By: Chris May, CFA, President, CFA Society Minnesota
“What are you going to do as the president for CFA Society Minnesota?” – This is the question that I have received most often over the past several months as I have prepared to take on this two-year responsibility. In a way this question makes complete sense. On the other hand, it demonstrates a misunderstanding of the situation. CFA Society Minnesota has already had the benefit of having more than 60 individuals volunteer to serve as board members over the past 10 years. Additionally, for every individual board member, there are many more folks who have volunteered over the years in a multitude of other capacities. And that is just in the past ten years. Imagine all the countless people who have been involved since the society was founded in 1952. It is a result of the cumulative efforts of all of these individuals over the years that has led us to where we are today. So many incredible things have been accomplished (Intellisight Conference – eight years, Compensation Survey – six years, Mentoring Program – five years), mistakes were made, friendships were created, and fun was had.
In January 2019 the CFAMN Board of Directors ratified an updated strategic plan. This built on the plan that preceded it and was the result of work done by the entire board, support from CFA Institute (our global parent organization), and feedback from our members. I offer all this up to put today into context. When I am asked about my term as president, it is all of this effort that I think about. In short, the work has been done. The plan has been drafted. Things are underway. I feel a responsibility to see that plan executed. Our plan is simple to understand but complex to execute. We are going to focus on three things:
1) Delivering Member Value
2) Enhancing the Brand of CFAMN and the CFA Charter
3) Building and Maintaining Operational Infrastructure
There are many components to each objective that create the complexity of execution. However, it is our goal that all of our actions will support one or more of the strategic objectives.
There is another item that is important to the board that is not captured in the strategic objectives. In our Mission Statement the word ‘fellowship’ is included. Thus, we believe that it is important that CFAMN provides opportunities for our members to connect and develop relationships.
With that in mind, I recognize that I do not have a relationship with the vast majority of our members. I’d like to change that. For those still reading, please consider this your invitation to take me up on this.
I value people that are willing to challenge the status quo and try new approaches. One such person is Sam Hinkie, former GM of the Philadelphia 76ers. So my ask is this – read his resignation letter and email me your thoughts.
On the other hand, if you want to drop me a note about anything else on your mind, please feel free to do that as well. I can be reached at lyndemay6@gmail.com.
Member feedback is critical to our future success. We begin board meetings with comments from members and we would love to share your feedback. The Berkshire Hathaway letters routinely include a shameless plug for Berkshire products. In that light, I will make a similar ask. If you are interested in getting involved in the society please check out the Volunteer Board or reach out to Diane Senjem at support@cfamn.org.
Thank you to each of you. We have much to do, but without each of your, our society would not be as strong as it is today.
All the best,
Chris May, CFA
President, CFA Society Minnesota
Tag Archives: CFA Society Minnesota
Track Recap: ESG at Intellisight Part II
By: Hilary Wiek, CFA, CAIA, Society Volunteer
After the morning breakfast presentation, chronicled in my previous Freezing Assets blog, the Intellisight Conference offered four panel discussions to further explore the current state of investing with an ESG perspective, how to approach with different asset classes, ESG data coming from companies and ratings groups, and issues investors and managers are still facing in this space.
The first panel, called “Risk & Opportunities across Asset Classes,” was moderated by Michael Corelli of Moody’s and included Jodi Neuman of Trillium Asset Management, Mike Pohlen of North Sky Capital, and Emily Robare of Gurtin Municipal Bond Management. The main message from this group was that ESG investing has moved well beyond the screening of stock universes to remove morally objectionable companies from a portfolio. The panelists discussed how they have folded ESG thinking into the investment process across all asset classes.
The rationale for many investors to consider environmental, social, and governance factors boils down largely to risk and opportunity, principles that even those with little interest in saving the world generally find important. Bond rating agencies and bond purchasers are thrilled to have new metrics to incorporate into their analysis of a bond’s risk. Equity managers are also looking for companies with positive attributes that will make them more sustainable businesses in the future. By embracing companies that treat their employees well, have a high-functioning governance structure, and avoid misuse of resources, investors can focus in on a subset of companies more likely to do better in the future than their peers.
One example: when evaluating insurance companies, ESG factors, particularly climate risks, have become a very important lens that had previously been difficult to assess. With natural disasters coming more frequently and in greater magnitude (2018 had the 4th most natural disasters ever recorded; 2018 was the 8th consecutive year with 8 or more natural disasters costing more than $1 billion; learn more here, it is important to factor in the likelihood of such events when evaluating the health of an insurance business. Some insurers are more heavily geared to geographies more likely to face bigger losses, such as in Florida (hurricanes) and California (fires). In January 2019, Pacific Gas & Electric had a wildfire-related bankruptcy, a loss investors may have avoided if they properly assessed the fire risks facing California.
Moody’s is continuing to develop work around ESG factors in its ratings methodology. They assess 84 global industries representing $75 trillion in rated debt. They have identified 51 sectors with $62 trillion in debt that are considered low risk; some of these may even possibly benefit from emerging environmental trends. An example of the latter is the construction industry benefiting from repair and reconstruction after natural disasters and investments being made into the building of energy efficient systems.
While some would avoid entire sectors due to them being “dirty” or some other objectionable rationale, many equity investors utilizing ESG principles believe that the magnitude of the risks are specific to each company, so there is potential for a company in a dirty industry to outshine the competition, leading to better stock performance. In addition, many companies in carbon-heavy sectors are developing technologies to more efficiently use fossil fuels or even to swap out such fuels into cleaner energies, becoming a solutions provider to the energy transition instead of a victim of the trend.
Even in municipal bond analysis, ESG considerations can play a part. Climate risks are often very local and what are municipal bonds but plays on the ability of a local economy to continue to pay back investors? While it is likely that coastal areas around the U.S. will be impacted by heavier rains and coastal erosion, some communities have a broad and wealthy enough population to rebuild while others will lose population to more sustainable areas. It is likely that residents of Malibu, CA, would have the resources to rebuild after landslides, but New Orleans, LA, could suffer a permanent decline in its tax base. This translates to a bond issue from Malibu being a better credit than one from New Orleans. One difficulty, however, can be in modeling the timing. Even in an area likely to suffer from rising oceans, a five-year credit may encounter no difficulties, but the longer the time frame, the more likely a significant event could hit a locale.
ESG in the private equity landscape is usually focused on solutions to the environmental risks facing so many locales. They seek out portfolio companies with clean technologies that can profit from shifts in attitudes toward fossil fuels and climate change. Even when you find a clean technology, however, ESG risks must be considered. If a hydro-electric project faces a multi-year drought, how would the project do with decreased output for a sustained period?
The biggest issue for analysts hoping to assess ESG risks is the availability of reliable data. While companies have just recently been getting better at reporting things like carbon usage, other risks are only reported sporadically and there is a danger that some would penalize a company that is being forthcoming in reporting its ESG risks but then not penalizing companies not reporting because there is nothing for analysts to go on. There is very little ESG data reported to a muni bond investor hoping to assess environmental risks to an area, though some county by county government data can be useful in extrapolating a location’s risks. Later panels discussed the state of ESG data in the world today.
The next panel, titled “Who’s Who in ESG and Impact,” was moderated by Chris McKnett of Wells Fargo Asset Management and included Mac Ryerse of Columbia Threadneedle Investments and Michael Young of US SIF: the Forum for Sustainable and Responsible Investment. Ryerse has done a lot of work for the Sustainability Accounting Standards Board (SASB), who is working to standardize the company reporting of financially material impacts of sustainability on their businesses. In other words, SASB is working to address the data problem raised by the prior panel.
The topic of ESG and sustainability, and whatever other terminology one might prefer, is fast-moving and still being debated heavily. That said, there is a lot of talk and the category cannot be ignored, even if the AUM are still modest.
One news item of note from the session, Young recently worked with the College for Financial Planning to create the first professional designation for sustainable investment.
US SIF (social investment forum) has long been a resource for understanding the state of play in the sustainable investment space. They continue to work to drive awareness and adoption of sustainable investment principles. SASB has taken on the burden of working with industry participants, including public companies themselves, to establish industry-specific frameworks for the reporting of financially material information that would not typically be required by GAAP standards of financial reporting.
In 2018, US SIF published its biennial Report on US Sustainable, Responsible, and Impact Investment Trends. The report can be found here. From the website:
“The 2018 Trends Report presents data from new survey questions on the asset class allocation of survey recipients’ ESG assets, their percentage of ESG assets in passive strategies, and their support for the UN Sustainable Development Goals. The Trends Report also focuses on the extent to which ERISA-governed pension plans added ESG funds after the Department of Labor’s 2015 guidance acknowledging that “environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment.””
When it comes to the adoption of ESG principles in investment management, there appears to be a hockey stick upturn starting in 2012. Readers should be aware of issues with the data, however. There are very few new mandates in the public equity space these days as money is being pulled from active management and placed into passive ETFs and index funds. There has, however, been a surge in mandates seeking active managers integrating ESG principles into their investment process. Investment managers have realized that selecting Yes to questions in databases about ESG will open up their products to searches. Asset managers may change nothing about their process, but reason that since they’ve always considered corporate governance in their investment process, they can say yes and be considered for a prospective mandate. This “greenwashing” can inflate the amount of true ESG offerings available and can make it more difficult for asset owners to identify the right partners for these new mandates.”
Being a signatory to the United Nations Principles for Responsible Investment (UN PRI), is a phrase heard from industry participants as evidence of a commitment to invest with some sort of ethical guidelines. That said, any mechanisms to hold people’s feet to the fire in showing their commitment to responsible investing are rather toothless.
UN PRI has championed 17 SDGs or Sustainable Development Goals, which include such areas for global improvement as Zero Hunger, Quality Education, Gender Equality, Decent Work and Economic Growth, and Responsible Consumption and Production. 1,700 asset managers and investment providers are signatories to what the speakers called a framework for a conversation. The goals do not all neatly map out to easy financial choices, but the idea is that if investment dollars were to target some of these global issues, the world could be improved.
SASB is connecting businesses and investors on the financial impact of sustainability. They have brought some shape and focus to the marketplace, helping the area grow and become more robust. In a world where corporate valuations have become more and more dependent on goodwill and other intangible assets, analysts need to find ways to evaluate the sustainability of those assets. ESG factors can provide forward-looking insights into a company’s performance and risk.
There has been an explosion of data. In 2011, 20% of S&P 500 companies produced a corporate responsibility report. In 2018, it was 86%. That said, while companies surveyed think they are doing very well in their responsibility reporting, investors still feel there is a lot of room for improvement. The reports are inconsistent to each other, making them difficult to compare. The data points used are not governed by any accounting rules, leaving analysts unsure as to what is being reported and how reliable the metrics are. Analysts wanted data they can reliably build into models.
SASB stepped into the gulf as a standards-setting board taking an evidence-based approach to provide standards for issuers (of both stocks and bonds) to use in disclosing their ESG efforts. In order for something to be considered for a standard, there must be: 1) evidence of investor interest and 2) evidence of financial impact. This has led to ESG factors reasonably likely to affect the financial condition or operating performance of a company. 2,900 people worked on this standards-setting effort; a third each from: asset managers, asset owners, and academics.
The full standards (broken out into 77 distinct industries, as not every metric pertains to every company) were released in November 2018 and can be found at the SASB website here. While these are called standards, adoption is still strictly voluntary. The hope is that the investment community demanding to have the data will pressure the companies to provide it. Major accounting firms are starting practices to verify the reports that are published. Only a couple of dozen companies have implemented the SASB standards thus far; JetBlue was the first.
The third panel of the ESG track of the Intellisight conference was titled “Clarity from the Chaos?” and was moderated by Eric White of Cogent Consulting. The panelists were Matt Sheldon, CFA of KBI and James Spidle, CFA of Breckinridge. For context, Cogent is a Minneapolis-based investment consulting firm working with mission-driven investors on impact investing around the region. KBI is an Irish-based asset manager and Sheldon is a portfolio manager on the firm’s water strategy. Breckinridge is an investment grade fixed income manager that fully integrates ESG into its investment process.
The chaos of the panel’s title is largely the confusion clients and other industry participants feel about what everything means. As a fixed income manager, Breckinridge had to explain that ESG wasn’t just a concept important to equity managers. They had to make the case that as fixed income has set maturities sometimes far into the future, considering ESG risks is only prudent in evaluating a potential credit investment.
One point KBI feels is important for investors to know is that having an ESG lens does not mean that they cannot invest in “bad” ESG companies. If the risks are priced in, the issue may be a good investment. But they feel the company can get to a more appropriate valuation if they are more inclusive in the risks they consider. In addition, they want companies to be better and will engage with management teams to share views on how they feel the companies could improve their ESG practices.
Another issue in the chaos of ESG investing is that not every client prioritizes the same set of values. So while KBI may look for companies that are solving water problems, an investor might protest that a company is solving the problem of accessing water in order to facilitate fracking. Breckinridge largely manages customized separate accounts, allowing every client to have its own values overlay. No companies are pristine, but they have the information to be able to tilt a client’s portfolio to the areas they care about.
Another point of confusion is between investors and companies. The investors serious about ESG are often attempting to engage with issuers on various ESG topics, but each investor may have a different set of priorities in terms of what they want to see reported. Overall, everyone wants better disclosure and transparency, but what form that will take is still evolving.
Asset managers have been struggling with how to report their ESG efforts to clients. They’d love a generic report to supply, but each client has a different set of interests on which they want to see results. Reporting is definitely still evolving.
The idea that you can do well while doing good is another point that is still not fully accepted among investors. More and more asset managers believe they can integrate ESG thinking into their investment process without sacrificing returns, but discussions are ongoing with clients as to how realistic it is to invest to a narrow set of principles and still expect market or better returns. Given that many believe integrating ESG into the investment process will decrease risks, some advocate that at the very least you can achieve better risk-adjusted returns with this approach.
What it means to incorporate ESG into the investment process can vary widely. There are so many different approaches to integrating ESG and investors must do the work to look under the hood and evaluate the veracity of the ESG claims, given the incidence of “greenwashing” (see above) in the industry. Just falling back on an ESG rating by a service provider will not give the full picture, particularly as many companies who are rated have never had a conversation with one of the providers. Differentiated ESG integration will have the asset manager asking its own questions and coming to its own conclusions on a company’s ESG record.
An interesting point made by Sheldon: the best rated ESG companies are often trading at high valuations. The worst are at low valuations. So a good portfolio from a valuation perspective (perhaps banking on improvement through engagement with the low-rated companies) may have a low score from the ESG service providers like MSCI and Sustainalytics.
The main way to avoid the confusion and chaos in the ESG landscape is to start with very basic discussions with clients to ensure everyone is speaking the same language. Do not assume that when someone uses the word sustainable, for example, that it means the same thing to all parties. For that word alone, some think about it in terms of energy sustainability, while other think about how sustainable a competitive advantage is for a company; two very different concepts. So ask questions, form a common foundation, and the end result will be much closer to the vision of what the investor is truly looking for.
The final panel in the Intellisight ESG track on August 13 was called “Demystifying ESG Data, Ratings and Research” and was moderated by Chris Eckhardt of Columbia Threadneedle Investments. Geeta Aiyer of Boston Common Asset Management, Trevor David, CFA of Sustainalytics, and Jennifer Sireklove, CFA of Parametric were the panelists.
Columbia Threadneedle has a large sum of assets in ESG-related quant strategies. Boston Common is an ESG boutique incorporating ESG at every stage of what they do. Sustainalytics is a service provider offering ESG ratings on public securities issuers. Parametric is a quant manager with no individual securities analysis, but they are providing custom ESG integration for clients upon request. They have been thinking about active ownership practices with an ESG lens, however – voting proxies and the like.
ESG data allows you to do ESG research at scale. Columbia trades in 6,500 publicly traded companies and does not have time to trade them all. They use 3rd party ratings/research as a starting point. ESG data, now coming from many public companies, can be critical to ensuring a portfolio is meeting client expectations.
Sustainalytics provides company-level risk ratings meant to get at a company’s exposure to ESG risks. The firm starts with which factors are material at the subindustry level. They speak with companies and leverage Sustainalytics’ analysts’ expertise for this. They will make adjustments at the company level related to geography and other company-related idiosyncrasies.
A question for Sustainalytics was how they account for the fact that companies eagerly report good news, but are hesitant to provide data that will make them look bad. Sustainalytics will screen news sources daily and pull relevant incidents in that analysts will assess in the context of what they know about the company already.
Other areas Sustainalytics is developing: a carbon risk rating; country-level ratings; municipal bond ratings, including looking at the proceeds and how they are used. They also have product information at the company level – not just identifying “sinful” products, but also if the company is deriving income from things like affordable housing or sustainable transportation systems.
Parametric began having conversations with clients about ESG in 2018, but found that many of the client’s aims do not map well to public equities. Growth in affordable housing is a good example, as there are few public stocks that will impact this objective. Things that can work in public equities is controlling the types of companies you own and changing the way companies behave. Companies will be influenced more by owners of the company, so sometimes you need to own shares of a company whose practices you don’t like in order to effect change.
How to benchmark custom ESG portfolios? Most asset managers leave it up to the clients, but will have conversations about tracking error expectations, particularly if the client decides that a standard benchmark is the index of choice. Too many client-driven restrictions will lead to wide dispersion from a benchmark, but the ESG mandate being fulfilled may be more important than a tight performance profile.
Boston Common has an independent investment team as well as an ESG team. The output from the ESG team is a source of information to the investment team – a corroborating source from a different vantage point. Ideas can come from both sides and have to be vetted by the other. The team feels that it would be irresponsible to throw away any relevant data; more and more is becoming available for ESG factors. That said, in markets that are less efficient for financial data (emerging markets, small caps), there is less ESG data available, as well.
In terms of engagement, while some ESG risks are systematic and cannot be diversified away, investors can try to steer companies away from the iceberg. One needs to look beyond the typical dirty industries to companies that on the surface seem less likely to be impacted by ESG risks. But if a bank is making loans to oil producers or coastal developers and is not itself asking relevant ESG questions of its customers, it could face losses that could have been avoided.
Reporting is still a work in progress for the industry. Some are using the UN PRI Sustainable Development Goals, others tailor reports to client objectives, and still others are attempting to come up with standard reports that can meet the needs of most of their clients. Many asset managers are in continual discussions with clients on how best to meet their needs.
Are you interested in helping plan the 2020 ESG Track at Intellisight? E-mail Amanda at events@cfamn.org.
Event Recap (part 3): Diversity & Inclusion: Bridging the Gap in the Investment Industry
By: Hilary Wiek, CFA, CAIA, Society Volunteer
In the first two segments of my reporting on the Diversity and Inclusion event of June 5, I discussed the misconceptions about the event and some of the high-level topics discussed by our esteemed speakers. In this final installment, I will outline research and resources on the topic that may 1) help convince some people that there is supportive evidence to justify diversify and inclusion efforts in the workplace and 2) provide guidance on solving some of the problems outlined previously. As a recap of the prior blog post, one broad topic area was having productive conversations about diversity and inclusion, a second was hiring a diverse workforce, and a third was retaining a diverse workforce.
Speakers at the CFA Minnesota event stated that bringing evidence-based findings to discussions about diversity and inclusion has really helped to advance the topic, in some cases converting individuals who were skeptical there even is a problem. A number of studies have found what many who have given this topic any thought would have suspected from anecdotal evidence, but having research to back up the suspicions has been powerful.
For data and evidence, the University of Chicago, in partnership with private sector support, has dedicated resources to study this topic under the moniker The Science of Diversity and Inclusion (SODI). Their website states that the initiative “brings together leading researchers and organizations to identify, accelerate, and apply new evidence-based approaches to advance diversity, inclusivity, and belonging in our places of work and learning.” Profiles of the affiliated researchers, their areas of study, and a summary of their findings can be found here.
One of the more interesting studies mentioned at the CFA event was from a team out of Columbia University (Sheen S. Levine, Evan P. Apfelbaum, Mark Bernard, Valerie L. Bartelt, Edward J. Zajac, and David Stark) about homogenous and heterogenous investment teams (called “experimental markets” in the study). A link to the work, entitled Ethnic Diversity Deflates Price Bubbles,” can be found here. From the abstract (the italics are mine at the end):
“Markets are central to modern society, so their failures can be devastating. Here, we examine a prominent failure: price bubbles. Bubbles emerge when traders err collectively in pricing, causing misfit between market prices and the true values of assets. The causes of such collective errors remain elusive. We propose that bubbles are affected by ethnic homogeneity in the market and can be thwarted by diversity. In homogenous markets, traders place undue confidence in the decisions of others. Less likely to scrutinize others’ decisions, traders are more likely to accept prices that deviate from true values. To test this, we constructed experimental markets in Southeast Asia and North America, where participants traded stocks to earn money. We randomly assigned participants to ethnically homogeneous or diverse markets. We find a marked difference: Across markets and locations, market prices fit true values 58% better in diverse markets. The effect is similar across sites, despite sizeable differences in culture and ethnic composition. Specifically, in homogenous markets, overpricing is higher as traders are more likely to accept speculative prices. Their pricing errors are more correlated than in diverse markets. In addition, when bubbles burst, homogenous markets crash more severely. The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making. The evidence may inform public discussion on ethnic diversity: it may be beneficial not only for providing variety in perspectives and skills, but also because diversity facilitates friction that enhances deliberation and upends conformity.”
The CFA Institute has been spending time on diversity and inclusion as well, conducting surveys and hosting workshops with industry participants to better assess the state of diversity and inclusion in the industry, provide public data from these efforts, and come up with ideas on how to address the problems. Here is a link to the CFA Institute’s published work derived from its efforts, “Driving Change: Diversity & Inclusion in Investment Management,” which was distributed at the CFAMN event.
Once evidence has been supplied and hopefully accepted, the next question is what can be done about it? One of the resources mentioned several times at the CFA event was the book What Works, by Iris Bohnet, who is affiliated with the SODI efforts outlined above. The SODI site summarizes the book as a resource “to hand decision-makers the tools they need to move the needle in classrooms and boardrooms, in hiring and promotion, benefiting businesses, governments, and the lives of millions.” A short video summarizes Bohnet’s work here. She also authored the following articles:
- How to take the Bias Out of Interviews, Harvard Business Review
- Designing a Bias-Free Organization, Harvard Business Review
The pipeline of diverse candidates was another of the significant issues identified at the CFAMN event – even if a firm wants to hire from a diverse talent pool, there is often a dearth of qualified candidates fitting diverse profiles. Several organizations were mentioned at the event that are attempting to reach women and minorities earlier in their education to let them know a) that the investment field could be an attractive career option and b) what they need to do in order to prepare oneself for a career in the field (including education and internships).
One organization called out at the event was Girls Who Invest (GWI), which got its start in 2015. Each summer since 2016, GWI has held a four-week summer educational program for college women, after which each participant works in a six-week paid internship. The stated goal of the organization is to get 30% of the world’s investable capital managed by women by 2030. A New York Times article linked on the website states that only 7% of investment managers in the $15 trillion mutual fund industry are women. If you are looking for a way to help solve the diversity problem in our industry, GWI seeks volunteers to mentor students, speak at events, and teach courses during its college summer intensive learning program. They also seek financial partners in the investment management industry to provide mentors and host interns.
Another organization is Invest In Girls. Per the website: “Invest In Girls works with schools, community organizations, corporations and foundations to provide financial literacy programming to young girls.” This group’s programs seek to educate 10th, 11th, and 12th grade girls in workshops before they get to college, allowing them to learn about personal finance and careers in finance while there is still time to formulate a higher education plan. This organization is seeking volunteers to make short videos for its Role Model Exchange outlined here.
In 2013, financial services firms in Chicago came together with The Chicago Community Trust to form the Financial Services Pipeline Initiative. The key goals of this group are to 1) increase the representation of Latinos and African-Americans, at all levels, within the Chicago area financial services industry and 2) improve the overall cultural competency within the Chicago area financial services industry. While volunteer activities may be out of reach for the CFAMN membership, the website has interesting data and may provide ideas for how to bring some of this group’s activities back to our region.
Other resources/research not discussed at the event, but suggested by the speakers:
- Scott Page
- Ashley Goodall
- Nine Lies About Work (book abstract here)
In closing, did you know this event was planned and organized by a CFAMN volunteer? Thanks again to Amy Jensen, CFA, Investment Director at Northwest Area Foundation who put together this enriching program. Do you have a great idea to share or a project you feel passionate about? E-mail society staff and they’ll help you make it happen!
Event Recap (part 2): Diversity & Inclusion: Bridging the Gap in the Investment Industry
By: Hilary Wiek, CFA, CAIA, Society Volunteer
In my last blog post, I provided an introduction to the excellent program CFA Society Minnesota had in June on Diversity and Inclusion. In this post, I’ll outline some of the key topic areas from the event, drawing upon talks by BlackRock’s Jonathan McBride, Wells Fargo’s Leyla Kassem, CFA, discussions at the tables and then shared with the room, and two panel discussions – one with women working in their organizations on diversity and inclusion issues and the other with women discussing their paths to the leadership positions they now hold. A third post will provide information about where one can read more about or do more to advance this important topic. So here are some thoughts on the topics discussed on June 5:
1.) To have productive conversations about diversity and inclusion:
Assume positive intent. Our speakers challenged us to have an important and uncomfortable conversation. You probably have noticed that you will allow some people to tease you quite mercilessly and you take no offense. Or if you do take offense, you find yourself excusing them because you know that they meant nothing by it. Yet if a stranger made the same joke, your reaction might be quite different. This is one indicator of unconscious biases that we all harbor.
When hoping to have a constructive conversation on the topic of diversity and inclusion, it is good to do what you can to be aware of your biases, realize that the other people have their own biases, and make an effort to act with the assumption that you both have positive intent, regardless of what comes out of your mouths. By doing this, hopefully everyone will give the benefit of the doubt when it comes to word choice and will truly hear the perspectives being expressed.
It is important to note that unconscious bias training will not eliminate biases. The hope is to mitigate biases and have people learn to hire or act around the biases.
2.) Hiring a diverse workforce in the investment industry:
One major problem to getting to a more diverse workforce: pipeline. Many people at the event mentioned that when trying to hire people for their open positions, the applicants were overwhelmingly white males. One leader had assumed that her company was just doing a poor job recruiting, that the diverse talent was out there, but she came to see that many women and people of color opt out of the business because of things they have heard about the lifestyle and culture or they do not even realize what investment roles entail when they are in the process of designing their educational path. The next blog post will list a few real-world programs working to solve the problem of attracting diverse individuals to the industry.
It was noted that the accounting world has been successful in recent decades in identifying potential talent when there is still time to get the proper training. The investment world needs to get to diverse individuals early on and share with them what skills, attitudes, and attributes are needed to be successful so that those who are attracted by those things will know what they need to do to be qualified for investment roles when the time comes.
While schooling is important to get your foot in the door, learning the investment business is very much done through apprenticeship. It is important that young diverse talent has access to the mentors who will guide them through the early years of their career and give them the opportunities to broaden their skill sets at appropriate intervals. Companies can create programs to ensure that unconscious bias does not lead to only a certain type of person being selected for such opportunities.
What’s the goal? 50/50 male/female? Numbers are arbitrary and it could take years, even decades, to get to that level at the current pace. But getting to inclusive is more immediately achievable. The goal is to create an environment where all cultures and backgrounds feel heard and want to stick around. It will be harder to get to 50/50 if your diverse staff keep leaving because they don’t feel welcome.
3.) To get the most benefit out of having a diverse workforce:
The problem: retention. Even if you are able to make diverse hires, you will not garner the benefits of diversity if you are not able to make everyone feel heard (the “inclusion” part of diversity and inclusion), as the struggle to fit into an unnatural mold will be exhausting for many. While people are struggling to conform, they will not feel comfortable providing their best ideas for fear of dismissive attitudes from colleagues. Eventually people will depart, leaving your team back at square one in trying to restock the talent pool. Many firms will see this as a learning moment and assume that people who bring in diverse perspectives are a bad fit and they decide to hire people more likely to stick around – which often means hiring people who look or think or act as the current employees already do.
The solution is to focus the company’s efforts on inclusion. This means getting to know everyone, learning to play to each person’s strengths and listening to their points of view. This may be challenging to some, but it has been proven (see the next blog for research citations) that the more difficult and uncomfortable investment discussions that come from heterogenous teams result in better team decisions. As one speaker said, unanimity feels like a good thing, but hard things should be hard.
One way to work on the inclusion problem is to get to know each other. We have been conditioned to not ask about others who are different at work, to “keep it professional”, but getting to know the people on your team allows for the evident differences to fade and the commonalities to shine through. It also allows people to open their minds to the differing perspectives and realize the value they bring to a conversation. Diverse teams must find ways to bring the diverse points of view out, or the effort will have been wasted.
In a crisis, all of the differences and negative intent assumptions matter less and people come together to get something done. And afterwards the team is stronger for it. As a company, you have to figure out how to get your staff there without a crisis. Managers who are willing to show vulnerability to employees by admitting that this is hard and they need help will get their staff to care. Be fallible. People like the underdog.
I typed pages and pages of notes from this event and there were other really great points made during the morning, but I have attempted to faithfully provide the major areas of discussion. Please feel free to comment on the CFA site, particularly with substantive efforts you have been involved with or are trying that are intended to make a difference in the diversity profile of our industry.
Breaking up is hard to do – Global Central Banks Struggle with Normalization: Event Recap
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.