09/02/2015

Living in the Outlier

The past few years can only be described as one of the most unusually serene periods in history for the U.S. equity market. While over time it began to feel normal, we have been living in the outlier. Let’s take a quick trip down memory lane. 

The DiMaggio Streak of Markets

We’ll begin with the historic run from November 2012 through October 2014, what I have called the “DiMaggio streak of markets.” At 475 consecutive trading days above the 200-day moving average, we have never seen such a steady advance and lack of a meaningful pullback in the history of the S&P 500.

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uCONN

7 Ways to Manage Writing by Committee

The best way to manage writing by committee? Avoid it. As Ann Handley says in Everybody Writes: Your Go-To Guide to Creating Ridiculously Good Content,

Having a buddy by your side is helpful. Having an entire committee on your back? Not so much. 

However, writing in a regulated industry means that many of you must get your materials reviewed by compliance. Also, if you’re a financial marketer, your subject-matter expert will want to check your work. 

I have some tips, based on my experience as director of investment communications for an asset management firm.

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Avoid Turning your Investment Firm into a Technology Company

Digits
As information technology’s development accelerated, the investment industry took notice and began developing systems that would automate formerly manual tasks. Over time these systems have evolved into something more. While their benefits are continually vaunted by vendors and end users alike, the processes of ensuring that these systems are properly implemented and maintained belong, first and foremost, to the firm.

It is easy to become seduced by the technological attraction
that systems offer but if an investment firm does not clearly
and thoroughly understand the purpose of a system, the
technological dream will quickly turn into a nightmare. In
general, systems are there to facilitate tasks, such as data
management, analysis and reporting. Once that is known, a
system must be properly “placed” within a firm. That is, it is to be maintained by the operations team, supported by IT, managed by specialists (performance, risk, etc.), used as a feedback tool by the front office and fund sponsors, and as a means of communications to the clients.

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QC

08/13/2015

How to Select the Optimal Valuation Method to Build Better Price Targets (Part 3 of 3)

Flow chart (as featured image)This 3-part post is all about following best practices for selecting the optimal valuation method…namely the one that’s going to derive a price target more accurate than consensus.

As noted in Part 2 of this 3-part series, there are limitations to every valuation method, but some are better than others. For years I had been looking for an information source that quickly summarized the best method(s) to use under each circumstance, but couldn’t find one. So I created the flow chart below.

The idea is to start at the top of the flow chart and work your way down as far as possible, to get closer to the methods that measure free cash flow. Note the blue shapes are single-period multiples-based methods whereas the tan shape, DCF, is a multi-period cash flow method.

Callout: The further you can go through the flowchart, the closer you are to valuing the company’s free cash flows.

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Why Fund Sponsors Are Failing

AnswersI was in the process of working on an article
 about why fund sponsors were failing the 
funds and their pension beneficiaries. The
 article was going to focus on the role
 sponsors take in the management of the
 fund, identify their shortcomings and
 propose solutions. Coincidentally, I
 was watching The Daily Show with Jon 
Stewart one night while his guest, Wall Street Journal reporter Ellen Schultz, was promoting her new book. “Retirement Heist” talks about the deliberate mismanagement of pension funds for the benefit of the sponsor and their executives. The next day I stopped by the bookstore and picked up her book. Once I began reading, the focus of my own article shifted from solely looking at the role of fund sponsors in the management of pension funds to also consider the sponsors’ place in society and the long-term consequences of their short-term focus.

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NYSSA-TV

08/06/2015

Don’t Overlook Benchmarks

ChartInvestors are presented with a barrage of marketing material from funds and
 managers trying to raise capital, and
 what all these reports have in common is 
that they all focus on performance. That
 is not surprising considering the 
relatively large number of funds available with the few strategies being 
used, managers feel they can only
differentiate themselves through performance. Attend enough sales presentations and you will have heard how “my long-short equity strategy has consistently outperformed the market and that is why you need to invest with us.” By the way, the “Past performance is no indication of future results” is usually said with much less gusto.

This is not to disparage managers and funds alike but rather to help investors identify the good managers whose past performance is more than likely a good indication of their future performance. Although a thorough performance evaluation requires the skill set of a performance specialist, any investor can begin such an evaluation by questioning one simple and important component of the performance marketing material, which is the benchmark.

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Are financial predictions too risky for investment commentary writers?

CrystalballIs it a bad idea to make predictions in your investment commentary because clients will slam you when you’re wrong? Whenever you make predictions, you run the risk of being wrong. But being wrong isn’t a problem, in my mind, if your prediction reflects good thinking.

Lesson from my winning prediction

Accurate predictions alone don’t make you seem smart. I remember the time I participated in a betting pool with members of an investment policy committee. I had to predict where a certain number—probably the 10-year Treasury rate—would be one quarter later. 

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08/05/2015

How to Select the Optimal Valuation Method to Build Better Price Targets (Part 2 of 3)

Pros & Cons SmallIn my prior post I discussed the importance of identifying the optimal valuation method, which includes researching the valuation method used by most other equity analysts who cover the sector and stock being researched.

In this entry, I delve into the pros and cons of the most popular valuation methods. To ensure I wasn’t missing one of the more popular valuation methods, I researched the topic and came across two studies, one from the U.S. and one from the U.K. Given that buy-side analysts don’t publish their reports, these studies relied entirely on sell-side analysts and therefore they may not be representative of buy-side analyst’s work. The studies were conducted independent of one another and therefore shouldn’t be viewed comparatively. Instead, they provide an idea of the top 5 valuation methods used by equity research analysts in their respective markets. Having been based in London for part of my career, I can verify DCF is more extensively used in Europe than in the U.S.

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Book Review: The End of Banking By Manuel Stagars, CFA, CAIA, ERP

ThEndofBanking
The End of Banking: Money, Credit, and the Digital Revolution
. 2014. Jonathan McMillan. 

Announcing the demise of the financial system as we know it has become popular in the aftermath of the Great Recession. In fact, the Financial Times has dedicated an entire series to the topic, aptly named Death of Banks, wherein author Izabella Kaminska chronicles the downfall of traditional banking.

A recent book called The End of Banking goes one step further: In addition to carefully explaining how the financial sector maneuvered itself into the financial crisis of 2007–08, it presents several unconventional ideas to do away with regulatory capital arbitrage that sticks taxpayers with the bill for bankers’ risk taking. The book proposes a fairly straightforward policy framework that promises to reduce shadow banking, decentralize financial services from too-big-to-fail banks, improve regulation, and realign the private and the public sector with transparent monetary policy.

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07/21/2015

How to Select the Optimal Valuation Method to Build Better Price Targets (Part 1 of 3)

Buy-and-Sell-300x166In a prior post I noted all stock picking best practices (or “tips”) can be put into one of the four elements of our TIER™ framework (see image below).

If you’re asking “why should I care?”, I’d reply that the best stock pickers have a consistent philosophy and methodology for picking stocks. If you already have one, that’s great, but if you’re looking for one, you might want to start here and make modifications to fit your style or investment philosophy. This 3-part series focuses on the “T” of the TIER™ framework shown below.

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The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors

StewardshipofWealthIn his latest book, The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, Gregory Curtis goes beyond a traditional study on investment policy, asset selection and monitoring, and risk management of and the fiduciary issues involved in wealth management by thoroughly investigating the aspects of stewardship of the wealth of prosperous families. Curtis is the chairman and founder of Pittsburgh-based Greycourt & Co., a wealth advisory firm that serves high-net-worth families and select endowments on a global basis. This book builds on his Creative Capital: Managing Private Wealth in a Complex World. It provides a moral, ethical, economic, and investment compass for the wealthy.

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When Fear of Bonds Exceeds Fear of Stocks

Worried about your bonds? You’re not alone.

In speaking with our investors in recent weeks, the most universal theme by far was concern over their bond holdings. Historically low interest rates coupled with the prospect of the first Fed rate hike since 2006 (“rising rates”) were causing anxiety. And most importantly, the average bond fund was down in the first half of the year. There’s nothing more fear inducing to investors than short-term losses.

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Going Beyond GIPS

GIPSGlobal Investment Performance 
Standards, better known as GIPS, are a 
voluntary set of standards established to
 create transparency in the calculation and
 presentation of performance. From 
improving the credibility of compliant investment firms to providing clients the ability to fairly evaluate the performance of these firms, GIPS has arguably become the gold standard in investment performance. As client awareness has risen, demand for GIPS is pushing investment firms in becoming compliant in order to maintain their competitiveness. While this is a positive in an industry that sorely needs standards that encourage fairness and credibility, it would be short sighted for firms to stop at GIPS when it comes to their performance. We must remember that performance is not a part of GIPS but rather it is GIPS that is a part of performance. Meaning that, in the ever-growing field of investment performance, stopping at GIPS would rob a firm of maximizing the benefits of performance that go beyond GIPS.

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07/08/2015

Can YOU simplify investment commentary better than this?

I am not perfect. I don’t have all of the answers for how to best simplify the complex sentences that abound in investment commentary and related publications. However, we would all benefit if the smart investment professionals could communicate more clearly and economically.

To spur conversation, I’m posting some before-and-after versions of sentences inspired by what I’ve read in online and printed investment pieces. Most of my tweaks are minor. They don’t dramatically ratchet up the sentences’ effectiveness. However, their simplicity means that they demonstrate techniques that would be easy for anyone to implement.

If you’re trying to improve your writing skills, I hope that you’ll find some inspiration. If you’re a veteran writer or editor, perhaps you can suggest better alternatives.

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07/07/2015

Growth of Large Companies May Be Driving Wage Inequality

Hmueller

The global trend toward wage inequality may be driven by a rise in the share of people employed by the world’s largest companies, suggest Professor Holger Mueller and his co-authors, Paige P. Ouimet of the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School and Elena Simintzi of the University of British Columbia’s Sauder School of Business, in their new working paper, “Wage Inequality and Firm Growth.”

Using a proprietary data set of employee pay at a broad cross-section of UK firms (both private and public) from 2004 to 2013, the researchers examined how the wage differences between jobs of differing skill levels within a single firm (“within-firm skill premia”) varied between firms and over time. They found that the wage differences between high-skill and low- or mid-skill jobs increased with firm size. As company size grew (measured by either number of employees or sales – both had the same results), the wages paid for high-skill jobs increased significantly, while the wages paid for low- or mid-skill jobs remained the same or decreased slightly. For example, the highest-level job at a company in the 75th percentile of company size carried a wage 280 percent greater than the highest-level job at a company in the 25th percentile. The result of this phenomenon is that as firms grow larger, a divide widens between the high-level and both the mid- and low-level job wages, driving greater wage inequality.

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