Welcome to the CFALA e-newsletter, a periodic publication with stories about noteworthy events and programs sponsored or hosted by the society, guest articles by members, book reviews, and other items of interest to CFALA members. Click on the headlines below to read the full stories. And if you’d like to contribute a story suggestion or, even better, write an article, we’d love to hear from you. Please email Executive Director Laura Carney at firstname.lastname@example.org.
*Please note that the content of this e-newsletter should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Society Los Angeles.
In this issue ...
In Search of Yield: Institutional Capital is Beginning to Discover Dark Corner of the Market
In January of this year, Los Angeles based firm Oaktree Capital Group LLC (OAK) committed $100 million to Genesis Capital, LLC, a Calabasas based firm in the business of originating private loans to people who fix and flip houses. The money is to be deployed across the nation in private loans secured in the first position by houses being renovated for resale. The news of this investment was met by Arixa Capital Advisors, LLC, with both excitement and trepidation, as it gave Arixa’s own investment strategy institutional legitimacy, but at the same time marked Wall Street’s first foray into a dark corner of the market that the Westwood-based investment firm would prefer remain undiscovered. In its search for yield, institutional capital may finally be uncovering an area of the market that for the past five years has offered attractive risk adjusted yield but has been the exclusive purview of small investment companies that cater to private individuals.
Jan Brzeski, the founder of Arixa Capital, has noticed the market evolving over the past four years. In 2010 investment firms were commanding a 15% annual interest rate, lending on distressed homes or bank-owned properties. Traditional financing was unavailable even for well capitalized projects as banks were actively reducing their exposures to single family mortgages and were unwilling to lend on vacant homes which often had significant deferred maintenance. Mr. Brzeski notes, “At the time I started pursuing this strategy four years ago, I thought that the investment opportunity would be short lived, perhaps 24 months. Since that time I have become convinced that while the underlying economic factors that gave rise to this opportunity may have shifted, the market is deeper than I thought.”
Single family home fix-and-flippers make their money in three ways. The first is by finding a “deal” on a home - purchasing a home below its fair market retail value. In 2009 and 2010 there was an abundance of distressed homes in California in places like the Inland Empire and the San Fernando Valley, and well capitalized entrepreneurial developers were snatching up homes often for less than their replacement cost. Since that time, as the market has recovered, it has become increasingly difficult for developers to find these attractive deals. This occurred in part because of large capital flows from institutional investors amassing portfolios of single family rental homes. In 2011 and 2012, companies like Oakland-based Waypoint Homes and the New York-based Blackstone Group, LP, were very active in areas of the San Fernando Valley and the Inland Empire purchasing homes for their single family rental strategy.
The second way that single family home fix-and-flippers generate profits is by selling into a rising market. Over the past two years, as distressed deals have dried up, the market has rebounded strongly in Southern California. In the past 24 months home prices in the Inland Empire have risen 38%, in Los Angeles 33%, and in Orange County 28%. There are signs that the housing market recovery has begun to normalize and single family developers will likely no longer be able to rely on such a strong wind at their back.
The third manner in which single family home developers generate profits is by creating value through cost effective renovations. And it is this third factor that continues to make this market such an attractive area in which to generate yield. In California in particular, there is an abundance of homes in desirable neighborhoods that were built during the housing boom of the 1950’s and 1960’s. Many of these homes have never been remodeled and present home developers with a particularly attractive opportunity to renovate and resell these homes for 15% margins. Due to the short timelines for the purchase and resale of these projects, traditional bank financing does not meet the needs of home renovators. As a consequence, while yields have declined from the go-go days of 2010 and 2011, private lenders are still able to command between 12%-15% for short term financing at a 75%-80% loan to cost. It is these types of risk-adjusted yields that have attracted the likes of Oaktree into the space. Arixa Capital estimates that the size of the market for these types of fix-and-flip loans to be $4 billion in California alone, deep enough to absorb capital from institutional entrants. Asset-based private lending is continuing to grow in popularity and it is likely you will see more announcements like Oaktree's as investors increasingly seek out dark corners of the market in search of yield.
By Kevin Zvargulis, CFA
Left Coast Living: Professional Ups and Downs of Living in Los Angeles
The beaches are great, the scenery is diverse, and the weather is often just right. But traffic stinks, public transportation is scarce and commutes can eat up hours every week. Certainly on a personal level, living in Los Angeles has many advantages and disadvantages. But what about professionally? What are the ups and downs of working in Los Angeles in the financial industry?
The Pacific Time zone poses advantages and challenges for those in our industry. Early mornings are excruciating to some, but traffic at 5:00 a.m. is less painful than 7:30 a.m. For global traders, the Pacific Time zone offers opportunities relative to other time zones. Michael Huynh, CFA, an equity trader with Payden & Rygel in Los Angeles notes, “One of the biggest advantages in being located in the West Coast is that we can cover every global market during our working day. For example, for a trader that gets in the office at 5:30 am, they are able to catch the last three hours of the European equity market. And for Asia, the Japanese equity market opens at 5 pm which is manageable relative to the equivalent 8 pm east coast “dinner” time. “
As many in Los Angeles can attest to, having to start early for East coast requirements does not necessarily mean an early quitting time. Huynh says, “I work New York hours in the morning and switch over to LA hours in the afternoon. In a nutshell, I work a pretty long day.”
Much of the financial industry activities, such as analyst days, are on the east coast which makes travel time-consuming for Los Angeles analysts. Even for companies not based in New York City, very often the companies hold their conferences and analyst days in the Big Apple. After accounting for the time difference, say goodbye to an entire day just for travel out east. Add the fact that Manhattan hotels are notoriously expensive, suddenly the webcast of the conference starts to look awfully attractive for those in Los Angeles.
Although travel to the east coast can often be time consuming and tiresome, during the winter, Southern California weather can be an attractive enticement to get other people to hop on a plane, allowing the Southern California resident to stay put. One Midwest company executive admitted, “We are looking for excuses to come to California in January.”
Investor relations departments should be reminded of all that Los Angeles has to offer for prospective analyst days. Outerwall, the maker of Redbox DVD kiosks, is based in Bellevue, Washington, but had their most recent analyst day in Los Angeles. Rosemary Moothart, Outerwall’s Director of Investor Relations said, “We like to spread things around a bit.” That stance would be welcome by many in the Los Angeles professional community.
If you are in the entertainment industry, Los Angeles is clearly the hotbed. In finance, many would look to New York in the same fashion – the place to be. However, as Mr. Huynh points out, “I believe with capital markets becoming more global and most equity trading moving away from traditional exchanges, being on Wall Street has lost much of its advantages.”
Additionally, for some, being away from the “noise” of traditional money centers such as New York and Boston can prove to be an advantage. Ryan Ross, CFA spent years in the Midwest as an analyst before recently moving back to Southern California. “I think being in cities where finance is not as big of an industry allows for more independent thinking. If I go to dinner in Southern California after the market has a horrible day, I couldn’t tell by any buzz in the restaurant. I doubt that is the case in Manhattan. Being away from such chatter, I think, is better for objectivity.”
We are all familiar with the costs of unethical actions...fines, censure and even jail time. So, why then do unethical actions persist?
The author of the article referenced below gives two answers: (1) Unethical behavior happens progressively. When we make that first poor decision that sets us on a course, we underestimate the ultimate cost and (2) People are not effectively aware of the benefits of ethical conduct. These can include a clear conscience, the lack of lingering guilt, the ability to live carefree and have no fear of the truth and the value of a sterling reputation which creates new business opportunities and increases personal satisfaction and joy.
The benefits of unethical actions are immediate and come with a great cost. The benefits of ethical actions take longer to play out but are more permanent and satisfying. As industry professionals we would do well to keep these truths in mind and share them with our colleagues. Read more...
By Dan Pomerantz, CFA
Employer and Community Outreach in Action
The March/April issue of CFA Institute Magazine's news section recognizes eight local member societies, including CFA Society Los Angeles and its executive director, Laura Carney, for partnering with the Wall Street Warfighters Foundation to "identify, develop, and place disabled veterans." The article includes the thoughts of our president, Mark Harbour, regarding the qualities that veterans bring to the workplace. Read more... And more...
The Great Divide over Market Efficiency
Clifford Asness, managing and founding principal of AQR Capital Management, and John Liew, founding principal of AQR Capital Management, provide their thoughts on the Market Efficiency in this Institutional Investor article. Rather than give us a just an academic discussion of their position, the authors also provide a personal, firsthand account of the limits of arbitrage in the midst of market extremes. Read more...
Interview: John Ridding of the FT on Paywalls and Passion
In the course of our financial content curation work, we can't help but notice that registration- and fee-free links to quality material are becoming increasingly more difficult to come by. This 2012 Mediaweek (UK) interview with the Financial Times' John Ridding provides some insight regarding the business strategy driving this phenomenon. We've also provided a link to a widely-cited CNBC interview with Warren Buffett from earlier this year, in which he gives his own thoughts regarding charging people for online news content (near the beginning of the interview). Read more... And more...
As Downtown Grows, the Big-Money Developers Rush In
L.A. Downtown News' Eddie Kim reports on the recent downtown development boom, encompassing local developer, out of town developer, and academic perspectives. Kim's article complements a more recent Bloomberg article, which focuses on the efforts of Shanghai-based Greenland Holding Group Co., and Ifei Chang, the president and CEO of its U.S. subsidiary, Greenland U.S. Holding, Inc. Read more... And more...
MOOC: Engaging India
edX and the Australian National University will soon be offering a MOOC (Massively Open Online Course) on various aspects of contemporary India, including its economy. The Australian Financial Review recently posted an article providing more background regarding the course and the edX educational platform. Read more... And more...