April 2015

CFALA e-Newsletter: April 2015

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 laura@cfala.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 ...

Interview with Paul Smith, New President and CEO of CFA Institute 

On January 20, 2015, CFA Institute named Paul Smith, CFA as its new president and CEO.  Smith has more than 30 years of leadership experience in the asset management industry, including over 18 years in Asia. He joined Bank of Bermuda in Hong Kong as Asia head of securities services in 1996. After HSBC’s acquisition of the bank in 2004, he served as global head of securities services and global head of alternative funds administration based in New York, where he was responsible for the delivery of services to 2,000 investment funds with over US$250 billion of assets. Before joining CFA Institute in October 2012, Smith was chairman and CEO of Asia Alternative Asset Partners.


Mr. Smith offered to share his thoughts with CFA Los Angeles, and we caught up with him while he was in Hong Kong (a 10:00 p.m. phone call in Hong Kong – thanks Paul.)


Tom Derse:  You have said “Society has fallen out of love with the Investment industry.”  Is it worldwide?  Is it regional?  What do we do as charterholders to regain that trust?


Paul Smith:  It is a personal opinion.  There are plenty of charterholders who disagree and many think the industry is held in fine regard.  But the increase in robo-advisors, passive investing, and real estate investing indicate an erosion of trust. In addition, surveys indicate many people believe the industry is overpaid and underperforming.  There is also a perception that we are not “professionals.”  Yet we seem to think highly of ourselves which causes a gap between how we regard ourselves versus how the public perceives us.


In different corners of the world, opinions will differ.  But uniformly in the developed world, our industry scores poorly.  So we need to proceed and err on the side of caution.


We as charterholders have a good track record and we should do more to talk about the value we bring to society.  We need to have a more robust discussion about pricing and the value we add.  We need a transparent dialogue about what we do and a what is the proper fee for that value.


TD:  Indexing is all the rage.  We even had Charles Ellis speak at our annual dinner in Los Angeles.  Is this a reflection of confidence in active managers’ competence, ethics or other dynamic?


PS:  Indexing has brought a great deal of value to a lot of investors, but its popularity is largely due to price conscious investors who are unconvinced active management adds any value.  We as asset managers have sort of let the indexers take the stage and we were not as vocal as we could have been regarding active management, especially regarding asset allocation.


TD:  We are part of a worldwide organization, but our involvement is almost completely local.  How do we stress the importance of being not just a member of the local society, but being involved with the local society?


PS:  I believe we can best go global by being local.  What I mean by that is presence on a local level in 144 places worldwide shows global presence.  And that presence doesn’t even have to mean being directly involved, but by showing affiliation and working toward improving engagement with the public.  I believe if you want to show support then you need to belong, regardless of your level of involvement.  I think it is important that the local society have visibility and even passive members of the local society want to improve that visibility.


TD:  You will be the featured speaker at a CFA Los Angeles event on Friday, May 8.  What do you look forward to when visiting Southern California?

PS:  What’s not to enjoy?   I like big cities. I was born in London and live in Hong Kong.  Los Angeles is my speed.  I am looking forward to being there again.


By Tom Derse, CFA

Investment Motto: Be Prepared and Watch Out for the Pizza 

Earnings, dividends, conference calls, and footnotes—all factors we as successful investment professionals must deal with on a regular basis. But monitoring these factors is often not enough in today’s complex world. There is often an overlooked factor that we ignore at our own peril… geopolitics.

Geopolitics is defined as the “analysis of the geographic influences on power relationships in international relations,” but author Pippa Malmgren, in her new CFA Institute Research Foundation book Geopolitics for Investors, believes there is much more involved than the definition indicates. She believes geopolitics includes both countries projecting their power abroad and the response to these moves by others. This action/reaction cycle is critical to understanding geopolitics and its impact on investments. In addition, there is a vulnerability to events that are entirely outside a nation’s control that must be taken into consideration.

Geopolitical risk is an often-used term in investments, but Malmgren notes “Geopolitics has the capacity to bring risks and opportunities, both large and small, onto the investment landscape.” It is while reading about this risk and opportunity that I think back to my days as an options floor trader facing my first major geopolitical event, Iraq’s invasion of Kuwait.

It was a tense time in the financial markets late in 1990 following Iraq’s invasion of Kuwait. I had structured my positions so that they would profit should the markets drop on news of an invasion of Iraq. The news of the invasion finally arrived early in 1991, marking the start of the first Gulf War, and I was confident that my short positions in the market would be profitable.

The markets quickly took their expected tumble following the invasion (for the first 10 minutes anyway), but surprisingly, they soon rallied as reports were received of the coalition troops making tremendous gains while moving through Iraq. Instead of risk following the impending war, the markets had discounted the invasion and provided an opportunity for price gains following good news on the progress of the invasion.

Although I experienced financial losses following this event, my first geopolitical lesson was learned: The world is uncertain, and investment markets often factor in widely known news and react differently than expected. After reading Malmgren’s book, I have learned some important new geopolitical lessons:

  • All too often, geopolitics is an overlooked or underappreciated factor in the investment management process.
  • The deep interconnectedness of the world economy has caused high global correlations to be commonplace.
  • Core relationships that have underpinned the “world order” for decades seem to be deteriorating.
  • Geopolitics today is moving markets but is dominated by wishful thinking rather than critical analysis.
  • If we do not allow change, including geopolitical change, to be a process, it is likely to become a stream of destabilizing events.
  • To fail to understand and address geopolitics and the various interconnected disciplines is to fail to exercise due diligence.

We all have our stories to tell, but by gaining a better understanding of geopolitics, we position ourselves to be better investment professionals. Malmgren states that not very many years ago hedge funds deployed spotters near the White House to observe late-night pizza deliveries (the more pizzas and the later the delivery hour, the bigger the problem). Geopolitics is hard to quantify (this is a 10-pizza event), but efforts to evaluate its impact will be rewarding for you and your clients.

By Bud Haslett, CFA
Executive Director
CFA Institute Research Foundation 

What have we learned since the 2008 crisis? 

What has changed, if anything, in terms of ethics since the 2008 crisis? Are there any noticeable improvements in regard to ethical infractions committed and was anything done to restore faith in the financial markets?


According to the 2015 Global Market Sentiment Survey (GMSS), not much has changed.  A decisive 96% of respondents agreed that there is a lack of trust in the finance industry.      


Additionally, infractions continue.  Bank of America settled for a record $16.65 billion over mortgage securities fraud.  SAC Capital Advisors was dealt the largest insider trading penalty ever imposed.


In the 2015 survey, members cite better enforcement of existing laws and regulations as the most needed regulatory or industry action.  But regulation alone won’t solve the problem.  Sixty-three percent of respondents cite poor firm cultures as the culprit.  This is up from 54% the prior year.  A better job needs to be done by both parties, not only domestically but also on a global and cross-border scale.


Kurt Schacht from the CFA Institute concludes that all parties in the financial services industry have plenty left to do to improve the behaviors and practices of investment professionals.  The full article can be accessed here.   


By Glen Ferrand, CFP, CFA
Advocacy & Ethics Committee

Learning Culture

Here's another opportunity to get to know CFA Institute President and CEO Paul Smith, CFA. In this short Hubbis video interview, Smith expresses his views on the importance of continuing professional education for wealth managers. Read more... 

Ethics and Finance: Candid Insights from John Hendry 

CFA Institute's Usman Hayat, CFA, interviews Professor John Hendry, author of Ethics and Finance: An Introduction.  The resulting Enterprising Investor article is a bit long, but it's still an easy read. Takeaway phrase: “The point is that we all know what is and isn’t ethical. That’s not the problem. The problem is awareness.” Read more... 

Study Finds Active Underperformance Mainly in Broker-Sold Funds 

The Oregonian's Brent Hunsberger summarizes the findings of a study of active underperformance, published last year in The Journal of Finance and co-authored at the University of Oregon.  The authors of the study compare the performance of broker-sold actively managed funds with that of direct-sold funds. Read more... And more... 

Michael Finke - Planning for Retirement Living: The Financial Implications of Aging 

Texas Tech University professor and former Journal of Personal Finance editor Michael Finke discusses the implications of aging for retirement planning in this archived video webcast from the CFA Institute's 2015 Wealth Management Conference.  In his presentation, Finke provides an overview of longevity trends and the cognitive/physical changes and risks associated with aging. Read more... 

Model Thinking 

Coursera and the University of Michigan will be offering a ten-week, Massively Open Online Course, starting on June 1, on "how to think with models and use them to make sense of the complex world around us."  The course will cover a wide variety of models, but will include sections on statistics, behavioral economics, and economic growth.  Like many MOOCs, the course is non-credit; however, it can be taken at a nominal cost (usually $50) or even for free. Read more... 















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