you too young to remember Howard Cosell and Telly Savalas, “Battle of the Network Stars” was a very successful limited run TV show that featured celebrities competing in athletic events. Nowadays it seems as though we are going through the “Battle of the Network Market Commentators Clichés” about the Fed’s potential next move.

It doesn’t matter if its TV or the financial press you can’t escape various Fed prognostications such as: The Fed will raise rates soon because unemployment data is reaching its threshold and might surpass it soon—remember what happened when the Fed tightened too early in 1937, or the Fed won’t raise rates because it is worried about the dollar and what is happening in Europe or China, and so on and so on. It gets to the point where I have heard the same arguments pro or con so many times, they do become clichés.

But still, interest rate moves deserve consideration. When it comes to the Fed and interest rate changes, I have two basic questions for myself at this particular moment in time:

1. Q) Do I think that the Fed will raise rates during my investment horizon (i.e. next 18 months)?

    A) Yes.

2. Q) Do I care?

    A) No.

Why? Rates can only do one of two things at this point in time, stay the same or go up. Eventually they will go up. A healthy percentage of market participants like me believe that. However, that forecast is already in my investment thesis and forecasts for the market. What is vastly more important to me is if interest rates are going to go up materially faster than I predict and will it happen during my investment horizon. There is nothing in the data that leads me to believe that it will. For example inflation is relatively tame, wages are stagnant at best, money velocity is nothing to write home about, and retail demand is just OK. Unless I was convinced that any of those things in combination above were to evolve into something more malignant during my investment horizon, there is no reason to drastically modify my investment thesis for the market.

What I try do to do in these scenarios is try to develop a list of potential market-moving events, like some of the things mentioned above like wage inflation, and monitor them for moves that go beyond my expectations. If enough of those things on my list change where my investment thesis is in danger of breaking regarding the Fed and interest rates, then I act. Until then, I don’t.

Therefore my suggestion is ignore the clichés about rates in the short term and pay more attention to matters that can cause events to materially change your investment thesis.

Oh yeah, one more thing. “Don’t fight the Fed”.

What Would Gender Balance Mean to the Finance Industry?

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Lissa Rurik, CFA, CAIA

Recently the U of MN’s Carlson School Funds Enterprise hosted a Conversation of Gender Balance in Finance. The two hour presentation hosted two speakers followed by a panel discussion with questions from the audience. The afternoon was inspired after a similar event focusing on Women in Entrepreneurship resulted in a significant increase in women contestants at the recently conducted Minnesota Cup. It is hoped that as a community we can encourage more women to consider careers in finance if we can shed some light on the topic through exploration and discussions such as this.

The Keynote speaker was Sharon McCollam, the Chief Administrative and Chief Financial Officer of Best Buy Co., Inc. Ms. McCollam sees the topic of women in leadership in finance as not only important for the growth of women in their careers, but also because such diversity is important to a company’s ultimate success, as it is valuable for different points of view in all aspects of a company’s activities.

Critically important is how women show up in the workplace. After starting out in the transportation and aviation industries, Ms. McCollam moved onto roles in consumer products, then food organizations. She spent five years outside of the U.S. running a mergers and acquisitions team, and recalled the day she was sent to Asia to negotiate a purchase transaction. Greeting the Asian businessmen at their first meeting she was asked “Why in the world did they send a woman?” Why? “Because we’re here to discuss the purchase price for your business” she responded. Then she simply moved on to the salient conversation. Women must present themselves with confidence, competence and calm.

At every level we must have a career plan. The career plan will change but we must be committed to the goal. Also, find mentors to evaluate those plans, and BE a mentor. Seek people at higher levels, not only for mentorship but also sponsorship! Do not confine yourself to other women – do not create your own glass ceiling! Think of how the next move will look on your resume.

Run into the fire – as this is where the big career moves are possible. This requires recognizing the risks. We need to lead change with courage and determination. We must be decisive and accountable. Women tend to have more difficulty with during times they aren’t popular. We must be resilient. Also leaders must have good judgment even when all the facts aren’t available. Use past experience and make the call! Men do this more easily. Wrong calls are always a part of the process but one must be courageous.

Have managerial courage, understand your personal code of ethics and be able to demonstrate good judgment. Your integrity will be challenged, and if the line gets too close that integrity will be irrecoverable. Hire great people – do not underhire, and do not be afraid to delegate. This is what allows a manager to go to the next level.

Lastly, love what you do! This is really important. Who do you work for? If your boss isn’t willing or able to help you grow, start planning the next move and adjust the career plan to change the outcome.

Next, Liz Mulligan-Ferry of Catalyst Research shared some facts to support the need for diversity and the progress that needs to be made in this area. Liz first highlighted the reasons diversity is important in the workplace: since women are responsible for 70% of purchase decisions, it makes sense for companies to reflect the marketplace; companies with women in leadership are seen as more ethical and philanthropic; diversity facilitates the ability to leverage top talent; and companies exhibiting diversity in the workplace experience increased innovation and improved financial returns. Barriers to advancement for women are encompassed in gender-based stereotypes, unconscious biases and a reliance on mentors to the exclusion of sponsors for moving ahead. Women are seen as less effective in conflict (either too timid or too abrasive, never just right). They’re viewed as competent or likable, but rarely both. And while mentors provide advice and help to navigate corporate politics, one really needs sponsors, with power and clout, to help a person fight and advance to the next level. Sponsors tend to be senior level executives where such relationships are important for facilitating the right developmental opportunities. Critical job experience includes international assignments, P&L responsibility and budget increases of 20% or more.

Strategies for Success:

  1. Learn the unwritten rules of your company (e.g., culture).
  2. Make your accomplishments known. Be visible and let people know what you can do.
  3. Build relationships. Get to know people and let them know you!
  4. Take career risks. (Interestingly, men will apply for a job when they meet about 60% of the qualifications whereas women typically wait until they meet 100%!)
  5. Ask for what you want. Be open if you don’t know what it is, but be ready to ask if you do.
  6. Get feedback for improvement (better gained from a mentor than a sponsor…)
  7. Be a catalyst!

The final segment of the afternoon entailed a panel discussion with Ms. McCollam, Matt Grimes (Wells Capital Management), Laura Moret (Chief Counsel of Piper Jaffray Asset Management), Kathy Rogers (EVP, Business Line Reporting and Planning, US Bancorp) Tammy Schuette (Corporate Controller at TCF Financial) and Mark Simenstad (VP of Fixed Income Funds at Thrivent Financial). While the panelists acknowledged that great progress has been made in this arena, Mr. Grimes and Simenstad indicated that women only account for 10 or 15% of the applicant pool in jobs where they have hired over the past several years. Additionally, women comprise only 15% of the membership of the CFA Society of Minnesota. Speculation as to the reasons for this low representation centered on women’s own misperceptions, around the hours required for the job among other issues. While questions from the audience – ranging from how to take risks to the importance of proactive negotiating, drew multiple opinions from the panel, all agreed that it is increasingly imperative for companies to find ways to be more inclusive in growing their employee bases. Demographics in the U.S. are really changing, and we need a workforce that resembles the customer base. It is a matter of community support, and it’s important for corporations to sponsor a mindset of openness and awareness as to what efforts toward diversity means. Inclusion means that people can be authentic; they can bring their whole selves to work, participate and feel good about themselves in the process.