Tag Archives: CFA Institute

A Letter from Our Society President

· · Leave a comment
Joshua M. Howard, CFA

Spring is here in Minnesota.  Even if the weather occasionally is lousy I still enjoy this time of year, as the first two weeks of April bring the NCAA championship game, the Masters, the home opener for the Twins, the Wild in the NHL playoffs, and the end of another Timberwolves season.  I also seem to enjoy this time of year much more than when I was a CFA candidate, especially as we get closer to Memorial Day.

I apologize for skipping my monthly letter in March – there was way too much basketball to watch. Despite my preoccupation with the Blue Raiders of Middle Tennessee, the Northern Iowa Panthers and all the other lower seeds that pulled off upsets, Society staff and volunteers were still providing value-add programming to our members.  Since my last letter the Society has offered multiple lunches, a Distinguished Speaker Series presentation, an After Market Appetizers event at Surly and the Upper Midwest Research Challenge finals.

In mid-March we also hosted the first ever CFA Institute conference held in the upper Midwest, when the Wealth Management conference came to Minneapolis. Almost 200 people from around the world attended the two day event. The presentations included a variety of engaging topics on behavioral finance, fundamental indexing, philanthropy, asset allocation, and many other topics pertinent to a financial advisor. With roughly a quarter of all charterholders now working in wealth management this conference was very relevant to our membership.

Two final thoughts. First, I want to wish the best of luck to the North Dakota State Research Challenge team as they head to Chicago on April 11th to compete in the CFA Institute Research Challenge Super Regionals (and hopefully the International Finals the next day). They did a fabulous job at the Regional finals in February and will be a tough team to beat.

Second, I want to personally thank Kris Kautzman for the work she did for the Society over the past five years.  Many of you knew her through her work on volunteer coordination, member engagement, or with our prep classes. She has moved on to her dream job, combining her non-profit expertise with her love of music, and I wish her all the best.

Joshua M. Howard, CFA

President, CFA Society Minnesota

Standing Out in a World of Asset Management

· · Leave a comment
Tom Brakke, CFA

The CFA Institute Research Foundation Board of Trustees met in Minneapolis recently. In conjunction with the visit, CFA Society Minnesota hosted an event which featured talks by Paul Smith, the new CEO of CFA Institute, and Brian Singer, head of William Blair’s Dynamic Allocation Strategies team and a trustee of the foundation.

Smith spoke briefly about his first five months as CEO, focusing primarily on improving the value proposition that CFA Institute offers to its existing charterholders. He stressed the word “standards,” saying that the organization needs to be vigilant in protecting the standards that apply to the awarding of the CFA, CIPM, and Claritas designations. In addition, in his estimation, CFA Institute must continue to be outspoken in improving how the investment industry operates and how professionals meet the needs of their clients.

The latest event in the Distinguished Speakers Series, Singer’s presentation challenged the entrenched orthodoxy of today, which he said is due in part to the success of the CFA program. The foundation of that orthodoxy is Modern Portfolio Theory and related ideas, the assumptions of which Singer called “inherently yet quaintly stupid.”

He urged the attendees to consider the traditional notion of equilibrium versus the operation of a complex adaptive system. One is static, the other dynamic. One linear, one not. One characterized by complete information, no errors or biases, and no “endogenous novelty” – the other featuring incomplete information, plenty of errors and biases, and differentiation, selection, and amplification effects that cause distortions that aren’t immediately corrected.

When asked which they thought represented the market environment in which they work, audience members voted overwhelmingly for the latter. However, even though that is his thesis, Singer said both perspectives are important to understand if you are to be successful as a professional.

Singer disputes the notion that the fundamental value of an asset is reflected in its current price, but rather believes that fundamental value serves as a gravitational force for price over time. Therefore, he thinks that a short summary of a sound investment process involves three basic questions: Where do prices differ from fundamental value? Why do prices differ from fundamental value? How can those value/price discrepancies be captured?

While he talked about the hot topic of Greece to illustrate how his team uses game theory to assess the objectives of geopolitical (or market) players, perhaps Singer’s most interesting commentary concerned the structuring of his organization versus others.

He eschews the traditional approach, where analysts seek more and more information and then try to sell their ideas to portfolio managers, thinking that it leads to behavioral errors and a torturing of data in search of an answer. Instead, he wants his group to create “deductive frameworks” that don’t look like the decision tools that others use. For one thing, he says, in contrast to others, “We don’t need that much information.”

The key is to create a structure in which to organize information that focuses on the most important elements of a decision – and to staff the organization in a way that brings diverse points of view to the table. That means hiring individuals with different cultural, educational, and work backgrounds. Each puts forth his or her opinions privately, in advance of a discussion, so that the range of views within the group is accurately conveyed before debate is dominated by the loudest and most powerful voices.

Singer stressed the importance of being clear about the information at hand prior to making conclusions. What is fact and what is opinion? We can lose sight of the facts, because the rush to form opinions often overwhelms the process of thoughtful analysis.

In Singer’s eyes, the world of asset management as we know it has evolved on the basis of outmoded theories, no doubt reinforced by the career risk that keeps investment professionals from straying too far from the crowd and the organizational structures that haven’t really changed in decades.

It’s time, he says, to rethink your approach and “put a stake in the ground about what you believe.”

Two Skeptics Debate the Role of CFA Institute

· · 2 Comments
Tom Brakke, CFA

In a recent column in Chief Investment Officer (“A Skeptic’s View of Today’s Religion”), Angelo Calvello calls out CFA Institute as “the Church of the Capital Asset Pricing Model,” accusing it of perpetuating groupthink about how markets work and not having “a demonstrable positive impact on the way we invest.”

As a CFA charterholder (one old enough to have a mere four digits in his charter number), you might expect that I would bristle at the characterization. While I think the charges are too sweeping and too focused on CFA Institute alone, I agree with most of what Calvello says about the asset management industry of today.

In fact, I’ve written in a similar vein over the years. I absolutely believe that there is a “paucity of genuine innovation.” When I ask investment professionals to rate their own industry and companies (after all, they are in the business of rating other ones), invariably they assign low marks.

Like Calvello, I “have criticized asset management’s business models, culture, and compensation structures; the academy’s lack of imaginative scholarship; and asset owners’ and managers’ behavioral biases” as key factors in the promise of the investment profession not being fulfilled.

And, as for the teaching of investment notions of the day as doctrine, I gave this advice in one of my Letters to a Young Analyst (in regard to the desirability of different credentials): “If you choose to pursue an MBA or a CFA, remember that they are built upon orthodoxy, by and large, which you need to learn and attack at the same time.”

Later in that book, I added, “We need to remind ourselves that modern finance is a very young discipline. Despite that, it is common to see historical asset class returns presented in a way that presumes them to be sound estimates of the future; asset allocation and risk management techniques being made to look scientific; and securities being described, classified, and recommended using relatively few years of evidence as if they were definitive.”

There is so much that we don’t know – and, despite that, the teaching of finance in universities and by CFA Institute and other credentialing organizations is entirely too focused on answers rather than questions. It may not be surprising, then, that the same tack is usually taken when investment professionals talk to asset owners. Narrow perspectives are honed and reinforced; unfortunately, good questions tend to get in the way of pat answers.

One of the best things about the CFA exam process is the need for candidates to study a broad body of investment knowledge in order to pass the tests. However, as with other disciplines, it is easy for a test-taker to perceive that body of knowledge as fixed and foundational, even when it’s not fixed and may only be foundational for a limited period of time.

Soon enough, however, the diversity of the CFA curriculum fades away for most charterholders, at least those that find their way into asset management. Specialists rule, and the mission for most is playing the game of relative performance.

Has it worked for asset owners? Hardly.

Is CFA Institute responsible for the current state of affairs? No, although it’s complicit. In that, it has plenty of company, although it also has a lot more leverage to change the status quo than most of us.

I’m not sure how I would alter the exam process if it was mine to do, other than by stressing the transient nature of the current body of knowledge and the persistent failure of the investment industry to translate the reigning theory into successful practice. I want candidates to learn most everything that they are currently being asked to learn, just not to think of it as scripture.

And it would be nice for there to be a greater focus on the softer skills that matter just as much, from communicating effectively (yes, that means listening as well as speaking/writing), to understanding the broader context of investment decision making, to designing and managing organizations that can meet the real needs of clients. But, should the CFA curriculum be modified in some way to do that? I’m not so sure.

No doubt, we need different kinds of people in the industry, whether they are mathematicians and artists (as Ashby Monk wants to see in a new generation of asset owners) or polymaths (the subject of a previous Calvello column). Training more and more people in the same way isn’t an answer to the current shortcomings. Variant perspectives are required.

Which gets us back to CFA Institute and the tens of thousands of us that have earned our CFA charters.

The organization has always stressed the need for ethical behavior by charterholders, but, despite that emphasis and its Future of Finance initiative, it hasn’t been the force for change in industry behaviors that it should be. As I wrote in a previous posting on this site, CFA Institute “needs to engage and mobilize the large asset owners and asset managers that wield the economic power in the markets.” And change how business is done. That it apparently hasn’t done so to any degree is a greater problem right now than any tendency to cling to a particular theoretical doctrine.

In fact, charterholders are all over the map on many of the concepts that Calvello bemoans. And CFA Institute provides forums in which they are vigorously debated. While I might be an agitator and as skeptical by nature as Calvello, I’m not banned as a heretic. To the contrary, CFA Institute has invited me to share my views in various ways and I’ve had the opportunity to speak to many local CFA societies.

So, while I agree with much of what Calvello has to say, the first priority for CFA Institute should not be to rip up the current body of candidate knowledge. Instead, it should be more aggressive in trying to improve the industry. As with a portfolio manager who becomes a closet indexer to avoid career risk, professional organizations can get too focused on protecting the position they are in rather than advancing the cause.

For CFA Institute, it is time to intensify the battle. It can’t be a bystander and it can’t be thought of as merely a credentialing agency. If that’s all it does, it is providing troops for the industry, not for the profession. That’s the last thing we need.