Académique Documents
Professionnel Documents
Culture Documents
May/June 2014
Expanding
Horizons
Global expansion is
a tricky balancing act
for asset managers
May/June 2014
COVER STORY
30 Expanding Horizons
Global expansion is a tricky
balancing act for asset managers
30
By Rhea Wessel
34
38
40
COVER ILLUSTRATION
Kelly Alder
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independent RIA on
Interactive Brokers platform?
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May/June 2014
48
9 EMEA Voice
The Ethical Gap between Principle and Practice
By Nitin Mehta, CFA
10 APAC Focus
Asia Pushes Back
By Paul Smith, CFA
VIEWPOINT
14 In the Dark
The latest allegations about market rigging
by high-frequency traders overlook more
serious problems
By Dennis Dick, CFA
50
PROFESSIONAL PRACTICE
20 Finding profitable high-yield anomalies
24 Compensation trends for analysts
27 Stopping boards disorganized crimes
56
55 Professional Conduct
Notices of disciplinary action
5 In Summary
56 Chapter 10
WORLD-CLASS CURRICULUM
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ancce Pro
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IN SUMMARY
VWUDWHJ\:KHQKHQGVKLPVHOIDWDQHYHQWZKHUHHYHU\thing is about to go wrong in spectacular and embarrassing fashion, he tells the reader, The essence of strategy on
these occasions is to be as near the door as possible. For
investors, the gravest danger comes when everyone suddenly perceives a threat simultaneously and tries to get
through the door at the same time. Under such conditions,
those with a proper understanding of geopolitical analysis
may have an advantage because it can provide high levels
of predictability, according to Jason Voss, CFA (The Value
of Geopolitical Analysis, 17).
One of the predictable patterns examined by Voss is Russias interest in Ukraine and the Crimea region in particular.
As a result of recent developments, members of CFA Society
8NUDLQHQGWKHPVHOYHVGHDOLQJZLWKFLUFXPVWDQFHVWKDW
their professional colleagues in many other markets never
have to contemplate, yet they persevere in trying to advance
a vision of progress. In the words of Anna Reshetova, the
societys administrative director, Its our great hope and
H[SHFWDWLRQWRTXDOLWDWLYHO\FKDQJHWKHQDQFLDOPDUNHWLQ
Ukraine (Hope and Uncertainty, 38).
For investors in more stable environments, hope is a
tricky thing because it can easily turn into optimism. Naive
optimism is invariably where Bertie goes wrong when he
decides to help someone without consulting Jeeves. The
two have very different approaches. The wise valet operates
with a shrewd understanding of psychologyhow people
will actually behave in a given situationbut Bertie usually proceeds on wishful thinking. According to high-yield
specialist Jochen Felsenheimer, the same thing can happen
with investment models. Its never the model, he says. Its
always the people putting assumptions into their models
ZKRDUHWRRRSWLPLVWLF7KH2PQLYRUHV'LHW
Is the latest controversy over high-frequency trading a case
RIRSWLPLVPJRQHZURQJ+)7UPVJHWWLQJFDUULHGDZD\E\
irrational high-speed exuberance) or a knee-jerk overreaction
based on widespread ignorance of market microstructure?
7DNLQJDWUDGHUVH\HYLHZRIPDWWHUV'HQQLV'LFN&)$
argues that people are overlooking the most serious probOHPVFDXVHGE\KLJKIUHTXHQF\WUDGHUV,QWKH'DUN
Some of us can identify with the situation in which Bertie
QGVKLPVHOIQHDUWKHHQGRIRight Ho, Jeeves. When one
of Jeeves plans appears to have gone awry (temporarily),
Bertie must ride a bicycle at night over unfamiliar roads to
a village nine miles distant. For life or investing, riding a
bike in the dark without a lamp often seems like an apt metaphor. Bertie would advise us to remain calm, pour a restorative drink, and make ourselves comfortable. After all, as
he says, It isnt so dashed easy to stagger when youre sitting in an arm-chair.
THE
FUTURE
OF FINANCE
STARTS
WITH
YOU
We all play a role in bringing positive change to the finance industry.
Explore cfainstitute.org/FutureFinance to learn more.
#FutureFinance
CFA Ins
nstit
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tiittute
ti
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20114.. CFA, CIPM
CIP
IPM
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#FutureFinance
2014
INVESTMENT
MANAGEMENT
WORKSHOP
711 July 2014
Harvard Business School
Boston, Massachusetts, United States
Offered by CFA Institute and Harvard Business School
JOHN KELLY-JONES
Partner and Chief Operating Officer
Independent Franchise Partners, LLP
2012 IMW attendee
FOLLOW US ON
LIKE US ON
FOLLOW US ON
Country
Number of
domestic funds*
Number of foreign
cross-border funds
notified for sale*
% of foreign funds
China
Hong Kong
Japan
Singapore
South Korea
Taiwan
913
233
4,176
558
9,488
613
Not available
1,240
89
2,125
280
855
Not permitted
84%
2%
79%
3%
58%
Source: PricewaterhouseCoopers.
As of Q4 2011.
have stepped up their efforts to build a regional passporting scheme. And investment managers have found getting
8&,76SURGXFWVDXWKRUL]HGLQ$VLDLQFUHDVLQJO\DUGXRXV
Moreover, strategically, the effect of product domiciliation on job creation has become increasingly apparent.
When UCITS exploded in use in Asia after the 1998 Asian
QDQFLDOFULVLVORFDOSURGXFWIDPLOLHVZHUHOLTXLGDWHGRU
collapsed into European-domiciled funds. Asset managers
RIWHQIRXQGLWHTXDOO\FRQYHQLHQWWRFHQWUDOL]HDVVHWPDQDJHPHQWUROHVLQ(XURSH%DFNRIFHRSHUDWLRQVIROORZHGDORQJ
Today, the balance of power is shifting. European asset
PDQDJHUV QHHG $VLDQ LQYHVWPHQW IXQG RZV PRUH WKDQ
Asian investors need European products. This new era will
be less hospitable to foreign-domiciled products. The change
VKRXOGEHJRRGIRU$VLDQQDQFLDOVHUYLFHVLQWHUPVRIMRE
prospects and for Asian investors as products are developed
primarily for local market needs.
Of the three initiatives, the Hong KongChina mutual recognition scheme has the most potential to excite. However,
while a game changer, it is not a Big Bang. The scheme
is likely to start as a conservative pilot program, applying
only to Hong Kong-domiciled, SFC-approved unit trusts and
products approved by Chinas Securities Regulatory Commission. The pace will be measured, and UCITS funds are
unlikely to be rendered obsolete overnight.
What is Chinas motivation in entering into a passporting
scheme with Hong Kong? Probably not to open its market
to foreign players but rather to strengthen the capability
of domestic fund management companies to compete globally. The Chinese industry is young and lacking in depth of
product experience. But it does have access to one of the
worlds largest pools of domestic savings. China will use
Hong Kong, with its international expertise, as a learning
ground to master how to run world-class asset management
FRPSDQLHV:KHQ&KLQHVHFRPSDQLHVQDOO\GROHDUQWKHVH
skills, it wouldnt be surprising if they give the big global
players a run for their money.
Out-of-the-Box
Thinking (Literally)
Wins Video Contest
Gan Jun Mao and Cheah Zi Chuin
from the University of Malaya won
the CFA Institute Future of Finance
Video Contest. As part of the 2014
Global Research Challenge, students were asked to create a video
to answer the question, What
should the financial industry do to
better serve investors and society? Using a common household
item, the winners creative portrayal of how to help investors feel
secure impressed the judges. You
can watch the video on the Future
of Finance hub at the CFA Institute
website or on YouTube.
ZLWKWKH$VLD3DFLF&DSLWDO0DUNHWV$ZDUGGXULQJWKH
Auckland Finance Meeting in Auckland, New Zealand. The
study by Professor Park Tae-jun, Professor Lee Youngjoo, and
Professor Song Kyo Jik on trading before earnings shocks proYLGHVLQVLJKWRQZKHWKHULQVWLWXWLRQDOLQYHVWRUVWUDGHSURWably around positive or negative earnings surprises. The study
showed that the trading volume decreases only before negative events because of information asymmetry among investors. They also found that institutions sell their stock prior to
an earnings shock whereas individual and foreign investors
do not anticipate the bad news. Park is a professor at Sungkyunkwan University and senior researcher at Korea Capital
0DUNHW,QVWLWXWH/HHLVDSURIHVVRURIQDQFHDWWKH6RJDQJ
Business School of Sogang University, and Song is a profesVRURIQDQFHDW6XQJN\XQNZDQ8QLYHUVLW\$OOWKUHHSURIHVsors are based in Seoul.
&)$,QVWLWXWH5HVHDUFK3UL]HVDUHDZDUGHGWRUHVHDUFK
projects to improve the standards of practice of the investPHQWFRPPXQLW\LQWKH$VLD3DFLFUHJLRQ7KHZLQQLQJ
research papers are posted on the CFA Institute website,
cfainstitute.org. Go to the Insights & Learning menu and
VHOHFW5HVHDUFK)RXQGDWLRQWRQGWKHRFFDVLRQDOSDSHUV
CFA PROGRAM
SCHOLARSHIPS
ARE AVAILABLE
www.cfainstitute.org/scholarships
scholarships@cfainstitute.org
ACCESS SCHOLARSHIPS
Access Scholarships provide needs-based
scholarship opportunities for those unable
to afford the full price of the CFA Program
enrollment and registration fees.
AWARENESS SCHOLARSHIPS
Awareness Scholarships are
designated for key influencers in the
academic and financial communities
and the media. University faculty and
students enrolled in CFA Institute
Program Partners and Recognized
Universities and employees of
governmental securities regulators
and central banks are eligible to apply.
CFA Institute 2014. CFA, CIPM, and Claritas are registered trademarks of CFA Institute in many
countries throughout the world.
2014
CFA INSTITUTE
RESEARCH AWARD
Congratulations to the winners of the CFA Institute
Asia-Pacific Capital Markets Research Prizes!
CFA Institute Asia-Pacific Capital Markets Research Prizes are
presented at reputable academic conferences in the region:
Asian Finance Association (AsianFA) Annual Conference
Auckland Finance Meeting (AFM)
Australasian Finance & Banking Conference (AFBC)
Financial Market Association (FMA) Asian Conference
The research prizes are designed to encourage research projects that will further improve the standards of practice of the
Asia-Pacific investment community.
Submit your research paper at those conferences and apply to
be considered for the prize. Papers are selected based on value
to practitioners, quality of content, readability, and presentation.
To learn more about the awards, please contact William Boivin:
william.boivin@cfainstitute.org.
VIEWPOINT
In the Dark
THE LATEST HYPE ABOUT HIGH-FREQUENCY TRADING OVERLOOKS DEEPER PROBLEMS
By Dennis Dick, CFA
market maker, or (as automated traders are now known) the high-frequency
trader (HFT).
on Bloomberg TV and said, Speed matters less in todays market than it has
ever mattered. After that comment,
critics were quick to attack his statement, challenging his claim, but I completely agree with him. While speed
helps to avoid getting picked off, the
real advantages arent reliant on speed
at all. The real advantages are built on
relationships. And this is where the
market starts to get shady.
DARK ADVANTAGES
OTC (over the counter) market-makLQJ+)7UPVNQRZQDVLQWHUQDOL]HUV
actually have built relationships with
online brokers in which they buy order
RZ IURP UHWDLO EURNHUDJHV WR WUDGH
directly against incoming marketable
orders. They pay the retail broker a fee
IRUWKHSULYLOHJHRIJHWWLQJUVWGLEV
on retail orders. The fee is known in
WKHLQGXVWU\DVSD\PHQWIRURUGHURZ
Going back to our original example,
assume stock XYZ is bid at $20.00 for
20,000 shares and offered at $20.01 for
20,000 shares. Any participant placing
an order to buy the stock at $20.00 on
that exchange would be behind the
other 20,000 shares that were there
UVWSULFHWLPHSULRULW\%XWWKH+)7
LQWHUQDOL]HUFDQWUDGHGLUHFWO\DJDLQVW
the retail market orders that they have
SXUFKDVHGDFFHVVWRUVWGLEVH[HFXWing against these orders off exchange.
The only regulatory requirement is
that they match or beat the displayed
national best bid or offer (NBBO). This
DUUDQJHPHQWJLYHVWKHPDVLJQLFDQW
advantage.
For example, if a retail trader sells
1,000 shares at the market in stock
;<=WKHLQWHUQDOL]HUFDQEX\IURPWKH
retail trader at $20.00 directly, jumping
ahead of the other 20,000 shares that
are in the order queue on the public
exchange. If another retail trader sends
a market order to buy 1,000 shares of
VWRFN;<=WKHLQWHUQDOL]HUFDQWUDGH
directly against that order as well, selling the stock at $20.01 and jumping the
public order queue once again. In effect,
LQWHUQDOL]HUVFDQJHWDIUHHULGHRII
the public quote, because they know
that if the quote starts to get out of
equilibrium, they can quickly sell the
stock they just bought from the retail
trader at $20.00 to the market participant that is bidding at $20.00 on the
public exchange and scratch the trade.
7KLVSD\PHQWIRURUGHURZUHODWLRQship they have with the retail broker
allows them to jump the order queue
continuously and lean on the public
order queue for protection. Its a slick
system, but who is being disadvantaged
by this? The person that is actually bidding on the exchange at $20.00, because
WKDWSHUVRQVOLPLWRUGHULVOHIWXQOOHG
The limit order would have been
VIEWPOINT
'R\RXKDYHGD\VZKHQ\RXIHHODELW
GLVVDWLVHGZLWK\RXUMRE"'D\VZKHQ
you cant help wondering whether all
the toil and stress is really worth it?
But do you know what would increase
\RXUMREVDWLVIDFWLRQWKHPRVW"7RQG
an answer, I conducted an anonymous
opinion poll of readers of the CFA Institute Financial NewsBrief: What would
increase their job satisfaction the most?
The results, although far from being
VWDWLVWLFDOO\JHQHUDOL]DEOHDUHUHYHDOing. Perhaps unsurprisingly, for 37%
of our 888 respondents, the answer
was greater compensation. The obvious problem here is that even the most
highly paid want more money, which
does not seem to make them any more
VDWLVHG:KDW,QGPRUHLQWHUHVWLQJ
is that more than 60% of respondents
did not select greater compensation.
1HDUO\DIWKRIUHVSRQGHQWVVHOHFWHG
a better worklife balance, and it is
easy to understand why. In the daily
seesaw of work and life, work seems to
easily outweigh life. It is your work that
pays your bills, so your exercise workout can wait for tomorrow; children can
be kept busy with electronic gadgets;
Greater compensation
37%
19%
14%
12%
A promotion
Friendlier work environment
Other
9%
5%
4%
The more I read about job satisfaction from different sources, the more I
am convinced that what really makes us
GLVVDWLVHGDWZRUNKDVDORWWRGRZLWK
ZKDWWHQGVWRPDNHVXVGLVVDWLVHGLQ
OLIHLQJHQHUDOXQIDLUQHVV2UJDQL]Dtions where things other than reason
and evidence winand win consistentlyand where people routinely
treat others the way they would not
VLJQLFDQWDPRXQWRIWLPHSUDFWLFLQJ could save their employer from wasting like to be treated themselves probably
the art of look busy, do nothing with- resources. Employees could speak up to have unfairness built into their culture.
out being detected by the radar of cor- encourage employers to avoid buying No matter what an employer tries
porate accountability. According to the expensive equipment or services that family fun days or free drinksthe
2013 Wasting Time at Work Survey by WKHLURUJDQL]DWLRQFRXOGGRZLWKRXWRU work environment wont be very satisSalary.com, 69% of the people surveyed point out that a certain idea is not worth I\LQJ$WVXFKRUJDQL]DWLRQVPRUHMRE
said they waste time at work every single spending time and money on because satisfaction has to mean more money
day, and the most common method, it was tried before and found useless. DGLQQLWXP%XWRWKHURUJDQL]DWLRQV
XQVXUSULVLQJO\LVVXUQJWKHLQWHUQHW %XWKLJKO\GLVVDWLVHGHPSOR\HHVDWDQ\ ZLOOQGPRUHKRSHDQGPRUHZRUN
Life, however, is seldom as simple as level may look the other way as orga- to doin what Kjerulf calls results,
GLVVDWLVHGHPSOR\HHVPD\ZDVWHWLPH QL]DWLRQDOUHVRXUFHVJRXSLQVPRNH recognition, and relationships.
until they leave. Consider, for instance, It is little wonder that job satisfaction Usman Hayat, CFA, is director of Islamic Finance
that employees are often in a position is something that eludes measurement and ESG at CFA Institute, London.
in which by taking small actions, they but must be managed.
In a world of bewildering informational complexity, an understanding of the ways that people, power, personal preferHQFHVDQGJHRJUDSK\FRQYHUJHWRLQXHQFHIXWXUHWUHQGV
is essential to investment management success. Studying
these convergences is better known as geopolitical analysis.
Careful application of the precepts of geopolitical analysis
not only provides insight into current events, such as the
recent crisis in Ukraine, but also sometimes leads to accurate predictions of future events. To some degree, many
investors appear to be aware that geopolitics is important.
A recent poll of readers of CFA Institutes Financial NewsBrief shows that 63% of respondents believe geopolitics is
very important to their analyses, with an additional 30%
stating it is slightly important. (See chart for complete
survey results.)
Yet, in my experience, people often misunderstand geopolitical analysis, thinking that it is simply an awareness of
the internal politics of a nation and how that affects overall
global politics. Instead, geopolitical analysis is much more
KROLVWLF'HVSLWHLWVVHHPLQJVXUIDFHOHYHOFRPSOH[LW\DQ
understanding of geopolitics leads to simpler, clearer, and
more accurate predictions of globally important events. In
other words, understanding geopolitics is one pathway to
investment management success.
GEOGRAPHY
Geopolitical analysis takes into account a nations geography and the inevitable consequences of that geography.
Very important
63%
Slightly important
Not important
30%
7%
Important examples include an examination of the constraints imposed on a nation by its natural resources, its
ease of access to the outside world, and its internal transportation systems. For instance, if a nation has limited access
to natural sources of energy, then a constant concern will
be how the nation can get energy sources and what must
be exchanged for that access. Further, landlocked nations
have fewer natural trading partners than those that have
access to seas and oceans, and being landlocked will likely
lead to stunted economic growth and cultural peculiarities.
As for internal transportation, consider that a geographical advantage of the United States is that it has navigable
May/June 2014 CFA Institute Magazine 17
VIEWPOINT
ULYHUVWKDWRZQRUWKDQGVRXWKDVZHOODVHDVWDQGZHVW
Because water transportation is much less costly than overland transport, the US has a permanent cost advantage compared with other major countries.
Geography also either blesses or curses nations with
neighbors. Ukraine sits poised between two much larger,
better-resourced entities: Russia and Europe. Furthermore,
when considering some of the previously-mentioned constraints (and ease of access to the outside world in particular), you can see that Russia has a much larger vested interest in Ukraine than does Europe. Ukraines location constrains Russias access to the oceans and thus its ability to
trade and project power globally. Additionally, because the
border between Russia and Europe is a vast plain, Russia
requires buffer states to secure its national boundaries. So, if
Ukraine is not in Russias orbit, access to Russias heartland
will be largely unobstructed by geographic obstacles, such
as mountains. For all these reasons, Russia is permanently
interested in Ukraine in a way that European powers, such
as Germany, are not and in a way that is almost unimagiQDEOHWRFLWL]HQVRIWKH8QLWHG6WDWHV
In short, geography provides almost unshakable advantages and disadvantages for nations. For analysts, the
permanent quality of geography provides high levels of
predictability.
DQGWKHH[SHFWDWLRQVRISHRSOHDERXWZKDWTXDOLHVDVEDVLF
needs. Basic needs of Russia include its famous need for
access to a warm-water port and its need for energy to heat
homes during its long winters.
RESUSCITATING JAPAN:
RETHINK, REFOCUS,
RESTRATEGIZE
As Japan attempts to make up for its lost
decades, its time to rethink the risks, review
the assumptions, refocus perspectives,
re-examine the opportunities, and reshape
your investment strategies in the worlds
third-largest economy.
Discover fresh investment ideas, learn about
emerging market trends, and interact with
international and Japanese investors and
strategists.
FEATURED SPEAKERS
Richard Koo
Chief Economist
Nomura Research Institute, Ltd.
Avinash Persaud
Chairman
Intelligence Capital Ltd.
EARLY-BIRD OFFER
Register by 2 June 2014 and save JPY 10,000
SILVER SPONSOR:
EXHIBITORS:
PROFESSIONAL PRACTICE
PORTFOLIO PERFORMANCE
KEY POINTS
,XVHPDQ\VLQJOHQDPH&'6EXW,DOVRXVHVLQJOHQDPH
derivatives on the equity sidemost frequently, put options.
I buy a bond, and at the same time, I buy put options to protect me against any default risk.
If the company goes bust and I lose money on my high\LHOGERQGWKHHTXLW\YDOXHPXVWEH]HUREHFDXVHWKHKLJK
yield bond is senior to equity in the capital structure (think
of the 1974 Merton model of option pricing).
One reason I use credit default swaps is simply that its
a very liquid market. Its far more liquid than the singlename bond market.
Why is that?
,WGHSHQGV,ILWLVFKHDSHUWRXVHD&'6DVDKHGJH,XVHD
&'6,ILWLVFKHDSHUWRXVHHTXLW\GHULYDWLYHV,XVHHTXLW\
derivatives.
PROFESSIONAL PRACTICE
PORTFOLIO PERFORMANCE
There are many things you simply cannot put into a model.
It doesnt work because you cannot quantify these things.
Our analyses are very simple. For example, if I play a high\LHOGERQGYHUVXVHTXLW\ZKDW,KDYHWRGRUVWLVUHDGWKH
prospectus of the high-yield bond because there might be
VRPHVSHFLFFRYHQDQWVRUODQJXDJHWKDWVXEVWDQWLDOO\DOWHU
WKHULVNSUROHRIWKHERQG
For example, I was very active in Greece. We made highyield investments on the sovereign side as well as the corporate side. We did not buy the Greek government bonds
that were governed by Greek law. We just bought the international bonds, which were based on UK law.
Obviously, Greece defaulted and investors lost a lot of
money on the bonds that were based on Greek law. But
those who had invested in bonds governed by UK law got
all their money back, even though it was almost an identical bond to the Greek-law bond.
Its as simple as this: The same bondthe same risk in
not simply deciding to buy Caesars credit risk. I have 50 different alternatives to buying Caesars risk. I dont need to
QGRQHRSSRUWXQLW\,QHHGWRQGWKHEHVWRSSRUWXQLW\
out of these 50.
Scenarios and convoluted capital structures, such as
Caesars, make the investment processes more complicated.
7KHUHDUHPDQ\ERRNVWKDWWHDFK\RXKRZWRDQDO\]HFRPpanies. But on the high-yield side, its a different game [compared with single-name credit analysis on the investmentgrade side]. Its learning by doing and learning by making
mistakes. You have to discuss many topics with many different professionals to fully understand the many dimensions of the investment. I do not know a single guy who can
DQDO\]HDFRPSOH[VWUXFWXUHOLNH&DHVDUVDQGFRPHXSZLWK
DGHQLWLYHHYDOXDWLRQRIWKHFDSLWDOVWUXFWXUHDQGRXWORRN
RIWKHUP:HDUHLQFRQWDFWZLWKVHYHUDOSHRSOHWRGLVcuss many different features, such as the default schemes
in the United States. Its hardcore teamwork.
PROFESSIONAL PRACTICE
CAREER CONNECTION
Pay Daze
WITH ASSETS UNDER MANAGEMENT RISING, WILL COMPENSATION FOLLOW?
KEY POINTS
By Lori Pizzani
7KHIRUHFDVWIRUFDUHHUVDQGSD\SDFNDJHVIRUQDQFLDODQDlysts and other investment professionals can vary according to which expert you ask, but most of those who shared
their perspectives for this report are cautiously optimistic
about what lies ahead for 2014.
There is more movement, more activity, although that
activity is not necessarily a lot more hiring, says Roy Cohen,
a New York City career counselor, executive coach, and author
of The Wall Street Professionals Survival Guide: Success Secrets
of a Career Coach. In his view, the risk appetite among Wall
6WUHHWUPVKDVGHQLWHO\LQFUHDVHGDVWKHQHHGWRFUHDWHQDQcial security for individuals,
including those facing retirement, has become a priority.
Compensation patterns for
0DQ\UPVKDYHVHWWKHLU
financial analysts and other
sights on attempting to generinvestment professionals
DWHRXWVL]HGUHWXUQVIRULQYHVvary widely within domestors as the economy becomes
tic markets and across geomore and more stratified
graphic regions.
and increasing numbers of
Since 2008, hiring and compeople are building enormous
pensation (salaries and
wealth. Cohen sees notable
bonuses) have been congrowth of positions within
strained as US firms conthe structured products area
tinue to rein in expenses.
(e.g., credit derivatives) and
for compliance and wealth
Although assets under manmanagement jobs.
agement for US firms have
started increasing again,
the implications for compensation are still unclear.
A CHANGING LANDSCAPE
ENVIRONMENTAL
MARKETS: A NEW
ASSET CLASS
Richard L. Sandor, Nathan J. Clark,
Murali Kanakasabai, Rafael L. Marques
In todays dirty, depleted, and dangerous
world, environmental markets are the key
both to short-term tactical opportunities and
to longer-term transformational ones.
RESEARCH
FOUNDATION:
YEAR IN REVIEW
2013
Learn more about manager selection, ethics,
asset/liability management, derivatives, life
annuities, tail risk, and other timely topics
with these informative summaries.
PROFESSIONAL PRACTICE
ANALYST AGENDA
Board Stiff
TO FIX GOVERNANCE, CHANGE INCENTIVE STRUCTURES FOR CORPORATE BOARDS
By Sherree DeCovny
In his many years as an economist and professor at the Wharton School at the University of Pennsylvania, Bernard Munk
learned that stories too good to be true generally are not
true. As the owner of an oil business, he intuitively walked
DZD\IURP(QURQVGHDOVEHFDXVHKHFRXOGQRWJXUHRXWZKDW
ZDVLQLWIRU(QURQ'XULQJDFRQVXOWDQF\HQJDJHPHQWKH
discovered Enrons power supply contracts involved a sigQLFDQWDPRXQWRIFRQFHDOHGULVNDQGKHDGYLVHGKLVFOLHQW
WRGURSWKHSURMHFW7KHQDQFLDOFULVLVRIZDV
dj vu, with the common threads being high-risk taking
by management, board of directors lack of understanding
of the risks, and massive destruction of shareholder value.
In his new book Disorganized Crimes, Munk points out
misaligned incentives for managers as one reason such crisis
events occur. Many companies promote executives using a
rank and yank system. Over time, the high-risk takers who
produce great returns move up the ladder, whereas cautious
PDQDJHUVSURJUHVVVORZO\OHDYHRUDUHUHG
The incentive structure were offering managers is telling them to move to the tails because thats how they get
paid, Munk explains. The fundamental law of portfolio
management is if you want to make a higher rate of return
than average, the only way you can do this is take more risk.
That is not to say that companies should not take higher
risks, but the board has a responsibility to monitor managements activities and disclose when the risk frontier of the
company has changed. If market participants do not have
current information about a change in the risk frontier, they
cannot price the companys securities properly.
7KHUHDUHQDWXUDOFRQLFWVRILQWHUHVWEHWZHHQWKHPDQDJHment, the board, and the shareholders. The board is supposed
to work on behalf of the shareholders, but in reality, directors are captured by the management and are fed biased
information. Effectively, the regulated capture the regulators.
1RIRUPDOPHFKDQLVPH[LVWVIRUSHQDOL]LQJWKHQHJOLJHQFH
of a board failing to detect and rein in increases in excessive risk taking. In fact, directors are legally protected by
the rule of business judgment. Managers can be sued, but
WKH\DUHJHQHUDOO\SURWHFWHGE\RIFHUVOLDELOLW\LQVXUDQFH
Today, a board member only has an upside, says Munk.
But if director incentives dont also embody a downside,
ultimately capture takes place.
Munk calls the SarbanesOxley Act (Sarbox) of 2002 a
telling example of legislating through the rearview mirror.
The legislators were already thinking about disclosure and
UHVSRQVLELOLW\RIVHQLRURIFHUVEHIRUHWKHVFDQGDOVDW(QURQ
WorldCom, and Global Crossing occurred. In the aftermath,
WKH\GHWHUPLQHGWKDWWKHQDQFLDOVWDWHPHQWDXGLWLQJSURcess was problematic and that management must sign off on
COMMUNICATE
WITH STYLE
-
Cloud-based enterprisewide
solution used by over 350
international investment
institutions in 25 countries.
Products and services are provided in various countries by subsidiaries, afliates, and joint ventures of The Bank of New York Mellon Corporation, including The Bank of New York Mellon, and in some instances by third party providers. Each is
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STOXX LIMITED
MINIMUM VARIANCE
SET FREE.
250
200
150
100
50
0
2004
2006
2008
1800 GR
2010
2012
2014
Source: STOXX Ltd. - Data from January 2, 2004 to January 29, 2014
www.stoxx.com
STOXX
STOXX
STOXX
Global 1800 Global 1800
Global 1800
GR Min. Var. GR Min. Var. Unc. GR
Annualized performance
Volatility
Sharpe ratio*
Maximum drawdown
5.8%
15.4%
0.32
-53.7%
8.9%
13.2%
0.66
-39.4%
8.1%
9.9%
0.64
-26.7%
Global expansion is
a tricky balancing act
for asset managers
By Rhea Wessel
E X PA ND IN G
HORIZONS
30 CFA Institute Magazine May/June 2014
Already one of the most global industries, investment management may become even more so as
UPVORRNWRLQFUHDVHWKHLUDVVHWVXQGHUPDQDJHPHQWDQGQGQHZFOLHQWV
KPMGs 2013 Investment Management Business Outlook survey of 100 senior executives at US mutual funds,
private equity funds, hedge funds, trusts, managed funds,
and other types of funds found that the top area for increased
spending in 2013 was geographic expansion, which ranked
even higher than IT investment.
Successful expansion is the product of thorough planning, a well-thought-out strategy, and stamina in execution,
says Marc Haynes, leader of the global investment practice
at Greenwich Associates in London and an author of the
2013 report Managing International Expansion: A Strategic Framework for Investment Managers.
Firms that expand internationally without adequate planning and preparation risk lower investment performance
EHFDXVHRIWKHSUHVVXUHSXWRQWKHUPVE\SURJUDPVWKDW
struggle, which tends to divert resources. Moreover, companies
may harm their brand at home if an expansion goes wrong.
One example of a successful expansion effort is UK-headquartered Schroders PLC. The largest listed asset managePHQWUPLQ(XURSH6FKURGHUVDSSHDUVWRKDYHDYRLGHG
missteps and has developed a strong brand in Europe, Asia,
DQGWKH8QLWHG6WDWHV1RWRQO\GLGWKHUPUHSRUWDUHFRUG
SURWLQEXWLWQRZKDVRILWVDVVHWVXQGHUPDQagement outside the United Kingdom.
The asset manager has followed a strategy of organic
growth, to which it recently added complementary acquisitions. In 2012, Schroders took a stake in the Indian asset
management business of Axis Bank Limited and fully acquired
WKHYDOXHRULHQWHG86LQYHVWPHQWJUDGH[HGLQFRPHPDQDJHU67:)L[HG,QFRPH0DQDJHPHQW,QWKHUP
PDGHDGRPHVWLFDFTXLVLWLRQ&D]HQRYH&DSLWDO1RZ6FKURGHUVKDVRIFHVLQFRXQWULHVSURYLGLQJLQYHVWPHQW
products to local and international clients.
Global expansion made New Yorkbased BlackRock the
worlds largest asset manager. Its acquisition of UK-based
%DUFOD\V *OREDO ,QYHVWRUV LQ VROLGLHG %ODFN5RFNV
SRVLWLRQDQGWKHUPLQFUHDVHGLWVSUHVHQFHLQ(XURSHLQ
July 2013 by purchasing the Credit Suisse ETF platform.
BlackRocks iShares channel brought in more than US$5
ELOOLRQRIRZVIURP(XURSHLQWKHWKLUGTXDUWHURI
BlackRocks Aladdin investment management platform,
which combines risk analytics with portfolio management,
trading, and operations tools, is core to BlackRocks global
expansion, analysts have said. In the companys third-quarter 2013 earnings call, BlackRock CFO Gary Shedlin said
WKH$ODGGLQEXVLQHVVJUHZ\HDURYHU\HDUEHQHWLQJ
from trends that favor global investment platform consolidation (among other factors).
The growth stories of Schroders and BlackRock may
seem appealing, but caution is advised.
COMMON PITFALLS
2IWHQSDUWLFXODUO\IRUVPDOOHUUPVDVVHWPDQDJHUVPD\
QG WKDW WKHLU EXVLQHVV LQDGYHUWHQWO\ EHFRPHV LQWHUQDtional. Investors may seek out the asset manager after
learning about strong performance. The asset managers
wind up with a promising book of business and then decide
to expand from there, even if the jurisdiction is relatively
new to them. In the long term, however, the move could be
costly. Acquiring a new customer is far less expensive than
maintaining a customer over the long term, given the high
levels of service that are necessary and the people-related
costs of the business.
3HUIRUPDQFHLVQRWRULRXVO\FNOHZKLFKPHDQV\RXQHHG
to establish deep relationships based on mutual understanding in order to get through the tough times, says Haynes.
It takes time to develop these relationships, and doing so
can be costly. The costs and complexities only multiply when
you add in the international dimension.
ASIA, ANYONE?
Many asset managers are attracted to the growth potential
in Asia. According to strategy consulting company Roland
Berger, institutional and retail assets in Asia are set to grow
at an annual rate of roughly 7%9% because of economic
JURZWKDQGQDQFLDOPDUNHWSHUIRUPDQFH7KHIRUHFDVWLV
EDVHGRQDPRGHOGHYHORSHGE\5RODQG%HUJHUWRVL]HWKH
asset management market.
'HPRJUDSKLFVULVLQJSURVSHULW\DQGFKDQJLQJUHJXODtions in various countries are driving pension fund growth
in the region. In the old days, says Bischoff, families were
the social security networks of the people. Step by step, pension funds are taking over part of that role.
6FKURGHUVKDVDSDUWLFXODUO\VROLGSRVLWLRQLQ$VLD3DFLF
according to the companys interim 2013 earnings presenWDWLRQE\6FKURGHUVFKLHIH[HFXWLYH0LFKDHO'REVRQ&RQsidering only the asset management business (e.g., excluding private banking), Schroders had very strong perforPDQFHLQ$VLD3DFLFLQWKHUVWKDOIRILQERWKWKH
intermediary and the institutional markets, with 4.1 bilOLRQRIQHWLQRZV
Companies should carefully plot their moves in Asia, cautions Bischof. Outsiders have been known to rush in without full consideration of the local differences. Market maturity, structure, and demand patterns in emerging onshore
Empowering People
FOR TALENT RECRUITMENT AND DEVELOPMENT, THE
CLARITAS PROGRAM PROVIDES A TREMENDOUS SELFREINFORCING POSITIVE-FEEDBACK LOOP
Young Lee, CFA, general counsel and a senior managing director
at MacKay Shields, was instrumental in bringing the Claritas Program to his firm and its parent company, New York Life. He also
helped pave the way for the Claritas Program at law firms and
industry groups, such as the New York Hedge Fund Roundtable.
As a result of his involvement, Lee heard about the experience
of the Claritas Program from many different perspectives and
agreed to share his views in a brief interview.
PDUNHWVVXFKDV&KLQDDQG,QGLDGLIIHUVLJQLFDQWO\IURP
WKRVHLQWKHUHJLRQVQDQFLDOFHQWHUVVXFKDV+RQJ.RQJ
and Singapore.
BlackRock also sees promise in the region, particularly
LQ&KLQDEXWZDUQVDERXWFUHGLWJURZWK7KHUPV
Investment Outlook points out that history shows rapid
credit expansion usually ends in tears. With China generating a record amount of credit in 2012 (much of which was
obscured in off-balance-sheet constructions, such as wealth
management products), BlackRock sees the risk of duraWLRQPLVPDWFK0DQ\SURGXFWVRIIHUVKRUWWHUPQDQFLQJ
for long-term assets and thus are very vulnerable to liquidLW\VTXHH]HV%XW%ODFN5RFNVRXWORRNDOVRVHHVWZRUD\V
of light amid the gloom: Regulators appear aware of the
risks, and are taking action to curtail growth and avoid a
EXVW>DQG@&KLQDVQDQFLDOV\VWHPLVQRW\HWLQWHJUDWHG
with the rest of the world, so any credit implosion appears
to pose limited global systemic risk.
SHRSOHZKRKDYHHDUQHGWKH&ODULWDV,QYHVWPHQW&HUWLFDWH
says Lee, who has been involved in developing the strategy
for MacKays growth outside the United States. [For more
on the impact of the Claritas Program for staff development,
see the sidebar Empowering People on page 32.]
The CFA charter is respected as the gold standard around
the world precisely because it cultivates dedicated investment professionals that are committed to the highest standards in our industry, Lee explains. Asset management
UPVVHHNLQJWRSHQHWUDWHQHZPDUNHWVQHHGWRKDYHSHUsonnel that are able to consistently perform at a high level,
often across multiple disciplines. The CFA designation helps
employers identify that type of talent.
GOOD JUDGMENT
With an ambitious team backed by the leadership at home
and working on a strategy tailored for individual markets,
an asset manager should have a strong basis for international expansion, but its reputation could still be at risk.
The way an investment manager implements an international expansion strategy is telling, according to Brett CornZHOO&)$DYLFHSUHVLGHQWDQG[HGLQFRPHLQYHVWPHQW
consultant for Callans Global Manager Research group who
DQDO\]HV[HGLQFRPHPDQDJHUVDQGDVVLVWVSODQVSRQVRUV
in searches for them.
,I,ZHUHHYDOXDWLQJDQDVVHWPDQDJHPHQWUPDQGWKH
UPZDVORRNLQJWRH[SDQGWKHSURGXFWOLQHRULWVEXVLness globally, I would want to know that the company has
checked all the boxes to make sure theyre setting themselves up to execute the strategy, he says. A failed expansion could raise questions for me about how the investment
manager is managing other aspects of its business. You dont
want to see an asset manager lose its ability to attract and
retain employees or make a misstep that could ultimately
UHHFWRQLWVLPDJH
Rhea Wessel is a freelance journalist based in Frankfurt.
THE ART
OF KNOWING
NOTHING
BRILLIANTLY
By Nathan Jaye, CFA
Cliff Asness
<HDKZHOODORWRISHRSOHFRQIXVHPHZLWK6XQ7]X
that have taken on very important roles in both the institutional and the mutual fund world. I believe momentum
should and will be as important as those two. And you can
trade momentum successfully in many other places besides
stock selection.
,QWHOOHFWXDOO\,EHOLHYHOHWWLQJDOOWKHUPVIDLOZRXOGKDYH
worked out better, even in the crisis. Im not sure I would
have had the guts to let it happen in October 2008 either.
But I think we would have conquered too big to fail forever, and I dont think the US would have slid off into the
3DFLF2FHDQ
Letting people fail is not a very pro-banker policy. Its
not a very proWall Street policy. Capitalism needs to have
two sides. Failure is the most underrated thing in the world.
Knowing there are two sides and knowing that if youre on
the wrong side, that you have skin in the gameto borrow
a phrase Nassim Taleb has been using quite well lately
is just vital. I think we could have taken many steps, and
going forward can still take many steps, to make failure
more common and more acceptable. A failure is success if
we learn what doesnt work.
Value works well over time, and these two strategies [momentum and value] are negatively correlated; they hedge each
other well. They both work over the long haul, but when
one fails, the other one tends to be having one of its better
SHULRGV0RUHJHQHUDOO\ZHEHOLHYHEHWWHUULVNGLYHUVLFDWLRQFDQLPSURYHDOPRVWDOOSRUWIROLRVDQGIHZGLYHUVLHUV
are as good as the combination of value and momentum.
Weve been working on how to make these measures
better. I will tell you the simplest ways still carry weight
with us. For instance, momentumnot just in price, but
in fundamentals, such as earnings, earnings surprise, and
HDUQLQJVUHYLVLRQVKDVEHHQVKRZQWRKDYHHIFDF\RYHU
time. Some investors, including us, have looked at momentum net of industry and other risk exposures as opposed to
the simple price momentum I told you before. There are all
kinds of ways to do it.
7KLVLVDQRYHUVLPSOLFDWLRQEXW\RXFDQVHHQDQFLDOFULVHV
as markets challenging the government, saying, Now that
its really bad, you certainly wont let us fail. If youve actually ever let someone fail, you have a lot more credibility,
and markets dont gain by challenging you in that way.
Its not a perfect prescription. I make no claim this is easy.
There will be countless eventsfrom monetary policy
WRVSHFLFEDQNLQJIDLOXUHVWRVSHFLFLQGXVWULDOIDLOXUHV
for government to demonstrate that it will, in fact, permit
failure and painful times to occur. Then, over time, I do
EHOLHYHPDUNHWVJHWWKHPHVVDJHDQGSHRSOHUHDOL]HWKH\
do have skin in the game. They dont challenge government quite as much.
AND
HOPE
UNCERTAINTY
Members of CFA Society Ukraine describe
changes in their lives and business
ON HOLD
Life in Ukraine is a waiting game.
Whether in business or personal
lifeor even the scheduling of
events at CFA Society Ukraine
political instability has put much
Andriy Klymchuk, CFA
on hold.
Earlier this year, CFA Society Ukraine was set to host
the 2014 Central and Eastern European Investment Conference in Kyiv [Kiev] in either October or November. That
meeting is now postponed. We were making plans, says
Andriy Klymchuk, CFA, founding president of CFA Society
Ukraine. It was going to be in Kyiv, but now unfortunately
not. We are ready to host the conference as soon as the sitXDWLRQVWDELOL]HVZLWK5XVVLD
Society members are hoping to work with the new UkraiQLDQJRYHUQPHQWLQUHEXLOGLQJWKHFRXQWU\VQDQFLDOV\VWHP
We are planning to work with the State Commission for
Regulation of Financial Services Markets and the [MinisWU\@RI(FRQRPLF'HYHORSPHQWDQG7UDGHWREDVLFDOO\EULQJ
the CFA Institute standards into the country, says Klymchuk. Those plans are still going forward, even in the face
of greater regional uncertainty.
Instability in Ukraine is affecting investment and business
as well. Klymchuk, who is CFO of modnaKasta, an online
retailer of discounted apparel, footwear, and home appliances
(with more than 2 million subscribers in Ukraine), says that
orders from the disputed region of Crimea have decreased.
In fact, the companys delivery service provider to Crimea
recently interrupted its service to the region altogether.
Clients are saying they need stability, political stability,
says Andrey Bespyatov, CFA, managing director of research
DWLQYHVWPHQWEDQN'UDJRQ&DSLWDOZKLFKLQYHVWVLQ8NUDLnian companies, some of which are listed on exchanges in
London, Warsaw, and Germany. Clients want to understand what is going on. What is happening with Crimea?
38 CFA Institute Magazine May/June 2014
CAPITAL CONTROLS
Instability in Ukraine has led the
new government to impose capital controls. I was going to buy a
house in the coming months, says
Klymchuk, but the banks have
IUR]HQ VRPH DFFRXQWV %DVLFDOO\
the only way to do business currently is to pay in cash.
Limits on withdrawing money
from deposits held in foreign currency stand at approximately
Andrey Bespyatov, CFA
US$1,400 a day, says Klymchuk.
We are able to leave our savings in US dollars and euros as
well as Ukrainian currency. There is no limit on local currency withdrawals, but foreign currency accounts are basiFDOO\IUR]HQDQGOLPLWHG7KHFHQWUDOEDQNKDVVDLG\RXDUH
not able to withdraw more than 1,000 or US$1,400 a day
in foreign currency. They are worried that people will take
all the money from the banking institution.
Some private banks with internal liquidity problems are
RESEARCH CHALLENGE
Anna Reshetova
DOUBLE,
DOUBLE
TOIL AND
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THE CENTRAL BANK BALANCE SHEET.,IWKHEURDGPRQH\VXSSO\
LVLPSRVVLEOHWRPHDVXUHDFFXUDWHO\WKHQZK\QRWJREDFN
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DOOVXEVHTXHQWIRUPVRIPRQH\VSULQJ"7KDWVD\V3HQWR
ZRXOGEHWKHFHQWUDOEDQNVEDODQFHVKHHWZKLFKLVFUHDWHGZKHQWKHEDQNEX\VERQGVRURWKHUDVVHWVZLWKQHZO\
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TOTAL DEBT.$QRWKHUZD\RIGHDOLQJZLWKWKHSUROLIHUDWLRQ
RITXDVLPRQH\LVWRFRXQWLWDOOVD\V3UXGHQW%HDUV1RODQG
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PRQHWDU\LQDWLRQLVV\QRQ\PRXVZLWKFUHGLWH[SDQVLRQ
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FIGURE 1
FIGURE 2
(cumulative % change)
(US$ trillions)
350
70
300
250
60
50
200
40
150
30
100
20
50
10
0
2009
2010
2011
2012
2013
2014
Source: Based on US Federal Reserve, Bank of Japan, and European Central Bank data.
1995
2000
2005
2010
FIGURE 3
TABLE 1
(base = 100)
Rank
1
2
3
4
5
6
7
8
9
10
6,000
5,000
4,000
3,000
2,000
1,000
Country
Dubai, UAE
China
Hong Kong
Taiwan
Indonesia
Turkey
Brazil
Colombia
Germany
United States
12-month change
28.50%
21.60%
16.10%
15.40%
13.50%
12.50%
11.90%
11.80%
11.20%
11.20%
0
1950
1960
1970
1980
1990
2000
2010
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John Rubino, a former financial analyst, is author of The Money Bubble.
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1970
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EVENTS
STAY
CONNECTED
EDUCATION
E
to the people
and ideas shaping
the future of
the profession.
Robert C. Merton
ENVIRONMENTAL
MARKETS: A NEW
ASSET CLASS
...
CAREER SUCCESS:
Navigating the new
environment
...
work
23
...
OUTREACH
Richard L. Sandor
Nathan J. Clark
Murali Kanakasabai
Rafael L. Marques
NETWORKING
1
www.cfainstitute.org
CAREER
CODE OF ETHICS
AND STANDARDS OF
PROFESSIONAL CONDUCT
In the March/April 2014 issue of CFA risky and that they should not invest unless they can afford
Institute Magazine, CFA Institute capital to lose the entire investment. Additionally, investors may
PDUNHWVSROLF\GLUHFWRU0LU]KDGH0DQXHO cancel their investment commitments for any reason up
discussed crowdfunding developments in until 48 hours before the offering deadline and must reconthe United States and Europe, including UPWKHLULQYHVWPHQWFRPPLWPHQWVLQZULWLQJLIPDWHULDO
the potential impact on investor protec- changes are made to the offering. Issuers and intermediartion as well as on economic growth and ies are also subject to a range of disclosure requirements
and prohibitions (including those related to promotional
job creation.
In recent weeks, weve had an oppor- activities) aimed at preventing investor confusion and conWXQLW\ WR DQDO\]H WKHVH GHYHORSPHQWV LFWVRILQWHUHVW
more closely, particularly with the US
SEC hard at work crafting rules that will NEED FOR ADDITIONAL SAFEGUARDS
JUDQWVPDOODQGPHGLXPVL]HGHQWHUSULVHV60(VIURP Although we support many aspects of the proposal, the
startups to more established businesseseasier access to investor protection problems with investing in venture cappublic equity capital.
ital startups are pervasive and, in certain cases, unresolvAnd although the US appears to be leading the way on a able. We have recommended additional provisions aimed
course to implement crowdfunding regulations, other coun- at alerting potential investors to the risks of investing in
tries are not far behind. Similar interest is brewing in Europe, such startups. For example, we suggested a quiet period
where the European Commission has issued a consultation between promotional activities of offerings that rely on difto assess whether rule making in Europe would be useful. fering exemptions to avoid investor confusion, additional
Among individual EU member states, Italy already has cre- disclosures by issuers related to the effect of market risk on
ated a framework for crowdfunding and the United Kingdom their businesses, and heightened prominence of the warnhas proposed allowing crowdfunding in equity securities. ings that issuers must provide in offering documents relatIn recognition of crowdfunding gaining global momen- ing to the risks of this type of investing.
WXPWKH,QWHUQDWLRQDO2UJDQL]DWLRQRI6HFXULWLHV&RPPLV7KH6(&KDVLQGLFDWHGDSSURYDORIDQDOUXOHLVRQD
sions (IOSCO) has issued a report providing a global over- short track; many expect completion of the rule-making
view of the crowdfunding industry and identifying current process before the middle of the year. The SECs Investor
investor protection issues as well as longer-term problems. Advisory Committee, of which CFA Institute is a member,
Although the crowdfunding market is still relatively small, has expressed similar deep concerns about investor protecWKH,26&2SDSHUQRWHVWKDWLWLVQHDUO\GRXEOLQJLQVL]HHDFK tions, but more importantly the appropriateness of these
year. That expansioncoupled with potential cross-border investments for small savers.
complexitiescarries the possibility that crowdfunding will
:HKDYHORQJDUJXHGWKDWVDFULFLQJLQYHVWRUSURWHFWLRQV
pose a growing set of investor protection risks in the future. in the capital markets isnt worth the purported economic
However, proponents of crowdfunding have expressed EHQHWVRIDOORZLQJHPHUJLQJFRPSDQLHVUHODWLYHO\XQIHWconcern that things are moving too slowly, particularly in tered access to public capital. Nonetheless, crowdfunding is
the US, where the SEC took 18 months to issue a crowd- now law, and regulators are obliged to advance the formal
funding rule proposal. But lets not forget that when the rules. As this issue plays out in the US and globally, we will
Jumpstart Our Business Startups (JOBS) Act passed both continue to raise concerns about investor protection. Too
houses of Congress and earned President Obamas backing much is at stake; without proper safeguards, crowdfunding
in mid-2012, it happened with alarming speed. Investor pro- could become a breeding ground for fraud and claim victection advocates can take some solace in the fact that the tims of the most vulnerable segmentsthose saving and
SEC was very deliberate in its development and release of investing for retirement.
its crowdfunding proposal. And when
Kurt N. Schacht, JD, CFA, is managing director
WKH SURSRVDO ZDV QDOO\ UHOHDVHG LQ
of Standards and Financial Market Integrity at
KEEP GOING
CFA Institute.
October 2013, there was plenty for us
to comment on.
Follow the Market Integrity Insights
blog: http://blogs.cfainstitute.org/
A few of the positive elements include
marketintegrity/
the SECs proposal to require offering
Follow us on Twitter: @MarketIntegrity
documents to contain legends alerting
investors to the fact that investing is
46 CFA Institute Magazine May/June 2014
Preemption rights allow shareowners to maintain their proportional ownership of a company without stock dilution
and are an important investor protection. But many Asian
companies seek approval for a shareowners mandate at
annual general meetings (AGMs) to issue shares without
these preemptive rights. Such mandates give management
the right to issue shares to handpicked investorsusually
at a discount to the market price.
The reasons for such mandates vary. One reason is to convert bondholder debt to equity, thus improving the capital
structure of the company. Other reasons include introducing a new strategic investor or a friendly investor. These
mandates expire annually, but fresh mandates can be sought
at the next AGM. The main concern for minority shareowners is that the cumulative effect of such multiple placements
FDQVLJQLFDQWO\GLOXWHWKHLULQWHUHVWV
Given that markets in Asia have such stark differences in
the complex regulations governing non-preemptive share
issues, CFA Institute set out to shed light on this important
issue and determine whether minority shareowners interests are being unduly diluted. The resulting report, Non-Preemptive Share Issues in Asia: Role of Regulation in Investor
Protection, aims to create greater awareness of the rights,
roles, and responsibilities of various stakeholdersincluding investors, regulators, company management, and board
members, as well as controlling and minority shareowners
ZLWKLQDQRUJDQL]DWLRQ
POLICY RECOMMENDATIONS
To further enhance investor protection, CFA Institute recommends measures in three main areas: cumulative caps,
transparency and disclosure, and shareowner approval.
First, CFA Institute recommends a maximum limit over
a three-year rolling period implemented through regulations (i.e., stock exchange listing rules or the Companies
Act, which mandates a total cap over a three-year rolling
period). Second, in regard to transparency and disclosure,
CFA Institute stresses the importance of adequate disclosure
of placees and discount details of prior share issuance. Where
companies have placed shares based on general mandates
in the immediately preceding three years, we recommend
that management clearly disclose the number and percentage of shares issued in those earlier placings, the discount
at which the shares were issued, and details of the actual
placees (including criteria for selecting those placees) in
the proxy materials at the next AGM for shareowner information. Furthermore, there must be adequate disclosure of
how share-issuance proceeds are used. CFA Institute recommends that companies avoid generic reasoning, such
as future working capital or future investment opportunities. As a best practice, they should articulate clearly the
intended uses for the funds to be raised through the general mandates. For companies that have raised capital in
the immediately preceding three years through earlier mandates, we further recommend that the actual utilisation of
proceeds raised earlier be included in the proxy materials
at the next AGM for shareowner information.
Finally, shareowner approval is essential. CFA Institute
recommends that share mandates require more than a simple
majority approval; a three-fourths majority requirement
would provide more equitable protection of minority shareowners in most Asian markets. Our study of Hong Kong
showed that at a 75% approval level, 15% of the general
mandate requests would have been rejected in 2012, 17%
in 2011, 10% in 2010, and 14% in 2009.
All market participants and stakeholders have a role to
play in creating a stronger corporate governance framework in Asia. As a start, companies must be more transparent and provide detailed disclosures when they seek mandates to waive preemptive rights. Meanwhile, regulators in
Asia should consider tightening rules to better protect the
interests of minority shareowners. Investors should attend
AGMs, ask questions, and vote on resolutions. By making
their voices heard, investors ultimately can make a difference.
The political agreement reached in January over the revised Markets in Financial Instruments Directive (MiFID II)
the European Unions cornerstone piece
of securities market legislationmarks
the end of a lengthy and often tumultuous reform process. Almost two and
a half years in the making, the revised
GLUHFWLYHWRXFKHVDOOSDUWVRIWKHQDQcial markets, establishing new rules for
the structure of markets and the tradLQJRIQDQFLDOLQVWUXPHQWVDQGVHWWLQJ
higher conduct of business standards over the provision of
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to take stock of where CFA Institute stands on key aspects.
A central theme of the MiFID II reforms is increased
transparency. MiFID I focused on opening up markets to
greater competition, and MiFID II seeks to shine greater
light on business practices and bring more trading activities to transparent, organised trading venues. In doing so,
MiFID II seeks to directly address some of the shortcomings
UHYHDOHGE\WKHQDQFLDOFULVLVVXFKDVRSDFLW\LQGHULYDtives and other over-the-counter markets.
7KHOHJLVODWLRQDOVRWDNHVDFFRXQWRIQDQFLDOPDUNHW
developments since the original legislation was developed,
such as the rise in algorithmic and high-frequency trading, and contentiously prescribes rules designed to limit
WKHHIIHFWVRIVXFKDFWLYLWLHVRQQDQFLDOPDUNHWV2WKHU
aspects of the reforms include position limits in commodity markets to curb speculative activity and strengthened
LQYHVWRUSURWHFWLRQVWDQGDUGVGHVLJQHGWRWDFNOHFRQLFWV
RILQWHUHVWLQWKHSURYLVLRQRIQDQFLDODGYLFH$OPRVWQR
stone has been left unturned.
CFA Institute has been engaged in the MiFID policy process for the past three years. Here, we review our contributions to the key aspects of the debate.
controls, algorithm testing, and harmonised circuit breakers or trading halts across exchangesrather than trying
to intervene in the trading process itself.
Consistent with this principle, we have advocated against
imposing minimum resting times or maximum order-totrade ratios; exchanges should be left to determine whether
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bandwidth consumption, rather than being arbitrarily set
by regulators.
ESMA will be subsequently tasked with developing techCONSOLIDATED TAPE
CFA Institute has consistently called for the introduction nical rules over matters such as establishing consistent tick
RIDFRQVROLGDWHGWDSHLQ(XURSHZHUVWDGYRFDWHGIRU VL]HVDQGFLUFXLWEUHDNHUPHFKDQLVPVDVZHOODVLQFRUSRsuch a proposal in our 2009 report Market Microstruc- rating order-to-trade ratios when setting exchange pricture: The Impact of Fragmentation under the Markets in ing structures.
)LQDQFLDO,QVWUXPHQWV'LUHFWLYH7KDWSDSHUUHSRUWHGGHFLHQFLHVLQWUDGHUHSRUWLQJVWDQGDUGVVLQFH0L),'ZDVUVW INDUCEMENTS
implemented in 2007. The absence of a consolidated tape In response to a wave of mis-selling scandals in Europe,
has been keenly felt in Europe, given its fragmented equity 0L),',,UHYLVHVWKHUXOHVDURXQGLQGXFHPHQWVVXFKDVWKH
market structure, with orders and transactions dispersed payment of commissions associated with the sale of investover multiple trading venues. Consolidated trade data vir- PHQWSURGXFWVE\QDQFLDODGYLVHUV6SHFLFDOO\DGYLVHUV
tually links fragmented markets, improves transparency, operating under the independent label will be prohibited
lowers search and access costs, and facilitates the accom- from being remunerated via inducements in order to elimplishment and measurement of best execution.
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0L),',,LQWURGXFHVFRPSUHKHQVLYHVWDQGDUGVRYHUGDWD (the agent) and the client (the principal). This developreporting, collection, and aggregation, thereby enabling ment follows actions already taken in the United Kingdom
the emergence of commercial consolidated tape providers and the Netherlands, where independent advisers must be
(CTPs). CFA Institute supported a commercially driven con- remunerated directly by the client instead of by the prodsolidated data solution but cautioned that regulators should uct manufacturer via a commission.
retain the ability to mandate a single consolidated tape utilAdvisers will also be required to meet minimum levels of
ity if commercial CTPs fail to meet investors needs.
professional knowledge and competency, for which ESMA
ZLOOEHUHTXLUHGWRGHYHORSJXLGHOLQHV7KLVLVDVLJQLFDQW
development that should raise standards of professionalALGORITHMIC AND HIGH-FREQUENCY TRADING
0L),',,LQFOXGHVQHZSURYLVLRQVRQDXWRPDWHGWUDGLQJ ism and integrity among investment advisers, a key invesincluding algorithmic and high-frequency trading (HFT). tor-protection mechanism.
CFA Institute recently published a report on inducements
Firms engaged in these activities will have to notify regulators with details of their trading strategies, conduct test- that examines the state of inducements in various markets
ing of algorithms, and establish controls to reduce the pro- around the world and considers possible reforms. Noting the
pensity for errant algorithms to propagate shocks through potential for unintended consequences from a full induceWKHQDQFLDOV\VWHP%URNHUGHDOHUVSURYLGLQJ+)7UPV ments ban and consumer aversion to paying upfront for
with direct electronic access to markets will also have to advice, CFA Institute has focused on reforming commisHVWDEOLVK FRQWUROV DQG SUHWUDGH OWHUV WR PLWLJDWH ULVNV sion structures, along with greater transparency over fees
exchanges will also have to put in place various procedures from all sources, rather than eliminating the commissionbased model completely.
to mitigate system stress.
With the legislation now agreed on, ESMA is tasked with
&RQWHQWLRXVO\0L),',,DOVRUHTXLUHVWKDWHOHFWURQLFWUDGLQJUPVSXUVXLQJDXWRPDWHGPDUNHWPDNLQJVWUDWHJLHVSUR- developing around 100 technical rules, a process that will
YLGHOLTXLGLW\RQDFRQWLQXRXVEDVLVIRUDVSHFLHGSURSRU- OLNHO\VWUHWFKIURP0D\WKURXJK'HFHPEHU$V
tion of time during trading hours. Given that todays markets RQHFKDSWHUFORVHVDQGDQRWKHUEHJLQVLQWKH0L),'VDJD
are critically dependent on the provision of HFT liquidity, CFA Institute will remain resolute in standing up for invescare must be taken to avoid excessively onerous measures tor interests in the regulatory reform process.
To review the CFA Institute research highlighted in this
that could hamper liquidity. At the same time, other invesWRUVFRXOGVWDQGWREHQHWIURPDUHGXFWLRQLQHHWLQJ article, please visit www.cfapubs.org/loi/ccb.
liquidity often associated with HFT activity.
Rhodri Preece, CFA, is head of capital markets policy for the Europe,
&)$,QVWLWXWHUHFRJQL]HVWKHZHLJKWRIDFDGHPLFHYLGHQFH Middle East, and Africa (EMEA) region at CFA Institute.
suggesting that HFT has a broadly positive effect on market
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absent adequate safeguards, automated trading can pose
V\VWHPLFULVNV:HKDYHWKHUHIRUHUHFRPPHQGHGWKDWUPV
and regulators focus on risk managementpre-trade risk
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WUDGHUHODWLYHWRWKHVL]HRIWKHLVVXHDQGWKHOHYHORIUHFHQW
trading in that issue. In addition to calibrating the transparency framework, we recommended adopting a phasedin approach and consistent data reporting standards. We
FDXWLRQHGWKDWSUDFWLFDOGLIFXOWLHVPD\DULVHZKHQLPSOHmenting pre-trade transparency standards in a market in
which transactions are largely conducted over the counter.
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and presenting investment performance.
Providing the investment industry with statistics regarding
the uptake of the GIPS standards would potentially motiYDWHWKHUPVQRWFXUUHQWO\FODLPLQJFRPSOLDQFHWRGRVR
The anticipated effective date of the requirement is 1 January 2015. Firms will be required to submit their information via an online form by 31 March 2015, with data as of
'HFHPEHU
The GIPS Executive Committee is seeking public comment on this proposal until 1 July 2014 and would greatly
appreciate industry feedback.
Visit www.gipsstandards.org for more detailed information on the requirement or to provide feedback.
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approaches fail to consider is the loss of information for
investors. Goodwill write-offs, if done in a timely manner,
are of interest to investors in terms of the signal they send
about the value of the companys intangible assets, the companys future earnings prospects, and an assessment of the
amounts paid for acquisitions.
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Furthermore, establishing separate standards for differFRPSDQLHVDQGDFURVVMXULVGLFWLRQV7RVXSSRUWWKHVHLQYHVWment activities, the IASB has a constitutional mandate to ent types of companies adds complexity and cost to other
develop a single set of high-quality global standards. Notwith- GLPHQVLRQVRIQDQFLDOUHSRUWLQJ)RUH[DPSOHGLIIHUHQWVHWV
standing this mandate, the IASB developed a second set of of accounting standards are more costly for standard setters
IFRS, essentially creating a two-tier system across the globe. to develop and maintain, educators to teach, and assurance
Similarly, the creation of standards for private compa- SURYLGHUVWRREWDLQSURFLHQF\LQIRUQDQFLDOUHSRUWLQJ
7KHVLWXDWLRQIRU86LQYHVWRUVZLOORQO\GHWHULRUDWHLIWKH
nies would result in the loss of comparability between the
QDQFLDOVWDWHPHQWVRISXEOLFDQGSULYDWHFRPSDQLHVZKLFK FASB extends (as it is currently contemplating) private comis vital to investors who invest in both types of companies. SDQ\VLPSOLFDWLRQVWRSXEOLFFRPSDQLHV,IVWDQGDUGVDUH
7KHLPSDFWZRXOGEHZRUVHIRU86LQYHVWRUV(QWHUSULVHVIRO- WREHPRGLHGIRUSXEOLFFRPSDQLHVWKH\VKRXOGEHEDVHG
ORZLQJ60(VWDQGDUGVFXUUHQWO\PXVWVWDWHWKDWWKHLUQDQ- on the need for relevant, useful information for investment
cial statements have been prepared in accordance with GHFLVLRQPDNLQJ7KH\VKRXOGQRWEHFKDQJHGMXVWWRVLPthe IFRS for SMEs. Private companies do not have a simi- plify reporting requirements, which may result in lowerODUPDQGDWHKHQFHWKHQDQFLDOVWDWHPHQWVRIERWKSXEOLF quality standards.
DQGSULYDWHFRPSDQLHVLQWKH8QLWHG6WDWHVGHVSLWHWKHGLI- Mohini Singh, ACA, is director of financial reporting policy at CFA Institute.
IHUHQFHVZRXOGVWLOOEHFRQVLGHUHGLQDFFRUGDQFHZLWK86
May/June 2014 CFA Institute Magazine 51
8QSUHFHGHQWHGQHVDQGVDQFWLRQVKDYHEHHQOHYLHGDJDLQVW
ILQDQFLDO PDUNHW VHOIUHJXODWRU\ RUJDQL]DWLRQV 652V
recently, but despite all its failings, self-regulation is still
much needed in todays markets, according to a recent report
by CFA Institute. Published in 2013, the report (Self-Regulation in the Securities Markets: Transitions and New Possibilities) also highlights three critical factors: what contributes
to a successful self-regulatory system, the characteristics
that reinforce the credibility of the system, and the strucWXUHVWKDWPHHWWKHGHQLWLRQRIVHOIUHJXODWRU\
SROs come in various forms, the report explains. Their
DXWKRULW\ PD\ EH UHFRJQL]HG LQ ODZ RU E\ WKH VWDWXWRU\
regulator in a jurisdiction. Some are membership-based
RUJDQL]DWLRQVWKDWDFWDVGHIDFWROHJDODXWKRULWLHVE\VHOI
policing and creating rules and policies for their members.
Others are informal or independent membership associations that serve advisory and educational roles for their
members and other market participants. SROs also can be
quasi-governmental entities that perform selected self-regulatory functions.
7KHVHRUJDQL]DWLRQVDUHPRUHHQWUHQFKHGLQ1RUWK$PHUica than anywhere else in the world. They are formally recRJQL]HGE\VWDWXWHRUUHJXODWLRQDQGDXWKRUL]HGWRHQJDJHLQ
UXOHPDNLQJDQGHQIRUFHPHQWWRGLVFLSOLQHPHPEHUUPV
and to conduct market surveillance. SROs in the US, such
as the Financial Industry Regulatory Authority (FINRA),
are overseen by the SEC and the National Futures Association (NFA), which oversees derivatives.
Canada has two SROs. The Investment Industry RegXODWRU\2UJDQL]DWLRQRI&DQDGD,,52&RYHUVHHVLQYHVWment dealers and enforces the rules of stock exchanges.
7KH0XWXDO)XQG'HDOHUV$VVRFLDWLRQRI&DQDGD0)'$
oversees the operations, standards of practice, and business
conduct of mutual fund dealers and operates in accordance
with the provincial securities commissions.
Self-regulation plays a minor role in Europe. The UK
recently moved away from self-regulation. In 2013, the UK
VSOLWQDQFLDORYHUVLJKWEHWZHHQWZRHQWLWLHVDGHYHORSment widely seen as a move away from self-regulation. The
Financial Conduct Authority (FCA) supervises behavior at
QDQFLDOLQVWLWXWLRQV7KH3UXGHQWLDO5HJXODWLRQ$XWKRUity, a subsidiary of the Bank of England, oversees banks
and insurers capital holdings, enforces compliance, and
monitors risk.
,QWKHHPHUJLQJPDUNHWV%UD]LODQG&RORPELDKDYH652V
Entities in China, Japan, the Philippines, Romania, ThaiODQGDQG7XUNH\FRQVLGHUWKHPVHOYHVWRKDYHVLJQLFDQWUHJulatory functions and responsibilities, but with the exception of the Philippines, such entities are SROs and industry
52 CFA Institute Magazine May/June 2014
DVVRFLDWLRQV7KLVNLQGRIGXDOUROHLVVLJQLFDQWEHFDXVH
as explained in the CFA Institute report, entities that also
serve as industry associations often perform advocacy and
other functions that tend to dilute their role as purer or
formal SROs.
INSIDE VIEW
Commenting on the CFA Institute report, Mary Schapiro,
former SEC chair and CEO of FINRA, explains her perspective on the importance of SROs.
First, she notes, the primary regulator can leverage SROs
to have much broader coverage of the industry. The examination process is a case in point. The SEC examines only
8%9% of investment advisers annually because there is
no SRO to handle that function. In contrast, FINRA examines about 50% of broker/dealers annually.
Second, the SECs budget is volatile and subject to politiFDOSUHVVXUHV7KHRUJDQL]DWLRQQHYHUNQRZVZKHWKHULWZLOO
be able to maintain its current level of funding from one
VFDO\HDUWRWKHQH[W$VDUHVXOWLQYHVWLQJLQWHFKQRORJ\
SURMHFWVWKDWKDYHDGXUDWLRQORQJHUWKDQRQHVFDO\HDULVD
challenge for the SEC. SROs have much more stable funding,
so they are in a better position to undertake such projects.
Third, when industry participants sit on the SRO board,
WKH RUJDQL]DWLRQ KDV DFFHVV WR D WUHPHQGRXV DPRXQW RI
operational expertise, which is useful in rule making and
enforcement. In contrast, industry participants are not represented directly on the Commission; their input comes
through meetings and comment letters instead.
6FKDSLURDOVRSRLQWVRXWWKDW652VKDYHPRUHH[LELOLW\
Sometimes SROs can respond to an issue more quickly than
the SEC because they dont have the Administrative Procedure Act and a number of other laws to constrain them
from acting quickly, she says.
THE CONTROVERSY
Critics of the system claim that SROs lack transparency and
EUHHGFRQLFWVRILQWHUHVW$OWKRXJKWKH\TXHVWLRQWKHIDLUQHVVRIDV\VWHPLQZKLFKQDQFLDOLQVWLWXWLRQVDUHDEOHWR
propose their own rules, the SEC must approve any rules
before they can take effect.
3HUKDSVEHFDXVHRILWVVL]HEUHDGWKYLVLELOLW\DQGWKH
funding level of executive salaries, FINRA has become a
focal point and lightning rod for many of the questions
raised about the SRO system in general, the CFA Institute
report states. In particular, it bears the brunt of criticism
pertaining to so-called private SROs.
US exchange SROs have also been a target for criticism.
([FKDQJHVXVHGWREHPHPEHURZQHGRUJDQL]DWLRQVDQG
Cross-Border SROs
A few cross-border exchanges have been created recently,
including in Latin America, the eastern Caribbean, east Africa,
and the Balkans. Cross-border exchanges allow countries to
pool their resources and raise the aggregate level of capital in
the region. Many emerging markets lack the volume they need
to grow, and regional harmonization could provide them with
the strength they need to develop their markets more quickly
and efficiently.
A harmonized approach for SROs would readily lend itself
to including cross-border licensing, disciplinary actions, joint
examinations, and other licensing issues. By cooperating
across borders, SROs in the emerging markets could jointly
provide the services needed to fuel a developing market, benefiting all participating countries, the CFA Institute report notes.
Emerging markets are moving beyond what we think of
as SROs in their cross-border initiatives, Rittenhouse says.
On the other hand, there are many issues to be ironed out.
Part of the challenge is getting political cooperation among
the countries to enter into bilateral or multilateral contracts.
The political forces have to be amenable to the contractual arrangements that the regulators are making among
themselves, she explains. They have to allow innovation and
recognize that everything doesnt have to be approved at a
governmental level.
'XULQJHFRQRPLFERRPSHULRGVEDQNVWHQGWRJURZWKHLU
balance sheets and have excess leverage. In contrast, during
economic downturns and phases of credit contraction, banks
typically shrink their balance sheets to safeguard their solvency and capital adequacy. In other words, the bank business model is naturally pro-cyclical.
CFA Institute has long contended that fair value information coupled with historical cost information can lead
WRDEHWWHUXQGHUVWDQGLQJRIWKHSURVSHFWVDQGULVNSUROH
RIQDQFLDOLQVWLWXWLRQV,WLVRIWHQFODLPHGWKDWIDLUYDOXH
measurement exacerbates the natural pro-cyclicality of
banks. The argument goes that fair value measurement
requirements force write-downs of assets and this leads to
WKHHURVLRQRIFDSLWDOUHHFWHGRQWKHEDODQFHVKHHW%DQNV
are then forced to sell assets or raise fresh equity capital to
ensure capital adequacy.
But bank regulators in many jurisdictions have the option
WRDOORZEDQNVWRH[FOXGHXQUHDOL]HGIDLUYDOXHJDLQVRUORVVHV
IURPUHJXODWRU\FDSLWDOLHWRDSSO\SUXGHQWLDOOWHUV)RU
example, the European Banking Authority (EBA) applied
SUXGHQWLDOOWHUVWRH[FOXGHWKHJDLQVRUORVVHVRIVRYHUHLJQ
exposures on the bank balance sheets when it was determining the potential capital shortfalls of European banks. The
SHORT-TERMISM
Although we do not dispute that a spectrum exists of differ- erosion of capital cannot be blamed simply on the nature of
ent types of investment asset owners (pensions, insurance, accounting information. Recent academic evidence shows
activist funds, hedge funds, private equity) with differing that fair value information did not lead to capital erosion
LQYHVWPHQWREMHFWLYHVULVNWROHUDQFHDQGKROGLQJKRUL]RQV to the extent that many of its critics tend to claim.
the distinction between long term and short term as a basis
IRUGHWHUPLQLQJQDQFLDOUHSRUWLQJQHHGVIRULQYHVWRUVLV AN ESSENTIAL INGREDIENT
IUDXJKWZLWKYDULRXVGLIFXOWLHV
7KHJOREDOQDQFLDOFULVLVSUHVHQWHGDPRQXPHQWDORSSRUTo allow effective capital allocation, all investors have WXQLW\IRUUHHFWLRQRQDQGUHIRUPRIGHFLHQFLHVRIWKH
a common need for the most transparent information on FXUUHQWQDQFLDOUHSRUWLQJIUDPHZRUN7KHWRSPRVWSULinvestee companies. This type of information includes the ority of policymakers should be on enhancing the overall
fair value of assets and liabilities. Many investors who WUDQVSDUHQF\RIQDQFLDOUHSRUWLQJLQIRUPDWLRQ)DLUYDOXH
KDYHUHODWLYHO\VKRUWKROGLQJKRUL]RQVRIWHQYDOXHFRPSD- LQIRUPDWLRQLVDQHVVHQWLDOLQJUHGLHQWRIWUDQVSDUHQWQDQQLHVEDVHGRQGHWDLOHGUHDGLQJRIQDQFLDOVWDWHPHQWVHJ FLDOUHSRUWLQJLQIRUPDWLRQDQGLVEHQHFLDOIRULQYHVWRUV
0 $KHGJHIXQGLQYHVWRUV6XFKLQYHVWRUVUHDGQDQFLDO
The interrelationship between accounting information
statements with as much interest as investors who have and behaviours of market participants is also an important
ORQJHUKROGLQJKRUL]RQVHJPDQDJHUVRISHQVLRQIXQG factor, but policymakers need to be cautious about critiassets). Furthermore, CFA Institute member surveys con- cisms of fair value measurement that tend to be aired withducted through the years have shown that investors of all out being backed by considered evidence.
types (long and short term) desire fair value information. Vincent Papa, CFA, is director of financial reporting policy at CFA Institute.
We are not aware of any evidence showing that increased
fair value reporting by investee companies shortens investor
KROGLQJKRUL]RQV+HQFHWKHUHLVDQHOHPHQWRIEDUNLQJXS
54 CFA Institute Magazine May/June 2014
DISCIPLINARY NOTICES
SUMMARY SUSPENSIONS
On 5 December 2013, CFA Institute imposed a
Summary Suspension on Daniel Ka-Kuen Lam
(Hong Kong), an affiliate member, automatically
suspending his membership. Because he did
not request a review, the Summary Suspension
became a Revocation on 6 January 2014.
In July 2013, the Securities and Futures Commission (SFC) of Hong Kong revoked Lams securities license after finding that he masterminded
window-dressing activities at the firm where
he served as a responsible officer and managing
director. Specifically, firm funds were transferred
to a company wholly owned by Lam, leading to
a drop in his firms liquid capital to a level below
the amount it was required to maintain under the
SFCs Financial Resources Rules. At the end of the
month, before Lams firm submitted its financial
filings to the SFC, a similar amount of funds would
be returned to the firm either by Lams wholly
owned company or his relatives and friends. The
SFC found that the purpose of these repeated,
intentional, and fraudulent transfers was to inflate
artificially the firms liquid assets, which is in
violation of the SFCs Financial Resources Rules.
On 27 September 2013, CFA Institute imposed
a Summary Suspension on Kevin J. ORourke
(US), a charterholder member, automatically
suspending his membership and right to use the
CFA designation. The Summary Suspension was
affirmed by a Summary Suspension Hearing Panel
and became a Revocation on 19 February 2014.
ORourke served as the president, sole owner,
and principal of Western Pacific Capital Management (WPCM) and controlled the Lighthouse
Fund (Lighthouse), an unregistered investment
pool. On 19 September 2012, the US SEC entered
an Order barring ORourke from, among other
things, associating with any broker, dealer, or
investment adviser, with a right to reapply after
two years subject to the conditions specified
in the Order. The SEC found that ORourke (i)
solicited his clients to invest in an unregistered
stock offering by Ameranth without disclosing
CHAPTER 10
leading national retailer, with thousands of big stores with parking lots. In
the 1960s, discounters were invented,
with Walmart and Target becoming the
biggest survivors. Conventional retailers were collected into shopping malls
DQGGLGQH1RZWKHELJJHVWSOD\HULQ
UHWDLOLV$PD]RQ2QHPLJKWVD\WKDW
$PD]RQLVWKHFRPSXWHUL]HGYHUVLRQRI
the Sears mail-order catalog business.
'R\RXZDQWWRSXW\RXUPRQH\RQ
$PD]RQ"%HWWLQJRQWKHZLQQHULVXVXally correct. Top-line growth of 20%
is very high but less than the compaQ\V SDVW UHVXOWV RI 3URWPDUgin expansion ought to be doable too,
partly because AMZN is starting from
DEDVHLQ,QYH\HDUVRQH
can imagine a 4.0% margin or a doubling in sales, producing $12 earnings
per share. If you know of another large,
high-grade company that can have EPS
JURZWZHQW\IROGLQYH\HDUVSOHDVH
inform me at your earliest convenience.
%XWZKDWRIYDOXDWLRQ",I$PD]RQ
sold at 50 times earnings in 2018, its
stock would be at $600. As of 21 March,
AMZN was at $366. If it goes to $600
LQYH\HDUVWKHUHWXUQRQDEX\QRZ
ZLOOEHDQQXDOL]HG,IWKHVWRFN
continues to sell at 100 earnings, then
the return will be fantastically high. But
that would be a rare result, and there
are numerous risks. Growing revenues
at 20% and increasing margins at the
VDPHWLPHLVDGLIFXOWWKLQJWRGRDQG
governmental concern could impede
growth, beginning with the aforementioned application of sales tax. Growth
does slow down. Sears is now hoping for
survival, and Walmart is having revenue growth in low single digits, with a
P/E of 13. (I hate it when that happens.
WMT has been 14 years of boredom.)
6R WKH HIFLHQW PDUNHW VHHPV WR
have wrapped itself around AMZN like
DS\WKRQLQWKH$PD]RQ
Ralph Wanger, CFA, is a trustee of Columbia
Acorn Trust.
XLF - FINANCIAL
1
2
3
4
5
6
7
8
9
10
Company Name
Symbol
Weight
JP Morgan Chase
Wells Fargo
Berkshire Hathaway B
Bank of America
Citigroup
American Express
American Intl Group
Goldman Sachs
US Bancorp
Metlife
JPM
WFC
BRK.b
BAC
C
AXP
AIG
GS
USB
MET
8.24%
8.15%
8.00%
6.22%
5.92%
3.13%
2.82%
2.80%
2.76%
2.26%
Time For A
Stock Alternative
Visit www.sectorspdrs.com
Liquidity
or call 1-866-SECTOR-ETF
Energy - XLE
Financial - XLF
Industrial - XLI
Materials - XLB
Technology - XLK
Utilities - XLU
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