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T H E O F F I C I A L J O U R N A L O F T H E C F A S O C I E T Y O F T H E U K

w w w . c f a u k . o r g s u p p o r t i n g A S I P , C F A a n d I M C p r o f e s s i o n a l sw w w . c f a u k . o r g s u p p o r t i n g A S I P , C F A a n d I M C p r o f e s s i o n a l s

PROFESSIONAL INVESTORSUMMER 2010

THE NEW INVESTMENT LANDSCAPE

“I think many people didn’t really understand what was happening in the

markets. Emotions were running high.” Ken Kinsey-Quick, CFA, ASIP,

head of multi-manager, Thames River Capital

BEST PRACTICEIt is time for a new approach

THE FINANCIAL CRISISHow various problems were all interconnected

DIVIDENDS IN EMERGING MARKETSIs emerging market equity income the Holy Grail?

EQUITY ANALYSTSWhy they are still too bullish

SOURCES OF RETURN ROUNDTABLEWhy there are diffi cult times ahead for investors

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CFA UK Annual Conference 2010Sources of return

To register, visit www.cfauk.org/ac2010

Thursday 17 June, Merchant Taylors’ Hall, London

Keynote speakers:Marc Faber, PhD - Editor and publisher of ‘The Gloom, Boom & Doom Report’

Anatole Kaletsky - Chief economist and founder, GaveKal and Editor-at-large, The Times

Plus:Peng Chen, PhD, CFA - President of Ibbotson Associates

Giles Keating - Head of global research, Credit Suisse

Mark Kritzman - President and CEO of Windham Capital Management

Neil Record - CEO and chairman of Record Currency Management

Amlan Roy - Head of global demographics and pensions research at Credit Suisse Securities

Michael Saunders - UK economist at Citigroup

Andreas Utermann, ASIP - Global CIO of RCM

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1P R O F E S S I O N A L I N V E S T O RW W W . C F A U K . O R G

WELCOME

George Spentzos, CFACHAIRMAN

Editor Maha Khan PhillipsSub editor Tom PumphreyEditorial assistant Laura MaddrellDesign editor Catriona Dickson, Dojo DesignPhotography Abi Hardwick, Abi Imaging

Professional Investor is published byCFA Society of the UK, 2nd Floor135 Cannon Street, London EC4N 5BP.Tel: 020 7280 9620 Fax: 020 7280 9636Email: [email protected]: www.cfauk.org

Chief executive Will Goodhart

SubscriptionsProfessional Investor is published fourtimes a year. Subscription rates are:£145 for UK/Europe,£195 for the rest of the world

CFA UK members and otherpractitioner readers are invited tosubmit articles for possible inclusion. Please email the society on [email protected]. Contributed articles will be reviewed for possible inclusion by the Marketing and Communications Committee.

Marketing & Communications CommitteeAnnabel Gillard, CFA (Chair), Claudine Delavy, CFA, Anouschka Elliott, CFA, Eric Foran, CFA, Nick Henderson, CFA, Guy McCulloch, Tim Nuding, CFA, Jane Thorburn, Steve Wellard

The society is not responsible for anymaterial published in Professional Investor, and publication of any material or expression of opinions does notnecessarily imply that the society agreeswith them. Neither the society nor thepublishers are jointly or severallyauthorised to conduct investmentbusiness and do not provide investmentadvice or recommendations to anyone.

Original designCG Business Communcations

Printed by Wyndeham Grange, Southwick, West Sussex.

The CFA Society of the UK represents the interests of more than 8,500 leading members of the investment industry. The society, which was founded in 1955, is a leading member society of CFA Institute and is committed to the development of the investment industry through the promotion of the highest ethical standards and through the provision of education, professional development, advocacy, information and career support on behalf of its members. CFA UK supports the CFA, ASIP and IMC designations.

Articles are published without responsibilityon the part of the publishers or authors forloss occasioned by any person acting orrefraining from action as a result of anyview expressed therein. Volume 20, Number 2.issn 0958-2541. © 2010 CFA UK

This issue of Professional Investor will be distributed

at the society’s Annual Conference on June 17th. This is the third year that the society has run an Annual Conference and we are delighted with the

quality of speakers that have taken part and at the response from members. I recently

returned from CFA Institute’s Annual Conference in Boston. We took part in the

meetings to help us prepare for the 2011 CFA Institute Annual Conference in

Edinburgh. The chairman of the Scottish Committee and I presented to delegates at the

meeting and showed a welcome video featuring Alex Salmond, fi rst minister of Scotland.

You can view the video on the society’s website.

CFA UK is honoured and excited to host next year’s conference (May 8th to 11th).

Having the conference in the UK gives us an opportunity to provide members with an

even more extensive speaker programme and with additional opportunities to network

with clients and counterparts from around the world. The Annual Conference is

always an opportunity to learn from leading investment professionals and to refocus

on core truths. This year’s event was no exception. For me, there were several

particular highlights. First, Jeremy Grantham of GMO reminded us that our

profession is littered with confl icts and simple ethical failures. As Grantham points

out: ‘We have allowed this deterioration in ethical conduct without a whimper. We

have made no protest into the general slide into the rathole where we fi nd ourselves

today’. He called for greater leadership in dealing with confl icts and the ineffi ciencies

arising from perceived career risk.

Elsewhere, Niall Fergusson warned us that while the present sovereign debt

situation is bad, it is likely to get much worse. As Fergusson says ‘If you can’t stabilise

public fi nances because too may people are receiving too much [from the state], then

reform is forced upon you by the bond market. The case for pre-emption is

overwhelming.’ But, Fergusson is not confi dent that the case will be heard and

forecasts higher infl ation for the UK as the only route acceptable to politicians for

dealing with the debt crisis.

These are the types of challenging issues that will likely be discussed at next year’s

conference in Edinburgh. We hope to see you there.

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2 S U M M E R 2 0 1 0

“T h e i n d u s t r y h a s b e h a v e d l a r g e l y l i k e a Alan Brown, FSIPShaking the trees (or rethinking the basics) | page 18

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featureTHE NEW INVESTMENT LANDSCAPE

10 SOURCES OF RETURN ROUNDTABLE Katherine Garrett-Cox, ASIP, Sunil Krishnan, CFA, Joe Biernat, CFA, and Robin Young, ASIP, discuss key investment trends, sources of returns, and challenges for investors in the future.

SHAKING THE TREESThe best practise model of today is fatally fl awed, and is based on unrealistic expectations, argues Alan Brown, FSIP. It is time to concentrate on what is important, rather than easy, and that means pension funds need to be focused on liabilities.

22

INTERNATIONAL SAVINGS AND INVESTMENT IN THE BALANCEThere are many diverse reasons for the recent fi nancial crisis, but it is a mistake to think that they are unconnected, argues Andrew Smithers.

UNEXPECTED DIVIDENDS FROM GLOBAL EMERGING MARKETSEmerging market companies paid out $150 billion in dividends last year, more than twice the UK fi gure. Despite this however, little attention is paid to emerging market equity income as an asset class. Edward Lam discusses why.

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3P R O F E S S I O N A L I N V E S T O R

CONTENTS

PROFESSIONAL INVESTOR | SUMMER 2010

the regulars

W W W . C F A U K . O R G

36

4

32

33

34

38

40

d e e r c a u g h t i n t h e h e a d l i g h t s”

MEMBER PROFILESPI interviews Ken Kinsey-Quick, CFA, ASIP, Rohini Rathour, ASIP, Nick Carmichael, CFA, Gemma Game, CFA, Stephen Peters, CFA, and Stephanie Niven, CFA.

NEW RESEARCHPapers on compulsory and voluntary annuities markets in the UK, domestic credit and private investment, and causal relationships between stock prices and exchange rates.

VOLUNTEER REPORTTimothy Nuding, CFA.

CFA UK REPORTSurvey results show improvement in CFA UK services.

CFA INSTITUTE REPORTThe launch of CFA Institute’s website and member’s portal – My CFA.

BOOK REVIEWSJ Mark Wiltshire, CFA, CAIA, FRM, highlights fi ve books which relive the summers of 2007 and 2008 and offer lessons for today’s investor.

NEW MEMBERSProfi les of members who have joined CFA UK in the last quarter.

25

30

30IN SEARCH OF RETURNS IN UNCERTAIN MARKETSA new breed of structured investments could bring an edge to portfolio management, says James Chu, CFA.

EQUITY ANALYSTS: STILL TOO BULLISHAfter almost a decade of stricter regulation, analysts’ earnings forecasts continue to be excessively optimistic, argue Mark Goedhart, Rishi Raj, and Abhishek Saxena.

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4 S U M M E R 2 0 1 0

IN BRIEF. KEN KINSEY-QUICK, CFA, ASIP

1991 Blue Circle Pension Fund1994 Ifabanque2000 Redwood Investments2000 Coronation Fund Managers2003 Thames River Captial

“In the 1990s hedge funds were a cottage industry, so much so that if you asked a manager about their operations and back offi ce and infrastructure, they would look at you quizzically”

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Head of multi-manager, Thames River CapitalINTERVIEW BY: MAHA KHAN PHILLIPS • PHOTOGRAPHY: ANDY LANE

Ken Kinsey-Quick, CFA, ASIP

MEMBER PROFILE

For Ken Kinsey-Quick, CFA, ASIP, hedge funds were always of interest, right from the early days, when managers only employed two or three strategies. He gained exposure to the asset class after moving to the UK from his native South Africa in 1991. Kinsey-Quick had taken a job

with the Blue Circle Pension Fund.“Blue Circle had farmed out some management to Barings,

where Crispin Odey was. He said he was leaving to launch a hedge fund. It was a bear market, and I noticed that pension funds with long-term investment horizons were losing millions of pounds because of their long-term bias in the short term,” he explains. “Hedge funds seemed like a really interesting proposition.”

Kinsey-Quick joined Paris-based Haussmann Holdings, one of the oldest funds of hedge funds in the world. He spent the next six years working at Ifabanque, one of the co-managers of Haussmann. “Th e great thing was that we had all the big names in those days, Soros, Robertson, and Bacon, for example. So we were heavily infl uenced by the original fathers of the industry.” Haussmann then gave some of its young guns 10% of the business to fi nd the industry’s future stars.

“What we found was that managers in the early part of their life cycle generate much better risk-adjusted returns than those who are established. Th ey are hungry and they have to succeed. As the fund gets bigger, the real talent moves from being a CIO to a CEO, and the quality of the DNA of the fi rm starts to go down as it starts to grow.”

Kinsey-Quick also launched and managed the Challenger fund range. By the time he left in 1999, Challenger US was ranked number one by the TASS hedge fund database.

He decided to set up his own shop in London, Redwood, but the timing was bad. “I launched in January 2000 and we went right into the bear market. At the same time, there was a company called Coronation which I had been advising, and they wanted me to join. So I sold Redwood to them and became CIO.” Despite the bear market, the fi rm grew from approximately $700 million when Kinsey-Quick joined to $1.3 billion in 2002.

DIFFICULT TIMESKinsey-Quick then joined Th ames River Capital as head of multi-manager, watching the the multi-manager business grow from $50 million in assets under management to $2.9 billion at its peak in 2008. Th en came a year of client redemptions

and underperformance. “2008 was my fi rst negative year and it was very diffi cult. I think many people didn’t really understand what was happening in the markets. Emotions were running high.”

Fund managers could not manage their strategies properly, he says, because prime brokers, and market makers’ had their balance sheets slashed. “Th ere was no liquidity, and banks were pulling in all their leverage. Th e system broke down. Th en it got repaired, and at the beginning of 2009 hedge funds were making money while markets were still falling out of bed.”

Kinsey-Quick has watched the industry evolve over time. “In the 1990s hedge funds were a cottage industry, so much so that if you asked a manager about their operations and back offi ce and infrastructure, they would look at you quizzically. It was a bit more freewheeling,” he says.

But he is against regulation for regulation’s sake. “If you look at the regulation coming out of Europe it is just messy. Hopefully, it will go through at some stage, but it will help with the public if hedge funds came onshore.”

ACQUISITIONIn May, UK quoted fund manager F&C Management announced that it was buying Th ames River Capital for an initial consideration of £53.6 million. Kinsey-Quick says that Th ames River’s model will not change. “We really wanted to take the business to the next level, which was to get involved in the institutional market. F&C is a really good fi t because they don’t have a fund of hedge funds business and while our business is currently around 80% wholesale versus institutional, with F&C it’s literally the other way around.”

Kinsey-Quick holds both the ASIP and CFA designations, which he says are extremely important. “I trained as an accountant, and working in investment management, I wanted to make sure I had all the right tools at my disposal.” He is now a board member of CFA UK and chairs the investment policy committee. “I felt that it was time to give something back. I also felt that hedge funds are often misunderstood, and that now is the time to really start the knowledge going. Hedge funds are here to stay.”

Kinsey-Quick is married with three children, with another on the way. He also explains that he is ‘mad enough’ to establish a vineyard down in Surrey, and enjoys getting involved in the more extreme. “I hiked to the South Pole a couple of years ago,” he says. “I took up kite surfi ng recently so now I am thinking of kiting to the pole,” he laughs.


6 S U M M E R 2 0 1 0

Rohini Rathour’s career path took an unexpected turn when she moved to the UK in 1991. “I didn’t really intend to live here. My father used to be in the

Indian navy and he was appointed naval attaché to the Indian commission in the UK. I thought it might be a good idea to come to London and get some work experience and just have some fun,” she explains.

Rathour had just completed an MBA from the Indian Institution of Management, Bangalore. Unfortunately, the move coincided with the recession here. She got a job selling insurance with Albany Life Assurance Company, but realised it was not for her. She then met her future husband, and decided it was time to get some further qualifi cations and settle into a career.

While doing a number of temporary jobs, Rathour sat the IIMR exam. “I really enjoyed doing it. What you learn you can actually relate to what is happening in the world.”

In 1995 Rathour was given the opportunity to train at Regent Kingpin Capital Management as an emerging markets analyst, focusing on the Indian sub-continent and Eastern European regions, thanks to the generosity of its founders, who were “willing to give me a foot in the door. I learnt a lot, it was very valuable.”

In May 1997 Rathour got what she says was her big break. She was hired by Ely Place Investments as an assistant investment manager, where she helped manage private client portfolios and a UK income fund. “Th e most humbling aspect of it is that people trust you to look after their money! But the initial focus for me was mainly the UK market. It was a great learning curve getting to know the big UK companies, and I love the fact that every day something diff erent was happening and the role was so varied. To this

INTERVIEW BY: MAHA KHAN PHILLIPS • PHOTOGRAPHY: ABI HARDWICK

Head of UK equities, Sarasin & PartnersHead of UK equities, Sarasin & Partners

Rohini Rathour, ASIP

day I feel privileged to work in this industry.”Rathour moved to Sarasin Investment Management

following its takeover of Ely Place in July 1998. Sarasin has always been a huge proponent of global investing. Rathour initially worked as assistant fund manager for the fi rm’s global balanced charity fund. She also worked as an analyst, using Sarasin’s thematic approach to picking pan-European stocks. In 2001 she helped manage the assets of the fi rm’s fl agship EquiSar fund, and in 2002 took over responsibility for pan-European equity selection for global thematic products.

In 2005, Rathour was asked to help manage the £1.3 billion UK equities portfolios that were inherited as a result of Sarasin’s merger with Chiswell Associates in 2004 using the fi rm’s global thematic investment approach. “Th ey asked me if I would be interested in leading this team to bring a thematic fl avour to the way their portfolios were being managed. It was a slow process, you can’t change the way people think overnight. But I wanted to prove that the global thematic process would also work for the UK market.”

In 2007, Rathour was promoted to head of UK equities. She says that if a company is not thematically interesting enough, then she simply won’t own it, pointing out that the UK market is very global in composition. “Th ere are many companies in the UK equity benchmark that don’t buy or sell anything in the UK. Th ey are driven by global events.”

When the fi nancial crisis hit, Rathour held her nerve. “2008 was awful but the steps we took meant that 2009 was a really good year for UK equities, because of some of the positioning that we did. Th ere were some real opportunities in that crisis and if you were brave enough to take them then you came through the other side a lot better.”

Rathour is married, with two children.



raise an independent credit fund to gain exposure to some of the opportunities that were apparent in the dislocated market,” he explains. Getting off the ground has been very tough, largely because of liquidity constraints. “At the moment I think it may not get off the ground the way we initially envisaged but we’re looking for opportunities to build a business within institutions and I have been engaged with some such institutions. We’ll see what happens.”

In 2009, personal tragedy struck Carmichael’s family, when his sister-in-law, Camilla Milbank, fell off a horse and broke her neck and damaged her spinal cord. Today, the eff ects of Camilla’s injuries are such that she has movement and feeling of her arms and wrists only. In a very sad twist of fate, Camilla’s father, Charles, also suff ered a broken neck and damage to his spinal cord after falling down a fl ight of stairs, returning home from visiting Camilla in

hospital. Both Charles and Camilla ended up in the National Spinal Injuries Centre at Stoke Mandeville Hospital.

In an eff ort to raise money for their care and the care of others aff ected by such injuries, Carmichael and a friend are competing in the Gobi March, a 250km self-supported footrace across the Gobi desert over seven days. Th is comes down to six marathons in as many days in searing heat, carrying all they need to survive on their backs. “I’m looking forward to it but it will be very tough. We’ll have some dark moments out there when we’ll question what we are doing, but the goal for us is just to cross the fi nish line.”

CFA members who would like to support Nick Carmichael’s cause can do so by sending money either to the Back-Up Trust via www.justgiving.com/Gobi2010 or directly for the benefi t of Camilla and Charles through www.friendsofcamillamilbankappeal.com

MEMBER PROFILE


7P R O F E S S I O N A L I N V E S T O R

Nick Carmichael, CFA, began his investment career as an associate in private equity at

Crédit Agricole Indosuez (now Calyon) in 2000 in London. “Finding the way to fi nance was perhaps slightly unusual, given that my degree was in French, but as long as you have a strong level of numeracy and analytical skills you can transfer that to many diff erent career paths,” he explains.

Carmichael joined the graduate recruitment scheme, and remained with the company that became Calyon until November 2006, during which time his career ranged from being a manager in distressed asset management to an associate in leveraged fi nance. “I did a graduate rotation at the bank and one of the small private equity funds off ered me a permanent role, which I jumped at. We had real closeness and proximity with the management teams and we were analysing alot of diff erent companies and looking at a huge variety of industries and businesses.”

Carmichael completed the CFA Program in 2007. “Th e CFA exams are a tough ask, I think. You need to work pretty hard and it’s challenging. But the knowledge I gained was very useful. Th e CFA curriculum lends itself very well to fund management, and even though my career has not been in fund management, there are some fundamentals that are exceptionally useful for private equity and leveraged fi nance.”

In November 2006 the team moved together to CIBC World Markets. Carmichael became director of European leveraged fi nance. Th en, in early 2008, CIBC closed down its European operation and part of the team moved to the Royal Bank of Canada, where Carmichael held a similar role. He left the job in July 2009. “I wanted to explore whether it would be possible to

Nick Carmichael, CFA Independent fundraiser, private equity


Gemma Game, CFA, completed a masters degree in Natural Sciences from

Cambridge University, but then, she says, “I realised that I didn’t want to work in a lab all day. I decided to explore diff erent careers, and see where else I could use my background in pharmacology.”

A summer internship at JP Morgan Asset Management, working with a portfolio manager responsible for a healthcare fund, showed Game that she could combine her passion for healthcare with a fund management career.” It was really exciting to realise you could be a specialist in the City in a sector where you have real passion,” she says.

Game joined Merrill Lynch Investment Managers’ graduate programme in 2001, working on the global equities team, with responsibility for the healthcare sector. During that time, she also became a CFA charterholder. “Studying and working a full time job was demanding, but the CFA Program was incredibly helpful in teaching me the basic foundations of investment management,” she explains.

In 2005 Game became a portfolio manager. “Th e more I managed money the more I realised the importance of getting your timing right. Healthcare is a complex, news fl ow driven sector and is constantly evolving – that’s what makes it interesting”

She says she loves looking at the most recent discoveries and clinical trial data, and spending time with chief executives who translate all that medical knowledge into something practical. In 2006, MLIM was merged into BlackRock, and Game continued in her role as a portfolio manager and healthcare specialist. In October 2007, she moved to AXA Framlington to run a healthcare fund as a senior portfolio manager.

“Healthcare will always be what I do. I love my current role; it’s global and takes me everywhere. Th is is a fascinating sector right now. Th e US has just reformed its healthcare system so the next few years it is going to be an evolving environment for all the companies we own. At the same time, globally, there is an incredible amount of investment in healthcare infrastructure in the developing world that off ers some fantastic opportunities.”

When she’s not working, Game loves music. She is a soprano with the Royal Choral Society, travelling globally with them on performances.

S U M M E R 2 0 1 08

Although he studied psychology at university, Stephen Peters, CFA, was always interested in fi nance.

His father had worked in the City, and he enjoyed investing his own money. “At university, I realised that psychology was a long and not particularly rewarding career path for me. So I applied for a graduate job in investment management, one that off ered a free lunch and not much else.”

Peters joined an IFA that is now Towry Law. “It was a two-year full time graduate scheme, and I rotated around the diff erent departments. I realised I wanted to do more fund research, but there wasn’t an opportunity at the fi rm.” Peters moved to Hewitt Associates in 2002, initially doing research on defi ned contribution schemes and then both fund manager and product research

Stephen Peters, CFA Investment trust analyst, Charles StanleyINTERVIEW BY: MAHA KHAN PHILLIPS • PHOTOGRAPHY: ABI HARDWICK


Gemma Game, CFAPortfolio manager, AXA Framlington


when the two teams were integrated.“It was a real eye opener. It’s amazing when you

are 22 years old and you don’t know anything, and you get a lot of the time of very senior fund managers. You get to know people and products very quickly.”

He initially focused on equities, but then his focus expanded to include other asset classes, such as hedge funds, private equity, currency and infrastructure. “Th e most important thing that I found was that the best fund managers were honest. A combination of over enthusiastic marketing departments and some less than brilliant fund managers could lead, three years down the line, with performance not turning out the way they wanted it to. Th e best fund managers did not try to tell you that they were something that they were not.”

He says it was an interesting time to be a consultant, with the industry going from being reactive to being proactive. “Th ere were banks, trying to sell LDI solutions and derivatives, and consultants were forced to increase their level of skill and knowledge.”

Peters decided to sit the CFA exam. “Historically, graduates always took the actuarial exams. What was being realised was that actuarial exams were great for people who wanted to be scheme actuaries but not as useful for those who wanted to be on the investment consulting side of the business.”

He says the qualifi cation has been helpful. “I was speaking to fund managers, all day, every day.


Stephanie Niven, CFA, entered the fund management industry after a summer internship with Goldman Sachs Asset Management in 2004. She was in the middle of completing a history degree at Oxford University. “History is all

about taking a great deal of information and distilling it, and the skills were transferable. I was very lucky to be placed in GSAM. I loved the team I was working for, and although I was supposed to rotate, I stayed!” she says.

After graduating, Niven joined the European active equity team full-time as an analyst, responsible for the materials and industrials sector. “Th e one thing that surprised me is that you are thrown in at the deep end. You don’t know what you know, and what you don’t know! You are expected to know things without anyone telling you, so you really have to be a self-starter.”

Niven sat the CFA exams early in her career. “It was encouraged to do the CFA. It was helpful because as an analyst in fund management, there wasn’t any formal training programme. Th e CFA became that training programme for us and we learnt things that we wouldn’t have otherwise.”

Niven began to focus on hedge funds and emerging markets, and ran a basket in

P R O F E S S I O N A L I N V E S T O R 9

MEMBER PROFILE

Stephanie Niven, CFAPortfolio manager, Javelin Capital INTERVIEW BY: MAHA KHAN PHILLIPS

the emerging markets long/short equity fund. In July 2009 she joined Javelin as part of a trio from the GSAM team. “We are still setting up our fund at the moment, but what we are doing is quite unusual. We want to understand what strategy works best and where, so we each have a diff erent approach within the fund. One colleague looks at tactical trading whereas I look at sectors from a fundamental point of view and try to understand when industries shift from being well behaved to trending. Another colleague looks at mean reverting stocks.”

When she is not working, Niven is a keen athlete. She was a British Universities National Champion in water polo, has completed three marathons and a number of triathlons, and is entered for Ironman Nice in June.

Having the knowledge that the CFA provides gave me a useful grounding to talk to fund managers about what they do, without actually having had the experience of being a fund manager.”

Peters says that eventually, he became frustrated with the time it took from doing investment research to actually implementing solutions for clients. “I decided to move on. I wanted to do an analyst role in a smaller organisation.”

He joined Charles Stanley in July 2007 and is responsible for all investment trust and closed-end fund research. “It is an interesting time to be in the sector. Th e demise of investment trusts has been predicted time and time again, but they keep re-inventing themselves.”

Peters has also started running money internally for the fi rm using a growth model and an income model. “So far the performance has been pretty good, so I’d like to continue to build a track record and hopefully make them into portfolios. I don’t run the funds against any benchmark. Th ey are relative return but not benchmark relative.”

Peters is married, with one daughter, with another baby due in September. He is a big cricket fan, and is currently learning Portuguese.


10 S U M M E R 2 0 1 0

PI – What are the challenges for growth in the current investment environment?

GARRETT-COX – With concerns still being expressed about the possibility of a double-dip recession, we believe that 2010 will be subdued in terms of growth in developed economies. Th e challenge is that so much of global growth stems from the US consumer and until we see a recovery in jobs and the housing market, both of which seem some way off , it is diffi cult to see how any of the current signs of increased consumer activity can be sustainable. Some Asian and emerging market economies will produce stronger growth fi gures but this will not be suffi cient to completely off -set the eff ect of the reduction in US consumer spending. From an equity investor’s perspective the growth challenge comes from maintaining the current positive earnings momentum, which will be the main driver of the equity market in the coming months.

KRISHNAN – Th ere are three main issues facing the developed economies, in particular. First, the fi nancial crisis highlighted the extent to which the previous 20 years of prosperity had depended on increasing leverage in the household sector across most of the western world. Th e process of rebuilding savings and paying down debt is

reducing the proportion of household income which can be spent. As well as diminished demand for credit, the supply of credit has been restricted by banks looking to rebuild capital bases. Th is issue may well be resolved more quickly given the advances in bank profi tability in the recovery. Last, economies are facing the challenge of unsustainable public sector debt paths given current entitlements and demographics. Whether this is resolved through austerity or higher real interest rates (or, as with Greece, both), the outcome is to depress trend growth in the coming years.

YOUNG – Challenges for global growth centre on three key adjustments – the easing of both internal and external imbalances between developed and emerging economies; the phased withdrawal of fi scal and monetary stimulus; and, the internal adjustment between the core and periphery in the euro-zone.

A benign workout would involve a multi-year appreciation in emerging currencies (particularly the yuan) and rising Asian interest rates; some

tightening of developed country fi scal policy along with relatively low interest rates to aid de-leveraging; and, a recognition from Germany that a euro-zone solution requires both retrenchment (lower labour costs and stricter fi scal discipline) from the periphery and expansion from the core (transfer payments and faster domestic demand growth).

So far there has been an improvement in external imbalances. Interest rate expectations are rising faster in the East and phased fi scal tightening is being discussed in the West. Savings ratios have adjusted upwards in the US and UK and private sector de-leveraging has moderated. Our central case is for the global economy to continue to improve, but at a diminishing pace by year-end.

However, a more malign adjustment would involve protectionism, a market-driven tightening in policy and political paralysis in the euro-zone. Greece has highlighted how markets can become impatient and political tensions remain; not least over China’s exchange rate policy. Recent market moves increase the risk of a malign outcome.

Navigating in diffi cult landscapes

In a complex investment environment, senior members of CFA UK discuss what the key obstacles are to growth and the

biggest challenges investors face

“Greece has highlighted how markets can become impatient and political tensions remain; not least over China’s exchange rate policy” ROBIN YOUNG

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KRISHNAN – It seems intuitive that with trillion-dollar bailout packages and quantitative easing, real production of goods and services cannot keep up and rising prices must be the consequence. But there are two issues with this argument. First, despite the explosion of narrow money (funds credited to banks by central bank activity), most Western economies are still seeing a deceleration in broad money – the measure most relevant to economic activity. Only if bank lending reaccelerates will broad money expansion resume, and at that point central banks will have to focus on stimulus withdrawal. Second, with central banks now focused on CPI objectives, infl ation manifests itself increasingly in asset prices – such as the housing bubble. Here there is scope for monetary policy and regulation to monitor and manage frothy capital markets – but at present they lack a rigorous theoretical rationale to guide this.

GARRETT-COX – Sub-trend economic forecasts and a signifi cant amount of spare capacity in the system point to a limited risk from the threat of infl ation in the UK over the medium term. Infl ation in the UK is around 3.7% which is above the upper band of the MPC’s stated range but the governor of the Bank of England is not concerned for the moment. In fact Alliance Trust is forecasting infl ation in the UK to peak at around the current levels and drift lower in the second half of the year as a number of one-off measures (including the return of VAT to 17.5%) drop out of the data.

PI – Is infl ation an issue and if so how should we be dealing with it?

YOUNG – Infl ation is an issue in the developing economies and, ultimately, will be a problem in the developed markets. Policymakers cannot aff ord to make a 1930s US, or 1990s Japan defl ationary policy mistake so are likely to err on the side of overly-loose monetary policy. BIERNAT – While infl ation is under control today and infl ationary pressures are likely to be subdued over the short term, the aggressive fi scal and monetary policies of the major central banks raise the risk of infl ation over the long term. Even as economic activity has begun to move positive, the risk of an economic setback or even a prolonged recession cannot be ignored. Over the next year the US and European central banks must begin to withdraw the massive liquidity that was extended to the markets in the crisis.

Never before in economic history has such massive stimulus been extended and economists are heavily split in their opinion on how the market will react to this stimulus being pulled back. To use an analogy from the space program, the question being asked by market strategists is will the US economy, the European economy and the world economy reach ‘escape velocity’ (suffi cient positive momentum) by the time the booster engines (extraordinary liquidity) are turned off .

As recent events in Greece have shown, economic risks may extend beyond the withdrawal of central bank liquidity. If Europe’s economic recovery suff ers a signifi cant setback, as a result of the sovereign debt crisis sparked by Greece’s problems, then the positive momentum in the remainder of the world’s economy may also fi zzle. Th e economic setback from the oil spill in the Gulf of Mexico may also pose an unexpected economic drag. In summary, 2010 will not be an easy time for investors. Th is is not to say it will be a year of negative returns, but most likely modest returns with relatively few great opportunities and many real risks.

“2010 will not be an easy time for investors. This is not to say it will be a year of negative returns but

likely modest returns with relatively few great opportunities and many real risks” JOE BIERNAT


12 S U M M E R 2 0 1 0

PI – What about exchange rate volatility?

KRISHNAN – Exchange rates are back in focus, partly because here, as elsewhere, volatility has picked up with the crisis and since. But the other reason is that economic fundamentals now have more to say about FX movements. For years, with broadly similar economic policies and globalised product markets, FX volatility was more driven by trade fl ows than by investor judgements about the long-term prospects for an economy. But with even close neighbours coming out of the crisis in varying states of health, and a range of monetary and fi scal responses being deployed, macroeconomic fundamentals are back as a key driver of FX markets. We should expect this to continue, as many of the themes are long-term in nature. Investors will be best served by avoiding complacency about the contribution of currency to total returns, and remaining well diversifi ed internationally unless there is a compelling value case for a particular currency (and the patience needed to allow it to work!)

GARRETT-COX – When there is high degree of uncertainty concerning political stability, fi nancial market conditions and the global macro outlook, there will be exchange rate volatility. Th e lack of a clear winner in the UK general election put pressure on sterling but the Conservative/Lib Dem coalition is the best result as it has a chance of surviving intact through the end of the year. Th e markets will be cautiously optimistic about the news, but we do not expect a signifi cant bounce. Th e euro has endured a weak start to the year and may attract further selling pressure in the second half as the euphoria, following the announcement of the bail-out of the peripheral European countries, subsides. Th e US dollar is a net benefi ciary of the global uncertainty so we expect it to continue to do well. Finally, we may get some news of a Chinese revaluation which would boost demand for most of the Asian currencies including the yen.

YOUNG – Recent exchange rate volatility refl ects the huge underlying economic dislocations. Sterling, for example, has moved from being signifi cantly overvalued on a real (infl ation-adjusted) broad trade-weighted basis to being considerably undervalued as the UK economy moved from a fi nance-fuelled economy to one that requires a signifi cant lift from net exports. Th e benign workout outlined above would lead to lower exchange rate volatility as the world adjusts to a controlled appreciation in Asian currencies, some depreciation of the euro and a period of stability between the other developed currencies.

PI – Are emerging markets going to be the alpha producers of future, as some would suggest?

GARRETT-COX – Th ere are many ways of producing alpha in a global portfolio and we think that a process that encourages high conviction stock selection within a robust framework for asset allocation across developed as well as emerging markets is the key. For these markets to take on the role of sole alpha producers of the future they are going to have to do more than show higher growth characteristics. Th e de-coupling argument currently surrounding emerging markets is not a new story although it has become of greater focus as the divergence in growth between some emerging and developed markets widens. As we know from previous experience, there is a link between strong economic growth and relative outperformance from stock markets. However, the correlation is not as high as is assumed by the excess premium paid for certain emerging market stocks.

YOUNG – Th e secular backdrop remains supportive for emerging markets and if another ‘bubble’ is being blown then emerging equities (and commodities) are likely to be the key recipients. Over the past decade China has experienced near double-digit growth through a combination of rapid investment and export growth, aided by low real interest rates. However, China will need to re-orientate its economy from net exports to domestic (consumption) demand and contain infl ationary pressures. During this process interest and exchange rates need to rise and the extent of any mal-investment may come to the fore. Th e other BRICs have proved in the past that the top of the economic cycle often masquerades as secular high growth.

KRISHNAN – Th e argument that the baton of economic leadership has passed to emerging economies is compelling, given trends in demographics, credit

“For [emerging] markets to take on the role of sole alpha producers of the future they are going to have to do more than show higher growth characteristics” KATHERINE GARRETT-COX



ROUNDTABLE

expansion and productivity growth. As such, with Western economies facing slowing growth, emerging markets are already the most likely source of revenue growth for companies and exchange rate appreciation. We should expect emerging market assets to play an increasing role in global portfolios – not just equities, but bonds and alternatives as well. We will come to see emerging markets as largely emerged, and with that will come greater diff erentiation between diff erent regions and countries – increasing the scope for allocation alpha within the universe. At the same time, it would be foolish to forget that economic growth does not drive investment returns unless valuations are reasonable at the time of entry. Chasing the latest hot theme will be less rewarding than patient accumulation.

PI – Is this the end of an era for bonds?

YOUNG – No in the short-term; yes in the medium-term. Large negative output gaps, Greece-like austerity plans, memories of the Japan experience and continuing private sector de-leveraging are likely to keep bond yields contained for a while. However, the ultimate outcome is likely to be infl ation as policy makers try to avoid defl ation and fi nance public sector defi cits.

KRISHNAN – Two decades of disinfl ation have delivered exceptional returns to sovereign bonds, but have also left us with yields which are extremely low in a long-term historical context. Since yields are a good guide to medium-term nominal returns, it follows that only if defl ation arises will real returns from here be strong. Put another way, longer-term uncertainties about infl ation

and fi scal sustainability are not refl ected in today’s rates. Yet it would be a mistake to look only at developed sovereigns. Th e crisis exposed a bubble in non-government fi xed income, but the aftermath created remarkable opportunities in corporate bonds and convertibles which have not fully diminished. Similarly, yields in emerging market debt are high enough to allow attractive returns if, as seems likely in many cases, infl ation is now better managed than in the past.

GARRETT-COX – With the threat of a double-dip recession, infl ation falling and interest rates anchored for the time being at sub 1%, we are not at ‘the end of an era for bonds’. Investors should take a look at the last 15 years in the Japanese government bond market to get an idea of what could happen if growth remains sub-trend or the economy moves into a defl ationary environment. Th e overhang of UK government issuance to fund the rising defi cit is a signifi cant negative for the market and is one of the reasons that we believe corporate bonds will continue to be an attractive investment with an average yield on an investment grade bond at above 6%. We believe the outlook is mixed for gilt yields and therefore our strategy will be to actively manage the interest rate exposure of the underlying bonds in which we invest.

BIERNAT – Looking specifi cally at credit, while the market has made an enormous recovery from 2009 crisis levels, this recovery is more of a risk than an opportunity. Absolute returns from credit were in excess of 16% for 2009. European corporate spreads (as measured by IBOXX) have moved in to 150 bps versus the wides of 484 bps in March of

last year. On an absolute basis non-fi nancial yields are 3.5% versus a long-term average of 5.1%. Th e new issue market is robust with new issue premiums versus secondary cash spreads at minimal levels versus premiums of more than 100 bps points in the comparable period last year.

All is not well however with signifi cant doubts about the future of the fi nancial market despite very strong support from central banks and assurances from government offi cials. European T1 and T2 spreads are today 551 bps and 291 bps respectively. While this is an enormous recovery from 3,500 and 885 at the wide it’s a long way from 103 bps and 52 bps for T1/T2 spreads before the fi nancial crisis. Th e real quandary for fi xed income credit investors is how to position the portfolio from this point forward. Although credit spreads may have some room to tighten if economic conditions improve it is easy to see returns from credit turning negative in the event of a double dip recession. Compounding this dilemma is the very low level of interest rates. Most fi xed income investors do not want to be in largely fl oating instruments but any rise in rates will negatively impact returns. Even if economic conditions move in a favourable direction there could be signifi cant technical factors limiting or even eliminating further positive returns from the credit market.

PI – Where will returns come from over the next three years?

BIERNAT – It’s extraordinarily diffi cult to predict where returns will come from over the next 12 months let alone the next several years. Many markets appear to be either fully-valued or over-valued. Playing volatility will likely to be the source of returns for investors who have portfolios that can be shifted quickly. In the fi rst quarter of this year the US equity market sold off then rallied sharply to hit new cyclical highs despite sovereign debt concerns in Europe,

“Longer term uncertainties about infl ation andfi scal sustainability are not refl ected intoday’s rates” SUNHIL KRISHNAN


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policy tightening in China and a surprise hike in the discount rate by the US Federal Reserve. Th e currency markets were choppy in the fi rst quarter and due to the continued fi nancial stress in Europe look to be as volatile for the remainder of the year. Emerging markets which have performed relatively well are likely to feel the weight of the Greek debt crisis. Government bonds may perform well over the short term as new government money is pumped into the fi nancial system as a result of the sovereign crisis but this money and previous funds must be withdrawn over the next several years.

GARRETT-COX – We are not in a normal economic recovery situation therefore it will not be as easy as it was in previous cycles to predict where the best returns will come from. We aim to retain a degree of fl exibility and implement an active asset allocation strategy as none of the regions or any single asset class off ers long-term consistent returns. We foresee that the interest rate environment and infl ation will be relatively benign going forward. We may see some spikes in high growth areas and we need to be vigilant about infl ationary pressure reoccurring, however, we think that the backdrop for investors is reasonably secure. We have a preference for companies that will benefi t from the Asian growth story, wherever they may be listed. In developed markets the ‘lower for longer’ regime from central banks will persist in the short term and equities will attract greater infl ows and potentially add further to market gains.

KRISHNAN – Our approach to medium-term allocation is to focus on the interaction of reasonable valuations and supportive economic fundamentals. Th is implies that equities will continue to off er returns of at least the historic average, although it is likely that volatility remains above the levels of three to six years ago. Sovereign bonds will remain challenged and may perform no better than cash on average. Emerging markets should outperform developed – especially in the context of bonds, and credit remains attractive relative to governments. Alternatives will have a useful diversifying role in portfolios – now that we have a better idea of when beta is disguised as alpha – though more limited leverage will probably reduce expected returns. But given the ongoing macro uncertainties, it is unlikely that a buy-and-hold strategy will be optimal. More sensitivity to market conditions and timing will be key, and our conversations with clients suggest that they are increasingly aware of this.

YOUNG – We are past the sweet spot of the economic cycle when all assets other than cash rise in value with low-grade credit, equities and cyclicals experiencing rapid gains. Th e next phase usually involves some consolidation in risk assets before a renewed, more modest and discerning rise as the economic cycle matures. Th e ultimate end-game is infl ation although, at the global level, this is probably two-three years away. Th is phase is usually associated with weak returns from equities and bonds.

SUNIL KRISHNAN, CFAPortfolio manager, BlackRock Multi-Asset Client Solutions group

ROBIN YOUNG, ASIPInvestment director, Aerion Fund Management

Sunil Krishnan, CFA, is a portfolio manager in the BlackRock Multi-Asset Client Solutions (BMACS) group, which is responsible for developing, assembling and managing investment solutions involving multiple strategies and asset classes. His service with the fi rm dates back to 2001, including his years with Merrill Lynch Investment Managers (MLIM), where he was fi nancial markets economist and co-manager of GTAA accounts. He holds an MSc in economics from the University of London and an MA degree, with fi rst class honours, in philosophy, politics and economics from Oxford University.

Robin Young, ASIP, is an investment director at Aerion Fund Management. He has over 25 years’ investment experience working initially as a bond fund manager for Friends Provident and at British Gas Pension Fund Management (now known as Aerion Fund Management). He joined the fi rm in 1995 as an economist. Following a sabbatical to study for a master’s degree in economics, he has, since 2000, focused on asset allocation.

JOE BIERNAT, CFAIndependent fi nancial consultant

KATHERINE GARRETT-COX, ASIPChief executive offi cer, Alliance Trust

Joe Biernat, CFA, is an independent fi nancial consultant. He was formerly chief investment strategist at European Credit Management (ECM) and a former head of its research department. Before this he was global head of credit research at BNP Paribas, co-head of global credit research at Deutsche Bank, and head of European credit research at Merrill Lynch. He was chairman of the CFA Society of the UK and a founding board member of the European High Yield Association.

Katherine Garrett-Cox, ASIP, joined Alliance Trust as chief investment offi cer in 2007, and was appointed chief executive offi cer in 2008. Her early career was spent with Fidelity Investments and UNI Storebrand before moving to Hill Samuel Asset Management. In 2000 she joined Aberdeen Asset Management and became chief executive of Aberdeen Asset Management. In 2004, she became chief investment offi cer for Morley Fund Management. She holds a BA degree in history from Durham University.

THE PANEL



Pension funds have been brought to their knees by falling asset prices, declining interest rates, a series of legislative and

regulatory changes all leading to higher costs. Oh, and the inconvenient truth that we are all living longer. It may be too late to save the defi ned benefi t fund, but it is not too late to learn some very important lessons from the experience of the last decade. Th e best practice model of today is badly fl awed and based on some totally unrealistic assumptions.

When I started out in this business 35 years ago investment management agreements were encapsulated in a one-and-a-half page letter and almost every mandate was ‘balanced’, investing across multiple asset classes. We still manage £12 billion of traditional balanced accounts. Mind you, the world was a lot simpler then and we limited our asset class defi nitions to gilts, UK

and overseas equities, and property. Th e fi rst and most important decision we made was how much to invest in our four asset classes and there was a real willingness to change the asset mix in a meaningful way.

WHAT WENT WRONG?All this began to change with the passing of ERISA (Th e Employee Retirement Income Security Act) in the United States in 1974. Th is was a powerful catalyst for the growth of the investment consulting industry, which in turn set about redefi ning the best practice model to the standard we are familiar with today:• Conduct an asset/liability study to

determine a strategic benchmark.• Construct an implementation plan

around that benchmark.• Conduct a manager search to fulfi l

the implementation plan.

• Fund and monitor managers.• Repeat every three to fi ve years.

On the face of it, this was an appealing model built around some ap parently common sense principles:• No one can time markets. • No single manager could be the best

at everything so managers would be chosen for their capabilities in specialist areas.

• While markets were not perfectly effi cient, some areas were clearly more effi cient than others. It made sense to use one’s alpha risk budget in areas where rewards were likely to be greatest. How could anyone fi nd fault with

this model? Well, it is riddled with problems. Th is article looks at these, starting with the least important and working up to the really big howlers. We conclude by proposing a better best practice model.

The best practice model of today is fatally fl awed, says Alan Brown, FSIP. It is time to concentrate on what is

important rather than what is (relatively) easy

BY: ALAN BROWN, FSIP

Shaking the trees (or re-thinking the basics)

EXECUTIVE SUMMARY• The current best practice model is

based on unrealistic assumptions• The growth in asset classes has

introduced greater complexity, making changes to portfolio structure diffi cult and adding signifi cant additional costs

• You can’t pay pensions out of relative returns; funds need to be more focused on what really matters, the liabilities

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COMPLEXITY AND COSTOver time, the level of complexity has grown dramatically. Our defi nitions of asset classes have ballooned from the four that I started out with to include private equity, infrastructure, hedge funds, currency, credit, emerging market debt and equity. And within a single asset class we sub-divide again into large, small, growth and value. Th is makes changes to portfolio structure diffi cult to implement and layers on signifi cant additional costs. If all of this was being compensated for by superior returns, all well and good, but looking at returns at the fund level suggests that any benefi ts being earned at the specialist level are being eroded through infl exible asset allocation and higher costs. It is the complexity and associated high costs and infl exibility of such structures we dislike, not the high degree of diversifi cation, which we applaud.

THE 80:20 RULEToday’s best practice model devotes most of its eff ort to controlling risks from the actual portfolio to the benchmark that came out of the asset liability study. Only intermitently, every three to fi ve years, do we manage the risks from the benchmark to the liabilities when we redo our asset liability work. Yet the lesson of the past 10 years is that the risks from the actual portfolio to the strategic benchmark are small, whereas the risks from the strategic benchmark to the liabilities are large.

In short, we have the 80:20 rule back to front. By spending most of our time worrying about market benchmark relative returns, we are missing the point that you can’t pay pensions out of relative returns; we need to be much more focused on the benchmark that really matters, the liabilities. As interest rates have declined over the last 25 years, pension liabilities have ballooned. By holding assets of much shorter duration, we missed out on substantial compensating increases in asset values.

OUR RISK APPETITE NEVER CHANGESImplicit in a static strategic benchmark is that our risk appetite doesn’t change even as our wealth changes or as return expectations change. Th is makes no sense at all. Surely we can all agree that our risk appetite should respond to changing return prospects and surely most of us will acknowledge that our risk appetite does change as our wealth rises or falls, even if the manner in which it changes will be diff erent for diff erent investors.

As one starts to think of risk in a more dynamic sense we fi nd ourselves having to think of the investment management problem in a much more holistic way. Should our risk appetite then be governed more by changes in our funding ratio or changes in return prospects? Th e answer will depend on the risk preferences of the trustees and this is likely to be conditioned on the strength of the implied covenant with the fund sponsor and the regulatory environment the fund operates in.

If the implied covenant with the fund sponsor is strong, then it is possible that trustees will not feel obliged to reduce risk budgets as funding ratios decline. But if the implied

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FIGURE 1: US EQUITY RETURN GRAPH

FIGURE 2: US EQUITY RETURN GRAPH

covenant is weak or the regulatory environment harsh, trustees may well feel that they have no choice in the face of declining funding ratios other than to reduce risk budgets and so limit potential further declines in wealth. We should never forget that asset allocation overwhelmingly determines the return earned on a fund, typically accounting for over 90% of the outcome.

BUT WE CAN’T TIME MARKETS, CAN WE?It is often held out that it is time in the markets that counts and any attempt to time markets is doomed to failure. To provide support for this argument one often sees charts of returns from an index set against returns from the same index minus just the top 10 days.

Th e argument goes that since you can’t possibly know when the best days will be and the price for

Source: Global fi nancial data, Schroders, nominal terms, no dividends


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missing them is so high, you had better stay fully invested. Of course no one operates a daily asset allocation policy. So what happens if you look at returns where you come out of the market 100 days before a top 10 day and go back in 100 days after? Th is equates to a 200 day investment horizon, or a little over nine months, a rather more realistic period.

Th e picture completely reverses and you make substantial gains by missing the 10 best days! I present this not as a case for market timing but to demonstrate that you can prove what you want if you torture the data long enough.

However, I will make an argument shortly that we can say something about equity and other markets, which is better than the very static return assumptions used in asset liability modelling. First though lets look at how eff ective or not asset/liability modelling has been.

ASSET/LIABILITY MODELLINGTh e great risk with modelling is that one can get caught up in the sophistication of the model and the precision of the numbers that emerge. Yet the ‘GIGO’ principle holds: garbage in, garbage out. Th e return assumptions used are of course critical. Typically an A/L model will use something close to the current redemption yield as the forecast for bond returns, and for equities something like a Gordon model. Th e Gordon model simply says that the long-run real return from equities will equal the current dividend yield plus the long-run growth rate. Th e idea is that in the very long run returns are dominated by income which dwarf changes in valuation. Th e current dividend yield is of course observable, and the long-run growth is usually derived from looking at long-run historical growth rates in earnings or GDP.

Now I haven’t been in this business for 40 years, but I have been in it for four decades and in each of those decades a Gordon model forecast would have been way away from reality. In the current decade and in the 1970s, the forecast would have been far too high, and in the ’80s and ’90s, far too low. (See table 1.)

Now if you really have a 40 year investment horizon, the Gordon model

Annualised real Strategic forecastreturns on the S&P500 (Gordon model) Actual

1970s 7.2% -1.4%1980s 7.6% 11.9%1990s 5.1% 14.8%2000 - 2008 2.7% -2.8%

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TABLE 1: S&P 500 ACTUAL VS FORECAST RETURNS

forecast would have been pretty much spot on. However, for most, if not all of us, being way off target for periods as long as 10 years is unacceptable.

To do any better we have to demonstrate forecasting ability. We are not proposing forecasting over short-term horizons where the signal to noise ratio is very poor, but we do believe that there is a lot we can say about returns over investment horizons of say fi ve to 10 years. Because over multi-year periods earnings and dividends do tend to grow in line with trend, whether or not we experience above or below average returns is largely determined by whether or not we are in a period of price/earnings multiple expansion or contraction:• If PE multiples today are high, it stands to reason that they

are more likely to fall than rise further, and vice versa.• Th ere is a well-documented relationship between infl ation

and PE multiples. When infl ation is high, PE multiples tend to be low, and vice versa.Th e fi rst relationship was used by John Bogle of Vanguard

fame to produce a forecast of the US market based on the simple assumption that PE multiples would revert to their historic average over a seven year period. Th e second relationship was demonstrated by Robert Shiller of Yale.

If infl ation is low, PE multiples tend to be high and vice versa. Th is relationship is not necessarily obvious. If you think about a Dividend Discount model, where the value of an equity is the discounted value of all of its future dividends, infl ation is implicitly in both the numerator (in the growth of nominal earnings) and in the denominator (through the discount rate). However, high periods of infl ation are often accompanied by high levels of uncertainty and volatility. Low periods of infl ation also mean low interest rates, which makes the cash fl ow consequences of borrowing to leverage more benign.

Th is relationship appears to hold good pretty much everywhere. So, if you have a view on infl ation at some point in the future, you also have an implicit view on PE multiples.

We do not suggest that either approach on its own is good enough, although both are an improvement on a Gordon model. Th ere are actually a wide range of factors that will infl uence PE multiples: a tendency to revert to the mean over the long term (Th e Bogle story); varying infl ation rates and

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interest rates (Th e Shiller story); higher or lower perceived equity market growth potential; changing accounting standards; impact of leverage/deleveraging.

We use these as examples only. Quite likely you, the reader, can add to this list.

TAKING A VIEW – A BETTER BEST PRACTICE MODELSo, if we are to take a more dynamic view of asset allocation, how are we to do this? First, we distinguish between dynamic asset allocation (DAA) and tactical asset allocation (TAA). TAA approaches tend to be quite short-term, high turnover strategies. Th e signal to noise ratio over short horizons is very poor and these strategies try to make up for that by having high breadth through high turnover and many moving parts.

DAA takes a much more medium term view. It is an approach which remains focused on the real world outcome a fund is trying to achieve. So, for example, if you were trying to earn a return of infl ation +5%, you might consider the following list of assets (again not exclusive) as having the potential to deliver the desired outcome: quoted equity, private equity, high yield, emerging market debt, property, infrastructure, hedge funds, commodities.

Most likely you would not consider investment grade debt as a candidate.

What we propose is that one continually appraises likely future returns of these asset classes against whether they are likely to deliver a return greater than or equal to infl ation +5%. If the answer is yes, they remain a candidate asset class; if the answer is no, they are removed or scaled right back. And if an asset, such as investment grade debt, not normally a candidate asset class, off ers returns in excess of the required threshold (as investment grade off ered in Q4 ’08 and Q1 ’09), then it gets added to the list. Now from the eligible list of assets, we go

on to construct a suitably well-diversifi ed portfolio.

Assets are continually appraised against the desired real world outcome and are included or excluded based on an assessment of whether realistically they meet the required threshold.

What if very few assets qualify? Th ere may be a time when there is a generalised asset price bubble so that most risky assets are overpriced and are off ering very low forward looking returns. Th e analogy here is of a tide going in and out. If you have been pushed well up the beach on the back of a big wave, as the wave retreats your goal should be not to get sucked all the way back down again. Th at is the time to settle for hanging on to the ground made until asset prices have retreated to more reasonable levels.

Is this a high turnover strategy? Not especially. Over the last decade there would probably have been only a few major calls that one would have wanted to make, but they would have made a big diff erence. Equities overvalued at the end of the ’90s. Credit undervalued Q4 ’08 and Q1 ’09. Long dated government bonds overvalued now.

You would probably have called the top in equities at the end of the ’90s a year or two early. What then? It is true that an investment approach which is materially diff erent to the consensus is bound to have its uncomfortable moments. However, if the approach is sensible one needs to have a governance budget which allows for an investment committee to stand fi rm during the diffi cult times. Second, the portfolio should be suffi ciently diversifi ed at all times that one is not a hostage to a single investment decision.

CONCLUSIONFocusing on market related benchmarks, rather than the real world outcomes we

PROFILE – FACT BOX

Alan Brown, FSIPCareer highlights: Alan Brown, FSIP, serves as chief investment offi cer, executive director and member of group management committee at Schroders. He joined Schroders in 2005 and was appointed to the board in July 2005. Between 1974 and 1995, he worked at Morgan Grenfell, Posthorn Global Asset Management, and PanAgora Asset Management before joining State Street Global Advisors where he served as group chief investment offi cer.

“...the industry has behaved largely like a dear caught in the headlights”

desire has cost us dearly. It has led to overly complex and costly structures.

By concentrating on market related risk measures we have largely ignored the huge risks we have assumed with our pools of capital when measured against their liabilities.

During the roller coaster ride of the last 10 years, the industry has behaved largely like a deer caught in the headlights. Not to have changed asset allocations in the face of such dramatic changes in pricing seems bizarre.

Th e idea that we cannot make a reasonable stab at forecasting whether returns will be above or below our required target is simply not right.

We can, and simply must do better. A return to a simpler world, where we concentrate on what is important rather than what is (relatively) easy would be a good start.



To have a reasonable chance of assessing the future, it is essential to understand the past. We are just recovering

from the worst recession for 80 years and investors wishing for future success need therefore to be clear about the causes of this collapse.

Asset bubbles, excesses and imbalances in international savings, and China’s exchange rate have all been justly blamed for our present troubles. Seeing them as separate and distinct issues is common, unjustifi ed and pernicious. It is, for example, often claimed that it is not the renmimbi, but the lack of US savings that is the problem. Such statements treat the various imbalances as if they were separate and unconnected, which they are not.

It is fair and reasonable that both individuals and countries should be free to decide to save whatever proportion of their incomes seems to them to be right. However, if intentions to save exceed intentions to invest, they will be thwarted by a fall in incomes and output, causing widespread unemployment. It is generally agreed that fi scal and monetary policies should be introduced to off set this. But if the

countries that have the excess savings rely on the rest of the world to take the necessary off setting action, the result will not be fair and reasonable, as the cost of thwarting the aggregate excess of savings intentions will fall on some populations and not on others.

If the required ex-post balance between savings and investment was achieved by higher investment, there would probably be no serious problem. Th e additional investment would boost future labour incomes as well as profi ts. In the corporate sector labour takes about 70% of the gross incremental return from additional investment so, despite the higher fl ow of income which would, in the future, fl ow from the importer of capital to the exporter, the recipients would still be large net gainers from the investment fl ow. If, however, the adjustment comes through the thwarting of savings intentions, then there will be a fall, rather than a rise, in the future incomes of the capital importing countries.

Leaving individuals and countries to save whatever proportion of their incomes they choose is not always therefore fair and reasonable. It can create huge problems if countries with current

account defi cits have low domestic savings rates and this has been the case in recent years, both within the eurozone, whereby German savings have been fi nancing Greek consumption, and internationally, where Chinese savings have been fi nancing US consumption. I show in fi gure 1 how the UK and US have combined low domestic investment ratios with current account defi cits, while China, Germany and Japan, with their high investment ratios, have nonetheless run current account surpluses.

UNFAIR DISTRIBUTIONTh e massive fi scal stimuli that have been introduced worldwide have been successful in moderating the rise in unemployment and the loss of income and output, but this has been achieved by reduced savings rather than boosted investment. Th e burden has also been unfairly distributed between countries. It is not therefore sensible to claim that it is low US savings that is to blame for

The reasons for the recent fi nancial crisis are legion, says Andrew Smithers. It is wrong, however, to treat the various problems as separate and unconnectedBY: ANDREW SMITHERS

International savings and investment in the balance EXECUTIVE SUMMARY

• Leaving individuals and countries to save whatever proportion of their incomes they choose is not always fair and reasonable

• The fl ow of savings from China to the rest of the world is not independent from the country’s exchange rate policy, but is one of its results

• The unwillingness of countries with savings surpluses, and those with defi cits, to adjust their policies in the desired direction suggests that the outlook for the world economy is far from rosy

FEATURE: INVESTMENT

19-21 investment.indd 1919-21 investment.indd 19 1/6/10 09:32:251/6/10 09:32:25

S U M M E R 2 0 1 020

STATS.the imbalances. Th ese low savings rates arise from the policy responses made to address the worldwide imbalance between ex-ante savings and investment.

Th e reduction in US savings through the policy response is not just a recent event, but one of many years’ standing and arises, at least in part, from Chinese exchange rate policy. While pegging the renmimbi, the Chinese government has been at least temporarily successful in immunising its impact. As a rapidly growing economy, it must be expected to have a naturally rising real exchange rate. Once the immunisation ceases to be successful, the exchange rate will rise in real terms, even if nominally unchanged. But, until then, real Chinese wages are depressed by the currency intervention and real profi ts boosted. As the savings rate of the corporate sector is higher than that of the household sector, this produces a rise in the national savings rate. Th is has to have a counterpart. Th e fl ow of savings from China to the rest of the world is not therefore independent from the

-5 0 5 10 15 20 25 30 35 40

US

UK

China

Japan

Germany

Investment Current account balance

% of GDP

FIGURE 1: COUNTRIES WITH CURRENT ACCOUNT DEFICITS INVEST LITTLE

“In recent years German savings have been fi nancing Greek consumption and Chinese savings have been fi nancing US consumption”

Sources: National Accounts for 2009 via Ecowin

© DORIANO SOLINAS




Andrew SmithersCareer highlights: Andrew Smithers is chairman and founder of Smithers & Co, an adviser to investment managers on international asset allocation. Prior to starting the fi rm in 1989, he was at SG Warburg from 1962 to 1989. He is co-author of Valuing Wall Street with Stephen Wright, published in 2000, and Japan’s Challenges for the 21st Century with David Asher, published in 1999. His latest book Wall Street Revalued – Imperfect Markets and Inept Central Bankers was published by John Wiley & Sons in July 2009.

country’s exchange rate policy, but is one of its results.

Th rowing money at the problem has been essential and successful. But in a sense this has been the easy part; taking the money out again promises to be much trickier and is made more diffi cult because of past imbalances. Recovery will probably be impossible without a more even sharing of responsibility. In due course it is possible, though I think unlikely, that Chinese savings intentions will naturally fall or investment intentions rise and the national net savings surplus will be absorbed without disruption.

It is more likely, though like everything in economics far from certain, that a continuation of the current pegged exchange rate policy will run up against the diffi culty of continued successful immunisation. Th is will produce an upward surge in Chinese infl ation, such as seemed to be developing before it was halted in 2008 by the world recession. If Chinese infl ation is suffi ciently far above that for the rest of the world, a stable nominal exchange rate for the renmimbi will be a rising real one.

INFLATIONWhile that could present a way of adjusting one important imbalance in the world economy, it will have diffi culty in being a smooth one. History suggests that, once infl ation rises above a certain level, perhaps around 5%, it triggers a response which renders it unstable. Th e standard explanation is that infl ationary expectations start to rise and, if these are not quickly countered by sharp rises in interest rates, they continue to mount. As rises in interest rates tend to have a short-term upward impact on infl ation, small increases can merely fuel

further rises in infl ationary expectations. Th e risk is therefore that rising Chinese infl ation will not provide a smooth route out of our current imbalances, but a very bumpy one, in which a sharp rise in interest rates is followed by increased unemployment and falls in incomes and output. It seems to me that, given the low level of interest rates and the high levels of fi scal defi cits, a successful economic policy response to such a development would be extremely diffi cult.

Th e past policy response of the Federal Reserve has been ill-judged. Faced with the apparent excess of ex-ante savings worldwide, and the low level of consumer price infl ation which accompanied it and was exacerbated by the pegged renmimbi exchange rate, the Federal Reserve pursued an excessively easy money policy. Th is drove up asset prices and drove down US household savings. It was therefore temporarily successful in off setting the excess ex-ante savings surplus. However, by driving up asset prices, the Federal Reserve lost control of economic policy, because asset prices are an important transmission mechanism through which, in normal times, interest rates aff ect demand. Th eir impact is, however, ephemeral. As asset prices get more and more out of line with their fundamental value, which for real assets must be related to their cost of production, they become increasingly liable to falls which will continue despite falling interest rates, as we have recently experienced.

Th e correct policy response by the Federal Reserve would have been to lower the target for consumer price infl ation and this is still the correct response today. To off set the imbalance created by the pegging of the renmimbi to a fi xed nominal exchange rate to the dollar,

“Recovery will probably be impossible without a more even sharing of responsibility”

FEATURE: INVESTMENT

infl ation in the US needs to be several percentage points lower than it is in China. Since at the same time the rate of infl ation in China needs to be kept below the danger point when it inculcates a rise in infl ationary expectations, the equilibrium level of US infl ation can hardly be more than zero.

My analysis may of course be wrong, or those events that I consider unlikely, such as a smooth rise in Chinese infl ation, may occur. If, however, it is broadly correct, the apparent unwillingness of both those countries which have savings surpluses and those which have defi cits to adjust their policies in the desired direction suggests that the outlook for the world economy is far from rosy.


22 S U M M E R 2 0 1 022

‘Equity income’ or ‘dividend investing’ and ‘emerging markets’ are not phrases that are ordinarily put together:

too many banks I meet scoff at the association. Emerging markets are associated with risk, fast growth and the future whereas dividends are associated with maturity, no growth and retirement. To many a seasoned emerging market adventurer, dividends are as bad as death and taxes: a tax on growth, a signal to exit. Th ere are times, it is true, in meetings with emerging market companies that I have mentioned ‘dividend policy’ and the room has fallen silent: “you don’t like growth?” I can hear the CFO and fellow investors thinking. Despite this, many emerging market companies are in fact sizeable and reliable payers of dividends. Some of the numbers, particularly over the last cycle will provide a big surprise to those who still think that the only companies committed to the dividend culture are Anglo-Saxon.

Th e fi rst point I would highlight is an irony. Th e perception that emerging markets are not a good destination for dividend investors is prevalent but wrong. Furthermore the perception is self-reinforcing. As Joseph Schumpeter pointed out: “Analytic work... embodies in the picture of things as we see them and wherever there is any possible

motive for wishing to see them in a given rather than another light, the way in which we see things can hardly be distinguished from the way in which we wish to see them.” Emerging markets developed as an asset class because of developed market analysts who wanted to fi nd more growth, or risk, or the next new thing. Th e migration of developed market investors looking for more growth has only accelerated because of the last cycle, since the consensus is as convinced as ever that emerging markets will grow and that developed markets are moribund. If one isn’t looking for stable dividends, one won’t see them.

Th ere are subtle ways in which investor desires or needs shape their analytic work and therefore the way in which they perceive and react to emerging markets. Jorge Chan-Lau (2004) points out, I think rather profoundly, that the shift of US pension funds towards foreign asset classes in the past few decades coincides with and is probably driven by the restructuring of pension plans away from defi ned benefi t

schemes towards defi ned contribution schemes; by contrast the UK market is still dominated by defi ned benefi t plans and its foreign asset allocation and investments in emerging markets lags greatly. Defi ned-benefi t or ‘defi ned-liability’ schemes force trustees to match their defi ned domestic liabilities to domestic assets. Th ey alter investor discourse by making these unfortunate investors think of the tracking error and volatility relative to their liabilities as ‘risk’ – given their mandate it is. Th e problem is that the framework lingers when investors are freed from defi ned liabilities. Even committed emerging market investors, such as the US endowment market, still think of their emerging market allocation in terms of adding or subtracting ‘beta’ or growth to their portfolio rather than value or an income stream. As world markets fall, they sell beta, and as they rise they add to it: this reality is self-fulfi lling. It should be no surprise then if emerging markets really are more volatile than developed ones.

Little attention is paid to emerging market equity income as an asset class, says Edward Lam. This is surprising given that emerging market companies paid out $150 billion in dividends last year, more than twice the UK fi gureBY: EDWARD LAM

Unexpected dividends from global emerging markets

“The perception that emerging markets are not a good destination for dividend investors is prevalent but wrong”

22-24 equity income.indd 2222-24 equity income.indd 22 1/6/10 09:33:481/6/10 09:33:48


STATS: INTERNATIONAL DIVIDENDS.

FEATURE: EMERGING MARKET EQUITY INCOME

GROWTH IN EMERGING MARKETSTh e reality is that a substantial and increasing segment of emerging markets are committed to dividends. Furthermore, what emerging market locals actually want as they grow wealthier is stability and income, not volatility; and why wouldn’t they? Growth is only a means to an end. Rockefeller was not a conservative businessman, but his attitude was clear, even in an age of unprecedented US economic growth. Th e same is true of emerging market entrepreneurs who create wealth and own wealth. In our experience these companies, run by fi rst generation entrepreneurs, have some of the best payout ratios combined with high growth rates. Th e companies that we worry about are the ones that consistently refuse to pay dividends or do not have a policy as this is often symptomatic of poor fi nancial discipline or a weak understanding of the long-term cost of capital. A good example of the emerging market entrepreneur is Tse Ping, CEO and founder of Sino Biopharmaceutical. Th e company fl oated in 2000 and since then has averaged a payout ratio of over 40% combined with an average sales growth of over 20%. Entrepreneurs like this understand that their long-term wealth is not dependent on large sums released from their stock’s IPO but the growth in annuity income streams generated by their company.

Th e drive of the most successful emerging market companies and countries is similar. Th ey want to reform capital markets so that they are less volatile, less dependent on external capital and can build income and capital internally. In some cases they

©COCO FLAMINGO

FIGURE 2: CONSISTENCY OF YOY PAYOUT INCREASES

FIGURE 1: CONSISTENCY OF PAYOUTS

0

50

100

150

200

250

300

350

9 years 5 years 3 yearsNumber of years dividend payments without omission

Num

ber

of d

ivid

end

payi

ng c

ompa

nies

US EM UK

0

100

200

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600

700

800

9 years 5 years 3 years

US

Number of years dividend payments without omission

Num

ber

of d

ivid

end

payi

ng c

ompa

nies

EM UK

Source: Bloomberg

“Do you know the only thing that gives me pleasure? It’s to see my

dividends coming in.”JD ROCKEFELLER


24 S U M M E R 2 0 1 0


Edward LamCareer highlights: Edward Lam is the Somerset Emerging Markets Dividend Growth Fund lead manager. A graduate of Downing College, Cambridge University, he began his career at Lloyd George Management covering Asia for emerging markets mandates. He joined Somerset Capital Management LLP in 2007 as head of EMEA and was appointed partner the same year.

have succeeded. Th e Chilean market is a good example. Reform of the pension system has led to a growth of pension assets to over 50% of GDP from negligible levels, and all listed companies are required to payout at least 30% of earnings. Wealth is consciously being saved and converted into income streams. Th e Chinese build up of foreign exchange assets invested abroad is also symptomatic of this. Th e reason the trend is not necessarily obvious is that emerging markets are not yet hugely wealthy and they still have some more traditional ‘annuity investments’ to make. Many Asian cultures still invest in their children as their primary deferred income asset. As they become richer they will undoubtedly have more money left over for formal equity income plans after funding their children’s education.

Th e statistics support the case for Global Emerging Markets Equity Income overwhelmingly: there are now more mid to large cap companies in emerging markets that have paid a dividend in each of the last nine years than there are in the UK, the stronghold of equity income investing. Th ere are almost four times as many emerging market companies which increased their dividends in dollar terms each year for

STATS

FIGURE 3: TOTAL DIVIDENDS PAID

UK companies

EM companies

US companies 81,121

155,868

253,389

growth’ and ‘more or less beta’, but many of the wealthiest insiders are happy just sitting on their steadily increasing dividend streams. After all, continuous dividends are an undeniable pleasure to receive. Finally, a by-product of inverting one’s view of emerging markets in this way, in order to focus on the companies with the best dividend streams, is the added benefi t of allowing one to be greedy when others are ‘risk-adjusted’

Source: Bloomberg

the past fi ve years than there are in the UK. Although there are many more eligible companies in emerging markets which are not paying dividends than in the UK, this highlights the potential of the market rather than a structural weakness. Even though there are still more US companies paying more dividends, more consistently, the gap is closing quickly. In the past 12 months mid to large cap emerging market companies paid out around $150 billion in dividends – two thirds of the US total and twice that of the UK. Given all this, the biggest surprise is how little attention is given to emerging market equity income as an asset class: there is less than $10 million devoted to this asset class compared to tens of billions in the UK equity income space.

A PLACE FOR DIVIDEND INVESTINGIt is true that one still needs to be selective, and perhaps this is the main problem for generic ETF access: for every emerging market company promising a high and growing yield there may be another promising not to pay a dividend. For this reason the overall yield is lower (at around 2%) in emerging markets than it is for example in the UK (around 2.7%), however, the yield is growing more quickly. Th e view that there is no place for dividend investing in emerging markets is old fashioned. Every week we push the agenda for dividends to emerging market companies; every month my team and I meet companies which are freshly considering a dividend policy.

Outsiders, because of their needs, will probably continue to judge emerging markets by the yardsticks of ‘excess

“There are now more mid to large cap companies in emerging markets that have paid a dividend in each of the last nine years than there are in the UK”



A new breed of structured investments could bring an edge to portfolio management, says James Chu, CFA

BY: JAMES CHU, CFA

In search of returns in uncertain markets

EXECUTIVE SUMMARY• Investors need new tools to maintain

returns in an increasingly uncertain investment environment

• Structured investments can offer exposure to an equity index while protecting the investors’ principal

• Structured investment products have some characteristics of dynamic portfolio allocation due to their embedded options

When Donald Rumsfeld introduced the concept of ‘known unknowns’ and ‘unknown

unknowns’, no one would know that he was also prophesying about fi nancial markets. During the recent fi nancial crisis, many portfolio managers and investors discovered that what really matters are the ‘unknown unknowns’. As this article went to press, we saw another ‘unknown unknown’ hitting the fi nancial markets. Th e sovereign debt problem in Greece has spread and escalated to a global meltdown in the markets. On 6 May the Dow Jones Industrial Average dropped by more than 900 points, before sharply gaining 600 points in 30 minutes. Such a swing has never been seen in the markets before. With markets getting more and more connected through globalisation and electronic trading, more ‘unknown unknowns’ will start to come out of the woodwork. Investors need new tools to maintain the returns they achieve returns in an increasingly uncertain investment environment.

© K

EV

IN H

AU

FF

/IK

ON

IM

AG

ES

FEATURE: STRUCTURED INVESTMENTS

STRUCTURED INVESTMENTS AS A DYNAMIC PORTFOLIO MANAGEMENT TOOLStructured investment products are often seen, and are used, as an alternative to fi xed income – combining the principal protection in fi xed income securities with returns linked to other assets: equities, currencies,

25-29structured products.indd Sec1:2525-29structured products.indd Sec1:25 1/6/10 09:35:011/6/10 09:35:01

S U M M E R 2 0 1 026

Auto-call (kick-out)

Range accruals

Booster-trackers (also known as supertrackers)

Growth with optimised entry

Absolute return strategies

Hindsight strategies (also known as ‘rainbow’)

Level of the underlying asset will be monitored on a pre-agreed frequency (eg. annually, semi-annually, monthly, etc.). If the level of the underlying asset is at or above a pre-agreed threshold, the structure is called automatically, repaying 100% of investment principal plus a fi xed return. Underlying assets typically are equities, indices, commodities or foreign exchange.

Generates an enhanced yield by taking a view that the underlying asset will stay within a pre-determined range. Every day a high interest income will be accrued if the underlying asset is within this range. Underlying assets typically are interest rates (Libor, constant maturity swaps rates or CMS), equities, indices or foreign exchange.

Instead of tracking the performance of an underlying asset on a one-for-one basis, this strategy enhances the return at maturity if the underlying asset has gone up. Usually the investments will quote a participation rate, which determines the return enhancement on the upside. For example, a 200% participation rate means that every 1% rise of the underlying asset at maturity will produce 2% return from the structure. The downside can be one-for-one, or could be controlled using a downside participation rate of less than 100%, or using protection barrier (eg. 50% of initial level) such that principal is protected unless the underlying asset has dropped below the barrier and fails to recover above its starting level at maturity. The potential upside could be subject to a maximum and/or a minimum. Underlying assets typically are equities, indices or commodities.

Combines traditional principal protected strategies or the booster-tracker strategies with an ‘averaging in’ feature such that the initial starting level of the underlying assets (which is used to determine the fi nal growth at maturity) will be based on the average (daily, weekly or monthly) over a short initial period (eg. three months). A more advanced but more expensive alternative is to have a ‘lookback’ feature such that the initial level of the index is the lowest (daily, weekly or monthly) over the initial period. Underlying assets typically are equities or indices.

The performance of the underlying assets will be monitored frequently (eg. every 12 months), and the absolute value of any rise or fall of the index over the monitoring period will be recorded, subject to a cap. At maturity, all these absolute performances are added to form a total, which will be paid out if the underlying asset is at or above the starting level at maturity. Underlying assets typically are equities, indices or commodities.

Instead of determining the allocation of the portfolio at the outset, it will be determined at maturity based on the performance of each underlying asset in the portfolio, with the highest weight attributed to the best performing underlying asset, the second highest weight attributed to the second best performing underlying asset, and so on. These have been used both in pure equity investments as well as multiple assets with equities, fi xed income, commodities, properties, etc.

TABLE 1: SOME INNOVATIVE INVESTMENT STRATEGIES AVAILABLE THROUGH STRUCTURED INVESTMENTS

Name of strategy Description of strategy

“Structured investments can be seen as a portfolio of fi xed income, assets. The allocation between these three asset classes would adjust automatically adapt to market changes”



STATS.

commodities and so on. Many investors and providers have therefore been approaching structured products by focusing on the potential yield that they can off er. Th is reinforces the treatment of structured products as a fi xed income or cash alternative in a portfolio.

Structured investments however are more than this. As the Edhec Risk and Asset Management Centre notes, structured investment products actually “correspond to dynamic allocation forms which we know to be more general than, and therefore superior to, static allocation”. Th e reason is that many structured investment products have embedded options.

Th e Nobel prize winning work by Black, Scholes and Merton showed that options can be replicated by a combination of long or short positions in underlying assets and cash (or loans). For example, consider a call option on an equity index. Th e option can be replicated by holding a long position in the equity index and cash loans, with the allocation between them based on an algorithm that is linked to the option pricing model. As market rises (falls), the replicating portfolio to the option will increase (decrease) its long position in the equity index by an amount as determined by the option pricing model, resulting in the rise (fall) in value of the replicating portfolio and hence the option. In other words, the option can be seen as a portfolio of underlying assets and cash/loans, with allocation adjusted dynamically, with an investment objective of delivering the returns as described by the options payout.

Extending the above analysis, since structured investments typically combine a fi xed income instrument like a zero coupon bond with options, it means that structured investments can be seen as a portfolio of fi xed income, cash/loans and underlying assets. Th e allocation between these three asset classes would adjust dynamically and would automatically adapt to market changes.

For example, consider a principal protected structured note with an embedded call option on an equity index. As the market rises (falls), the rise (fall) in the value of embedded option means that the structured note increases (reduces) its relative weight in the underlying assets and reduces (increases) its relative weight in the zero coupon bond. Investors eff ectively own a portfolio with exposure to the equity index that is adjusted dynamically, with an ultimate objective of producing returns linked to the performance of the equity index, whilst protecting investors’ principal from any stockmarket risk at maturity just like a bond. Th is aspect of dynamic allocation is something that traditional asset allocation, which is largely based on a static framework, lacks, and is an invaluable tool for investors seeking wealth preservation and growth in an increasing uncertain investment environment.

STRUCTURED INVESTMENTS AS INNOVATIVE INVESTMENT STRATEGIESTh e fact that structured investments have embedded options introduces another dimension to investors, namely innovative investment strategies for more fl exible investment solutions in

Investors can generate a high fi xed return, potentially higher than the return of the underlying assets, even if the underlying assets stays fl at or trades within a narrow range.

Investors looking for income can use this strategy to generate potentially higher yield than cash deposit by taking a view on the trading range of the underlying assets.

Buy-and-hold investors can use this type of structured investment for ‘outperformance by formula’, which is an alternative to actively managed fund (with outperformance relying on the manager’s skills) and/or complement to holding in a passive index fund.

The averaging-in feature means that any fall in the market over the short term would result in a lower starting level. The more expensive ‘lookback’ feature will ensure that the true low in the initial period will be used to determine growth at maturity.

An absolute return strategy that is completely formula based, and could be used by buy-and-hold investors as an alternative/complement to actively managed absolute return funds.

With the limitations of our abilities to accurately produce forecasts for a truly optimal portfolio, this strategy delays the asset allocation decision until performance of each underlying asset is known. This means for the fi rst time investors can perform an asset allocation with hindsight.

Possible investment applications

cash/loans and underlying dynamically and would



28 S U M M E R 2 0 1 0

uncertain markets. For example, recently structured investment products that utilised option strategies that are used by option traders to generate absolute returns in either a rising or falling stockmarket have been launched, with investment principal protected from stockmarket risk unless the market has more than halved at maturity.

Some people argue that such strategies could be implemented by investors themselves using options and other derivatives, instead of buying structured notes or other forms of structured investments. Th is may be applicable to very sophisticated institutional investors, but the truth is that some of these strategies are diffi cult, even for institutional investors unless they hire expert option traders (and have the necessary risk management system). Structured investments that deliver these strategies in a packaged manner would therefore be a better alternative, as all the management required to generate the payout of these strategies will be shifted to the trading desks of the banks that issue the structured investment or the embedded derivatives. Some examples of innovative strategies that can be delivered through structured investments can be found in table 1.

STATS.

UK - FTSE 100

US - S&P 500

Eurozone - DJ EuroSTOXX 50

Japan - Topix

Taiwan - MSCI TaiwanSingapore - MSCI Singapore

S Korea - Kospi 200

BRIC - S&P BRIC 40

Hong Kong - Hang Seng index

55%

11%

9%

6%

2%2%

2%2%

11%

FIGURE 1: STERLING-BASED STRUCTURED INVESTMENT LINKED TO A BASKET OF EQUITY INDICES

Source: Blue Sky Asset Management

A NEW BREED OF STRUCTURED INVESTMENTSIn light of how structured investments could be treated as a tool to add dynamic allocation to investors’ portfolios, a new breed of structured investments has been devised. Providers of such structured investments focus on proper use of innovations in derivatives and fi nancial engineering, designed to utilise its non-linear risk/return profi le to complement traditional portfolio management.

Th is new breed of structured investment is best illustrated by a case study. In Q1 2008 a wealth manager approached us to design a structured investment that can reduce stockmarket risk in a client’s global equity portfolio without giving up return potential. A six year sterling-based structured investment linked to a basket of equity indices was designed to replicate the equity allocation (see fi gure 1), and the payout at maturity was such that every 4% fall in the index basket will only see investor losing 1% of his investment. On the upside, at maturity the structured investment will repay 100% of principal, plus a return of 7% for every 1% rise in the index basket up to 70%, and then 1% for every 1% rise above 70%. For example, if the index basket is up 5% at the end of six years, the structured investment will pay 135% of the original principal. If the index basket is up 100% at the end of six years, the structured investment will pay 200% of the original principal.

Th e maturity of this structured investment will be in 2014, and therefore it is still too early to say what returns the investor will fi nally get. However, even before 2014, the structured investment has already added value by reducing the stockmarket risk of the portfolio throughout the fi nancial crisis. Figure 2 plotted the performance of the structured investment since April 2008 up to April 2010 (total of 24 months), as compared to the performance of the global equity portfolio (assuming a

“The truth is that some of these strategies are diffi cult, even for institutional investors unless they hire expert option traders”




James Chu, CFACareer highlights: James Chu, CFA, is the managing director and chief investment offi cer of Blue Sky Asset Management, an investment fi rm specialising in research backed structured investments for the intermediary business channel, with tailored offerings for discretionary managers, private client stockbrokers and institutions. He is the former business development head, investment & fi nancial products, at American Express Bank, where he focused on developing structured investment strategies, on multi-asset underlyings, for private clients globally. He began his investment career in 1994 with HSBC Asset Management, where he spent seven years managing derivatives-based funds and structured products for investors in the UK and Asia.

STATS.

30

60

90

120

100

150

Valu

e (r

ebas

ed to

100

on

Apr

08)

Direct investment portfolio Mid-price of structure MSCI World (US$)

Apr

08

May

Jun

Jul

Aug

Sep

t

Oct

Nov

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09 Feb

Mar

Apr

May

Jun

Jul

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t

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FIGURE 2: PERFORMANCE OF THE STRUCTURED INVESTMENT COMPARED TO THE PERFORMANCE OF THE GLOBAL EQUITY PORTFOLIO

Source: Bloomberg, Blue Sky Asset Management

portfolio of passive index funds as per fi gure 1 with currency risks fully hedged) and MSCI World in US dollars. One can see that:• Th e global equity index portfolio has

gone down 2.07% over two years (orange line), as compared to MSCI World which has gone down by 20.57% (blue line). Th is illustrates the importance of getting the asset allocation right.

• Th e structured investment has improved performance further, producing 25.72% return over two years (red line). Th is is due to the ability of the structured investment to reduce stockmarket risk – even before maturity – without giving up returns potential on the upside, which in turn is due to the embedded, implicit dynamic allocation between equities and fi xed income/cash that is described above.

• Th e maximum draw-down of the equity index portfolio was -34.8%,

whereas for the structured investment it was -14.5%. As the global equity market recovers, the structured investment did not lose out on its return potential, rising 47% from the market bottom in February 2009. Th is again illustrates how the structured investment, through the embedded dynamic allocation, responds and adapts to changing market conditions. As more ‘unknown unknowns’ hit

fi nancial markets, investors should be aware that they need tools that can tackle market risks in a dynamic manner, with innovative investment strategies that can weather and adapt to rapidly changing market conditions. A new breed of structured investments that focus on strengthening risk management in portfolios would bring an invaluable edge to investment management as we continue our quest for returns in an increasingly uncertain investment environment.



30 S U M M E R 2 0 1 030

No executive would dispute that analysts’ forecasts serve as an important benchmark of the current and future health of companies. To better understand their accuracy, we undertook research nearly a

decade ago that produced sobering results. Analysts, we found, were typically overoptimistic, slow to revise their forecasts to refl ect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.

Alas, a recently completed update of our work only reinforces this view – despite a series of rules and regulations, dating to the last decade, that were intended to improve the quality of the analysts’ long-term earnings forecasts, restore investor confi dence in them, and prevent confl icts of interest. For executives, many of whom go to great lengths to satisfy Wall Street’s expectations in their fi nancial reporting and long-term strategic moves, this is a cautionary tale worth remembering. Exceptions to the long pattern of excessively optimistic forecasts are rare, as a progression of consensus earnings estimates for the S&P 500 shows (fi gure 1). Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught up with earlier predictions, do forecasts actually hit the mark.

Th is pattern confi rms our earlier fi ndings that analysts typically lag behind events in revising their forecasts to refl ect new economic conditions. When economic growth accelerates,

After almost a decade of stricter regulation, analysts’ earnings forecasts continue to be excessively optimistic, argues Marc H Goedhart, Rishi Raj, and Abhishek Saxena

BY: MARC H GOEDHART; RISHI RAJ; ABHISHEK SAXEN

Equity analysts: Still too bullish

© A

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the size of the forecast error declines; when economic growth slows, it increases. So as economic growth cycles up and down, the actual earnings S&P 500 companies report occasionally coincide with the analysts’ forecasts, as they did, for example, in 1988, from 1994 to 1997, and from 2003 to 2006. Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10% to 12% a year, compared with actual earnings growth of 6%. Over this time frame, actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession (fi gure 2). On average, analysts’ forecasts have been almost 100% too high.

This article was originally published in McKinsey Quarterly, www.mckinseyquarterly.com. ©[2010] McKinsey & Company. All rights reserved. Reprinted by permission.

30-31 equity bullish.indd 3030-31 equity bullish.indd 30 1/6/10 09:36:001/6/10 09:36:00


STATS.

FEATURE: EQUITY ANALYSISE

arni

ngs

per

shar

e (E

PS

) for

S

&P

500

com

pani

es, $

Date of forecast (monthly)

1985

1990 19911993

1999 2002

2003

20042005 2008

1.1

1.0

0.9

0.8

0.70.6

0.5

0.4

0.3

0.2

0.10

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Analysts’ forecasts over time for each year Realised EPS for each year

1985 198619871988 1989 1992

1994 19951996

19971998

2000

2001

20062007

Ear

ning

s gr

owth

for

S&

P 5

00 c

ompa

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, fiv

e ye

ar r

ollin

g av

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e, %

Long-term average, %

13

7

1985–90

18

16

14

12

10

8

6

4

2

0

–21987–92 1989–94 1991–96 1993–98 1997-021995-00 1999-04 2001-06 2003-08

2004-09

Forecast1 Actual2

Act

ual P

/E r

atio

vs

P/E

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d by

an

alys

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, S&

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Long-term median, ex- high-tech bubble phase

20

15

1985

27

25

23

21

19

17

15

13

9

11

7

51987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 20093

Implied analysts’ expectations1 Actual2

PREDICTIONSCapital markets, on the other hand, are notably less giddy in their predictions. Except during the market bubble of 1999-2001, actual price-to-earnings ratios have been 25% lower than implied P/E ratios based on analyst forecasts (fi gure 3). What’s more, an actual forward P/E ratio of the S&P 500 as of 11 November 2009 – 14 – is consistent with long-term earnings growth of 5%. Th is assessment is more reasonable, considering that long-term earnings growth for the market as a whole is unlikely to diff er signifi cantly from growth in GDP, as prior McKinsey research has shown. Executives, as the evidence indicates, ought to base their strategic decisions on what they see happening in their industries rather than respond to the pressures of forecasts, since even the market doesn’t expect them to do so.

FIGURE 3: LESS GIDDY

FIGURE 2: OVEROPTIMISTIC

FIGURE 1: OFF THE MARK

Source: Thomson Reuters I/B/E/S Global Aggregates; McKinsey analysis

1Analysts’ fi ve year forecasts for long-term consensus earnings-per-share (EPS) growth rate. Our conclusions are same for growth based on year-over-year earnings estimates for three years.2Actual compound annual growth rate (CAGR) of EPS; 2009 data are not yet available, figures represent consensus estimate as of Nov 2009.

1P/E ratio based on one-year-forward earnings-per-share (EPS) estimate and estimated value of S&P 500. Estimated value assumes: for first fi ve years, EPS growth rate matches analysts‘ estimates then drops smoothly over next 10 years to long-term continuing-value growth rate; continuing value based on growth rate of 6%; return on equity is 13.5% (long-term historical median for S&P 500), and cost of equity is 9.5% in all periods.2Observed P/E ratio based on S&P 500 value and one-year-forward EPS estimate.3Based on data as of Nov 2009.


Marc Goedhart (above) is a consultant in McKinsey’s Amsterdam offi ce, Rishi Raj (below) and Abhishek Saxena are consultants in the Delhi offi ce.

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32 S U M M E R 2 0 1 0

COMPULSORY AND VOLUNTARY ANNUITIES MARKETS IN THE UKEdmund Cannon and Ian Tonks of the University of Exeter

ABSTRACT – This paper describes the operation of both the compulsory pension annuity and voluntary annuity markets in the UK.

Throughout the paper, we report on the movement of UK annuity price quotes in the voluntary market from 1957 to 2009 and in the pension annuity market from 1994 to 2009, examining whether annuities were fairly priced over this period.

Taking into account load factors associated with annuity contracts, and in comparison with other fi nancial and insurance products, we fi nd that annuities are fairly priced. However, the value of the money’s worth is sensitive to the assumptions made about life expectancy, and we explain the assumptions made about the appropriate life tables to apply to annuitants in these annuity markets. http://business-school.exeter.ac.uk/research/areas/topics/fi nance/outputs/publication/?id=622

FINANCIAL RESTRAINTS AND PRIVATE INVESTMENT: EVIDENCE FROM A NONSTATIONARY PANELMaura Costantini, Panicos O Demetriades, Gregory A James, and Kevin Lee of the University of Leicester

ABSTRACT – Once a country moves away from complete fi nancial repression – where the only source of credit for private investment is the domestic banking system – can the provision of cheaper, albeit rationed, domestic credit help stimulate private investment?

This is the question we address in this paper. In order to do so, we employ a theoretical model of investment which assumes that fi rms have access to quantity-constrained domestic loans that are cheaper than those they can obtain from international capital markets.

Our fi ndings demonstrate the importance of cross-country dependence in estimating investment models. In addition, they suggest that countries that managed to suppress domestic real interest rates without generating high infl ation enjoyed higher levels of private investment than those that would have been

obtained under liberalised conditions. There is, of course, a limit to the extent that real interest rates can be depressed by applying nominal interest rate ceilings without resorting to infl ationary policies. When low real interest rates are the result of high infl ation, private investment does not appear to increase. Thus, while mild fi nancial repression can stimulate private investment, severe repression through high infl ation may well have the opposite effect.www.le.ac.uk/economics/research/discussion/papers2010.htmlwww.le.ac.uk/economics/research/RePEc/lec/leecon/dp10-06.pdf

CAUSAL RELATIONSHIPS BETWEEN STOCK PRICES AND EXCHANGE RATESPaul Alagidede, Theodore Panagiotidis and Xu Zhang of the University of Stirling

ABSTRACT – Are foreign exchange markets and stock markets really related? If so, what is the direction of these linkages?

This paper investigates the nature of the causal linkage between stock markets and foreign exchange markets in Australia, Canada, Japan, Switzerland, and UK in a linear and nonlinear framework from January 1992 to December 2005.

Throughout this paper, recently developed cointegration tests are employed, and we provide evidence that there is no long-run relationship between the two variables using two cointegration approaches and an extended dataset.

To focus on the nature of the short-run relationship, we employ three variations of Granger causality tests – standard causality test, test with unequal-lag length model and Hsiao’s version of the test. The results from three tests are qualitatively similar: there is causal linkage from exchange rate to stock prices in Canada, Switzerland, and UK. In Hsiao’s version test, causal linkage from stock price to exchange rate is only found for Switzerland. In standard and unequal lag length version of Granger causality test, we reject the null of no causality from stock price to exchange rate for Switzerland at 10% level.

The Hiemstra-Jones test is used to examine possible nonlinear causality. The results indicate causality from stock prices to exchange rates in Japan and weak causality of the reverse direction in Switzerland. www.economics.stir.ac.uk/Research/Discussion%20Papers.htmwww.economics.stir.ac.uk/DPs/SEDP-2010-05-Alagidede-Panagiotidis-Zhang.pdf

The CFA Society of the UK monitors the research output of CFA Institute Program Partners in the UK. A selection of excerpts are published here

New researchRESEARCH

32 new research.indd 3232 new research.indd 32 1/6/10 10:02:501/6/10 10:02:50


Timothy Nuding, CFACareer highlights: Timothy Nuding, CFA is the chief executive of Prosperity Capital Services, a fi rm that researches and raises capital for London-based hedge funds from Japanese investors. During his fi nancial career he has had responsibilities in corporate and investment banking and asset management in the US, Japan and the UK. He worked for Citibank for 20 years, including managing the Eurobond business in London. Following this, he managed Dresdner Bank’s asset management businesses in Japan and the UK. He received his CFA charter in 2000. He holds a BA with distinction from Swarthmore College in the US.


VOLUNTEER REPORT

Timothy Nuding, CFATimothy Nuding, CFA, has been a member of

CFA UK’s marketing and communications committee since 2008. He is chief executive of Prosperity Capital Services

Would you recommend other members to volunteer?Absolutely! You have so much to gain and only need to contribute a little time.

What more could the society be doing for members and what role does MaCC play in this endeavour?I believe that for each member there is at least one contact in the society that would make a huge difference to his or her career. The only problem is that you don’t know who that person is. The society can help you fi nd that individual by creating common interest groups and inviting you to join. Personally, I plan to set up an invitation only ‘hedge fund research club’ within the society this year. Please get in touch if you are interested in being a part of this by emailing [email protected].

How has membership of CFA UK aided your career? The CFA charter has certainly given me the analytical skills and experience to approach any investment problem with confi dence. And CFA UK has provided me with a network of like-minded professionals with whom I can hone my craft, something which I greatly appreciate.

How did you get involved in the marketing and communications committee (MaCC)? In 2004 and 2005, I volunteered to teach the UK revision clinics for the CFA Level II fi xed income exams and later participated in some of CFA Institute’s activities in the US. However, I wanted to contribute to strengthening member participation in the UK society so I applied to volunteer with the marketing and communications committee back in July 2008.

What are the advantages of being on the committee? The advantage of being on MaCC is that you have the opportunity to learn how CFA UK operates fi rst-hand. You also get to know the key people who shape the future of the organisation.

What progress has the committee made since you joined?From my vantage point, the committee has made great strides in the past two years by improving the communication linkage between members and the organisation. Participation in planned events has vastly improved, feedback regarding Professional Investor magazine is much more positive, and

our new website has won kudos from many corners of the organisation.

What do you hope the committee will achieve in the coming year?We hope to further enhance the reputation of CFA UK outside the organisation’s membership – namely, to the media, public affairs and employers. I hope we can also provide marketing and communications which are more tailored to individual members’ needs by improving and targeting the information about how the society can make a difference to them.

What benefi ts do you get from being a committee member?I feel I gain a professional advantage from the discussions that I have with other network contacts who I meet thanks to being a committee member. I also enjoy the social aspect of the position as it counter-balances the analytical work I do, largely on my own, for most of the day. More recently, I have found great satisfaction knowing that I have made a difference to the society by contributing to its activities without expecting to receive anything in return.

33 volunteer.indd 3333 volunteer.indd 33 1/6/10 09:36:321/6/10 09:36:32

34 S U M M E R 2 0 1 0

Survey results show improvement in servicesThe results of this year’s annual membership survey suggest that the society has improved the range and quality of services that it offers to members.

Over 2,200 members responded to the survey in March and according to the results, more members think that the society serves them well as a member this year compared to last year.

Members increasingly view CFA UK membership as good value for money. This may be because the society lowered the costs of its continuing education events by £10 last July. We also introduced more complimentary events and offered free event passes to members. Another key factor could be the webcasting of events, which has enabled more than 1,900 members to watch past continuing education events online since November 2009.

“We are grateful to all members who completed the

today’s best practices are fatally fl awed. (For more information, please refer to Alan Brown’s article in this issue.) This is because the investment profession is overly concerned with beating market returns and monitoring risks against strategic benchmarks based on asset liability studies. He went on to question whether a greater emphasis needs to be placed on controlling the risks from these benchmarks to the liabilities that need to be met.

With regard to working in the profession, Brown claimed that you could choose to be a specialist or a generalist. In his opinion, generalists are going to be more successful in the years ahead. This is because, he said, “We are going to move into a world where multi-asset skills will be called upon to view the fund in a much more holistic context, and take a much more dynamic view of assets.”

Other topics covered on the day included succeeding

as a buy-side and sell-side analyst, succeeding as a portfolio manager, interview techniques and the perfect CV, active career management, and the current market outlook.

If you weren’t able to attend the conference, you can view the speakers’ presentations as PDFs or webcasts on the members’ area of our website. Please visit www.cfauk.org/members

Last chance to book for CFA UK’s annual conferenceCFA UK’s 2010 annual conference will take place on Thursday 17 June at Merchant Taylors’ Hall, London.

The theme of this year’s conference is ‘sources of return’, providing you with a unique insight on where investment performance is forecast over the year ahead. Within this context, leading academics and investment professionals will provide you with specifi c tools for

Alan Brown, FSIP, and Anne Richards addressed members

1

2

3

4

5

3%

10%

39%42%

7%

survey,” said Will Goodhart, CFA UK chief executive. “Year on year, our annual membership survey provides us with invaluable feedback and helps us determine how best to allocate our time and resources for the benefi t of members. Continuing education and careers support will continue to be the focus of our efforts for the next 12 months.”

Succeeding in the investment professionIn March, we held our annual ‘Succeeding in the Investment Profession’ careers conference.

Speakers at the day-long event included leading practitioners, who spoke about specifi c job functions and offered advice about working in the sector, and industry experts, who discussed the personal skills that are needed to secure a position.

Anne Richards, CIO at Aberdeen Asset Management, shared her thoughts on the characteristics likely to lead to a successful career in fund management. These included conviction, humility and credibility. She also stressed the importance of caring about the consequences of everything you do to maintain standards of ethics and integrity.

Meanwhile, Alan Brown, FSIP, CIO at Schroders, gave an overview of the past and present trends in investment management. According to Brown,

The majority of members think that the society serves them well

PLEASE RATE HOW WELL YOU THINK THE SOCIETY SERVES YOU AS A MEMBER? (SELECT A SCORE FROM 1 TO 5 WHERE 1 IS THE LOWEST SCORE AND 5 IS THE HIGHEST)

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identifying alpha, managing risk and taking risk on and off the table. Make sure you attend to hear the latest views on the global macro outlook for returns across a broad range of asset classes and to fi nd out how to protect your portfolio from unforseeable events.

Every year, CFA UK’s annual conference provides delegates with the opportunity to gain practical advice and tips from industry experts and hear their predictions for the outlook of the profession.

The opening keynote speaker is Marc Faber. Renowned for his contrarian investing style, the editor of the Gloom, Boom and Doom report will share his forecasts for future returns on emerging markets, commodities and sovereign debt.

Other confi rmed speakers include:

• Peng Chen, CFA, president of Ibbotson Associates

• Mark Kritzman, president and CEO of Windham Capital Management

• Amlan Roy, senior research associate and head of global demographics and pensions research for Credit Suisse Securities

• Michael Saunders, chief economist at Citigroup

• Andreas Utermann, ASIP, global CIO of RCM The conference will be

followed by the society’s annual summer reception.

Tickets for the event cost £235 for members and £450 for non-members. To register your place, visit www.cfauk.org/events

Extending the Code of EthicsMost members (71%) of CFA UK are also members of

CFA Institute. An additional 14% of the society’s membership is made up of registered CFA Program candidates, who the society supports through a programme of study groups and revision courses.

The remaining 15% of the society’s membership are not members of CFA Institute and have not, to date, committed or annually renewed a commitment to adhere to CFA Institute’s Code of Ethics and Professional Conduct Statement. Instead (as determined in 2000), these local members have accepted as a condition of membership to observe the recommended ethical standards developed by the International Council of Investment Associations’ Task Force.

From May 2010, CFA UK requires new and

renewing local members to commit to observe and adhere to CFA Institute’s Code of Ethics and Professional Conduct Standards. Members will be able to confi rm their commitment and review the code and standards online.

CFA Institute’s Annual Conference 2011CFA Institute’s 2011 Annual Conference will be held in Edinburgh from 8-11 May 2011.

More than 1,500 delegates are expected to attend this global event, which is taking place outside North America for only the second time in its history.

The event will be hosted at the Edinburgh International Convention Centre and at the city’s renowned Usher Hall.

CFA UK promoted the 2011 event to delegates at this year’s annual conference in Boston. “It’s a great honour for the annual meeting to be held in the UK,” said George Spentzos, CFA, chairman of CFA UK. “The UK society is by far the largest outside North America and we expect to draw signifi cant support from members locally as well as internationally.”

“Edinburgh is a terrifi c city to visit and is also a leading European fi nancial centre in its own right,” added Richard Dunbar, CFA, ASIP, chairman of the Scottish Committee. “The Annual Conference will provide an excellent opportunity to combine business, pleasure and learning.”

CFA UK REPORT

The theme of this year’s annual conference is sources of return

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36 S U M M E R 2 0 1 0

CFA Institute website and members’ portal – My CFAIn April, CFA Institute launched the new CFA Institute member website, My CFA. The website signals a renewed commitment by CFA Institute to provide members with personalised, timely content to keep up-to-speed with changes in the evolving investment industry. There are also additional resources for members to build their own lifelong learning plan and more opportunities for networking with other members.My CFA represents the culmination of a remarkable journey, which has involved countless staff, volunteers, and consultants; numerous annual conferences; society leaders’ meetings and project sessions; and thousands of survey respondents, beta version participants, and focus group contributors.

My CFA intends to help members fi nd web content

CFA INSTITUTE REPORTfaster through better site navigation and relying on member ratings and comments to identify the best content. It will enable members to receive personalised recommendations by topic, geography, and format, and get information on CFA society events. It will also allow members to take advantage of content and networking opportunities created by fellow CFA charterholders and investment professionals.

The ambition for My CFA is to help reshape the relationship between and among CFA Institute and its members around the world. Take a look at www.cfainstitute.org

CFA Ukraine launch Ukraine has become the latest country to host a CFA society.

CFA Institute welcomed CFA Ukraine, the 137th member society, to its worldwide network in April. A launch event was held in Kiev and more than 300 delegates attended.

The society’s mission is to promote the highest standards of integrity and professionalism in the Ukrainian investment industry and raise awareness of the CFA charter.

ADVOCACY NEWSMeeting with IASBThe CFA Institute Standards for Financial Market Integrity hosted its Corporate Disclosure Policy Council (CDPC) in London to discuss fi nancial reporting issues and the critical 2011 convergence agenda. Key projects for discussion included revenue recognition, fi nancial statement presentation, leases and fi nancial instruments, as well as liaison meetings with the International Accounting Standards Board (IASB).

IFRS meetingIn March, several investor representatives met with International Financial Reporting Standards (IFRS) trustees who are responsible for the IASB governance.

Issues discussed concerned investor representation at trustee and board level, and enhancing investor engagement and standard-setter governance and independence.

Financial Market Integrity IndexGermany is the latest country to be analysed under the CFA Institute Financial Market Integrity Index (FMI Index) Research. The FMI index gauges CFA charterholders’ perceptions of the state of ethics and integrity and how these perceptions change over time. Such input from investment professionals helps raise awareness of key issues and is valuable in developing professional standards.

Results from the German FMI index showed that in relation to the responsibilities

and expertise of supervisory board members at fi nancial corporations, respondents cited supervisory board independence and competence as their main concern.

Reports are also available for Canada, Hong Kong, Japan, the UK and the US. These recent global fi ndings suggest that charterholders feel that the worst of the fi nancial crisis is over, and that confi dence in regulatory and investor protections has improved annually in the markets least affected by the global fi nancial crisis.

Regulatory updateTo keep up to date with CFA Institute European advocacy news, please visit www.cfainstitute.org/ethics/Pages/

EDUCATION NEWS

European Investment Conference in CopenhagenThe third annual CFA Institute European Investment Conference will take place in Copenhagen on 8-10 November 2010.

Following on from the successful events in Amsterdam and Frankfurt, the conference will bring together a fi rst-class line up of speakers and sessions aimed at practitioners. An earlybird discount is valid for bookings before 15 September 2010. For more information, please visit www.cfainstitute.org/europe2010

16th UK Program Partner announcedThe University of Cambridge, Judge Business School, has

CFA Ukraine launch

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37P R O F E S S I O N A L I N V E S T O RW W W . C F A U K . O R G 37P R O F E S S I O N A L I N V E S T O R

CFA INSTITUTE REPORT

Commitment to professional development and competence is now attracting strong attention from fi nancial regulators.

Here in the UK, the FSA has set out proposals on Continuous Professional Development (CPD) – their term for continuing education – under the Retail Distribution Review. The preference is for the FSA to set and implement higher and consistent standards for the industry in the areas of qualifi cations, CPD and ethics for those involved in giving retail investment advice. One wonders, however, how long it may be before such levels of attention is directed at the wholesale market.

We all face the dilemma of how much time to invest in our own professional development. The age in which we live and work has left us time poor. We have competing demands from our own interests, families and employers. We have duties and responsibilities to all and it is perhaps no wonder that our own professional development often takes a back-seat as we seek to balance such priorities.

Yet, deep down, we all know that without striving to learn and improve ourselves professionally, we run the risk of being supplanted by someone better, or perhaps worse still, lacking the competencies to do the professional job expected by others. As HG Wells, writer and historian, famously said: “History is a race between education and disaster.” Used as a metaphor, it could easily be applied to you or me as we tread a career path of success or failure.

Consequently, commitment to continuing education not only goes hand-in-hand with career advantage but, increasingly, with business and regulatory advantage too. Meeting these demands may seem onerous, but it need not be.

CFA Institute and CFA UK, for example, are making great efforts to deliver learning and education opportunities at your fi ngertips. By investing in the provision of tools for members, both organisations are building on their solid programme of events and publications and shifting the learning focus onto online capabilities. In the past six months, CFA UK has launched a major programme of webcasting which complements the different audio and video formats that are available through CFA Institute. In addition, CFA UK and CFA Institute recently launched new websites to deliver this enhanced functionality and content. CFA Institute has also made it easy to keep track of your professional development through its online Continuing Education (CE) Diary, which logs your activities.

The CFA Institute member website was launched in late April 2010. It offers members personalised, timely content to keep pace with the dynamic investment industry. It provides resources to build a personalised lifelong learning plan and delivers online opportunities to network with peers.

Ultimately, the game plan for CFA Institute, in delivering its mission to lead the investment professional globally by setting the highest standards of ethics, education and professional excellence, is to aggregate and provide access for our members to the very best sources of investment knowledge, practice and analysis from around the world. The My CFA portal, coupled with the provision of excellent content materials through the CFA UK member website, is striving to make learning easier and more accessible at locations and times that fi t around you and your professional career needs. Make the time to use it.

LEARNING AT YOUR FINGERTIPS

Steve Wellard,marketing and communications director EMEA, CFA Institute

teamed up with CFA Institute to become the latest CFA Program Partner. It is the 16th Program Partner in the UK.

The partnership is an offi cial recognition of the relevance of the school’s fi nance programmes to the fi nancial services industry and acknowledgement that it provides a rigorous foundation to the CFA exam. Students of the Master of Finance post-graduate degree programme will now be able to prepare for the CFA Program as well as study for their master’s degree.

The University of Cambridge, Judge Business School, makes up one of the 118 CFA Program Partners worldwide.

Global Investment Research Challenge (GIRC)The EMEA fi nal of the 2010 GIRC took place in Istanbul, Turkey, at the end of March.

The event was hosted by the CFA Society of Istanbul and was sponsored by Thomson Reuters. University teams from the following 14 countries took part: Bahrain, Finland, France, Hungary, Ireland, Italy, Netherlands, Poland, South Africa, Spain, Sweden, Switzerland, Turkey and the UK.

The University of Cape Town won, making it the fi rst African team to be represented in the global fi nal of the GIRC. The global fi nal, held in Hong Kong on 17 April, saw the team from the University of the Philippines crowned as the global winners.

Executive educationTwo executive education programmes will be held in June 2010. From 7-11 June, the ninth annual Global Investors’ Workshop will take place in partnership with INSEAD in Fontainebleau, France.

Following this, in conjunction with Saïd Business School, The Oxford Private Equity Program will be held from 28 June-1 July.

More information can be found at www.sbs.ox.ac.uk/execed/fi nance/pe/

Details for the Autumn and 2011 programmes can be found at www.cfainstitute.org/learning/products/events/Pages/executive_education_programs.aspx

Winners of the 2010 EMEA Global Investment Research Challenge

36-37 CFAI report.indd 3736-37 CFAI report.indd 37 1/6/10 10:16:351/6/10 10:16:35

Zuckerman has written a highly readable book on John Paulson, one of the few winners from the crisis. Back in 2007, Paulson was a middle-ranking hedge fund manager working with his bearish analyst, Paolo Pellegrini. Together, through sheer perseverance, research and gut-wrenching conviction, they managed to reap over $20 billion in a contrarian bet against the fi nancial markets.

In my opinion, Paulson and Pellegrini are to be emulated by CFA charterholders. Their painstaking research, willingness to think outside the box, innovation and drive to generate return for benefi ciaries is admirably presented by Zuckerman. However, their willingness to innovate may have skated ethical boundaries, as recent news indicating that some mortgage deals conducted with Goldman Sachs may have been improperly disclosed to investors. Nonetheless, the core Paulson-Pellegrini narrative is skilfully interwoven with the stories of other fabled contrarians, including Dr Michael Burry, the subject of Michael Lewis’ The Big Short.

BOOKSBOOKS THE MATCH KING: IVAR KREUGER AND THE FINANCIAL SCANDAL OF THE CENTURY – FRANK PARTNOYMy desire to learn from past and present crises guided my book selection. And we have a great example in Partnoy’s compelling and cautionary tale The Match King – a book which has great relevance for today’s students of fi nancial crises.

Kreuger, a successful Swedish industrialist, embarked on a quest for ever-increasing yield, betting heavily on the availability of bull market liquidity, sowing fi nancial ruin as a result.

In 1920s America, Kreuger seduced Main Street and Wall Street with his charm and skill at generating both large fees for his banker’s and high returns for investors. In his attempt to establish monopolies in the match trade, Kreuger effectively became a sovereign lender, fi nancing his activities with highly innovative US share issues which ultimately crashed during the Great Depression. Although his empire collapsed, Kreuger was no Ponzi-scheme operator. Rather, he appears to be an industrialist who massively overstretched his fi nancial resources, unaware of the true risk contained in his innovative and interlocking funding techniques.

If Partnoy were to replace the 1920s with the 2000s, and exchange gold-linked convertibles with SIVs or CDOs, the tale could feasibly be one of the current unpleasantness.

J Mark Wiltshire, CFA, CAIA, FRM, highlights fi ve books

which relive the summers of 2007 and 2008 and offer lessons

for today’s investor

Career highlights:J Mark Wiltshire founded Latemar Capital Ltd in 2010 to help clients address credit crisis-related investment issues. Before that, he worked as a risk/investment manager for Florin Advisers Ltd, an emerging markets hedge fund. His primary focus is on the management and resolution of special situations, distressed and credit portfolios. He serves on CFA UK’s continuing education committee and the CAIA London chapter executive committee.

J MARK WILTSHIRE, CFA, CAIA, FRM

38 S U M M E R 2 0 1 0

THE GREATEST TRADE EVER: HOW JOHN PAULSON BET AGAINST THE MARKETS AND MADE $20 BILLION – GREGORY ZUCKERMAN

d

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P R O F E S S I O N A L I N V E S T O R 39

BOOK REVIEWS


COMPLICIT: HOW GREED AND COLLUSION MADE THE CREDIT CRISIS UNSTOPPABLE – MARK GILBERT Small books often make big waves. As with JM Keynes, A Tract on Monetary Reform or George Cooper’s more recent The Origin of Financial Crises, I believe that Gilbert’s succinct volume on the roots of the credit crisis should be required reading at the elite economics and fi nance faculties which regularly supply investment banks with human feedstock.

Gilbert, the London Bureau Chief for Bloomberg News, effortlessly presents a complex narrative of refreshing honesty, detailing the failure of imagination by central bankers, regulators and politicians, as well as the hubris, greed and perceived infallibility of bankers that led to the current crisis. He clearly demonstrates how profi t-hungry banks ethically compromised rating agencies, sleepy regulators and politicians seeking to capture votes of the economically dispossessed, unwittingly collaborated to create the perfect storm to the ultimate detriment of taxpayers and savers.

The pleasantly combative tone pushes the reader to question the status quo, presenting a compelling set of policy prescriptions to avoid the next systemic debacle. One can only hope that the bankers, regulators and politicians are reading. As the saying goes, “Those who cannot remember the past are condemned to repeat it”.

LORDS OF FINANCE: 1929, THE GREAT DEPRESSION AND THE BANKERS WHO BROKE THE WORLD – LIAQUAT AHAMEDAhamed certainly deserves his 2009 Goldman Sachs ‘Business Book of the Year Award’ for this work. Ahamed’s exquisitely readable book tracks the origins of the Great Depression through the eyes of the four dominant central bankers of the day from the US, UK, France and Germany.

Ahamed clearly demonstrates that, contrary to common belief, the Great Depression was not an economic confl agration beyond the control of policymakers. Rather, it was the result of disastrous decisions taken by a very small minority of four.

The book’s timing is uncanny, supplying new insights into the era at a time when policy-makers, bankers and taxpayers are again confronted with an economic downturn of epic proportions. His work allows us to re-examine current policy by using the mirror of the past. He details the creation of many of the policy tools that are currently being used to allegedly save us from ourselves. I highly recommend Lords of Finance to all investment professionals, not just students of monetary policy.

TOO BIG TO FAIL: INSIDE THE BATTLE TO SAVE WALL STREET – ANDREW ROSS SORKINThis is my top ‘crisis reading’ pick. Sorkin’s work may well be the Liar’s Poker of the noughties. It is the most comprehensive and readable work on the crisis to date, and outshines Hank Paulson’s detailed but wooden On the Brink and Larry McDonald’s excellent but Lehman-focused A Colossal Failure of Common Sense in terms of scope and contextual detail.

Too Big to Fail reads at a breakneck pace. Having established the trading and regulatory environment of the day, the reader sprints between the executive suites on Wall Street and the conference rooms of the New York Fed and Treasury Department in Washington DC, where banking executives and government offi cials attempt to engineer fi nancial institution mergers and rescue packages of astounding complexity in a matter of days, if not hours. Sorkin provides insightful portraits of the primary actors in the crisis, from the hubristic Dick Fuld of Lehman to rock solid Jamie Dimon at JPMorgan.

Sorkin is to be praised for his writing talent as he converts complex fi nancial, political and regulatory detail into a fl uent and informative narrative.

THIS ISSUE’S TOP RECOMMENDATION

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40 S U M M E R 2 0 1 0

Abbas, Danial

Abraham, Eddy, CFA

Acharya, Ishaan

Adetunji, Olubanjo

Adewunmi, Olumuyiwa Peter

Afuwape, SeunSeun is an associate relationship manager in the fi nancial institutions arm of Standard Chartered Bank UK. Seun started out in the Nigerian subsidiary of the bank and worked as a money market dealer/trader, an operational risk manager in credit risk control, and also in its transaction banking unit as a product manager before being transferred to the UK. Seun trained as a pharmacist and holds an MBA degree.

Agha, Saad

Akpareva, Tim

Alafouzos, Dimitrios

Alberts, Nicolaas

Alferovs, IgorsIgors is a Certified Financial Planner (CFP) at Barnett Ravenscroft Wealth Management. He has previous experience as a pension fund trustee and working for an international firm of employee benefit consultants and for regional firms of chartered accountants. Igors is an Associate of the Chartered Insurance Institute, has a degree in physics, and he passed the IMC exam in March 2010.

Alimzhanova, Lola

Anand, Veena

Andersson, Klas, CFA

Andjelopolj, Kalinka, CFA

Andrews, Elliot

Andrews, Christian

Annerose, Stephanie

Aramaz, MustafaMustafa is a director at Arcapita, a regulated investment bank with a private equity focus. There, he is responsible for Acapita’s investment holding structuring and transaction management. Before this, Mustafa worked with the law firms Gibson, Dunn & Crutcher and Baker & McKenzie. Mustafa has a BA in law from the University of London and an MBA from The University of Chicago Booth School of Business.

Arenson, Kevin, CFA

Argent, William, CFA

Arnheiter, Ulrich

Artamoskina, Julia

Asanuma, Kensuke

Avanessov, Sergei

Bailey, Philip Andrew

Banjo, OlalekeLeke works in the currency trading unit of Oceanic Bank in Lagos, Nigeria. He studied chemical engineering at Obafemi Awolowo University, Ile Ife, Nigeria.

Barbashin, Dmitry, CFA

Barker, Kenneth, CFA

Basarir, TufanTufan is a ratings analyst at Standard & Poor’s. He previously worked at UniCredit. Tufan has an MSc in fi nance and accounting from LSE and he is currently studying for Level II of the CFA Program.

Basu, Aritra

Bates-Kawachi, Jonathan

Baweja, Bhanu, CFA

Beck, Sean, CFA

New members February – April 2010The society welcomes the new members who have joined over the last quarter. To fi nd out how to join please visit www.cfauk.org

40-IBC new members.indd 4040-IBC new members.indd 40 1/6/10 09:51:121/6/10 09:51:12


NEW MEMBERS

Beechey, Gregg, IMCGregg is a solicitor in SJ Berwin’s fi nancial markets group, advising fund managers, brokers, banks and other investment fi rms on a wide range of regulatory and related matters. Gregg frequently speaks on regulatory issues affecting the fi nancial services industry. He recently passed the IMC exam to enhance his understanding of the industry and the issues faced by the investment professionals he advises.Beker, RadoslawBennett, RossBennett, Nick WilliamBensafi , Laurence, CFABerasneva, MaryiaBerenson, BenBerner, Lawrence, CFABester, Peter, IMCBeveridge, Mark, CFABhuiya, Rehanara, CFABingham, JoannaBird, Gregory, CFABiring, SharondeepBirolini, Jerome, CFABiveson, CeciliaBlain, CyrilBlewer, Alex, IMCBlyth, GraemeBolzano, JohannesBonacci, RaphaelBoote, Julie, CFABoullineau, Emile, CFABoyal, SampreetBoyiadjis, Antonia, CFABoyle, SharonBrady, JoshuaBridger, AaronBridger, Louis

Brink, ChrisChris has a master’s degree from the University of Reading, where he researched how the construction industry could use steel futures to hedge their exposure to fl uctuating steel prices. Following this, he started working for the construction fi rm Skanska as a quantity surveyor. Chris is currently studying for the CFA Program.

Broda, Tyler, CFA

Brook, Michael

Brooks, Simon

Brotchie, Caroline

Brychta, Vojtech

Burke, Aisling

Burke, Peter

Buson, Nicola

Butler, Ian, CFA

Butterworth, Darren

Campbell, Robert

Campbell, Uta, CFA

Capo, Antonio, CFA

Carbery, Grace

Cardy, Mark

Carstens, Greig, CFA

Carter, Sarah

Carter, Gregory

Cartledge, Charles, CFA

Caruso, Cristian, IMC

Cassar, Kristian, CFA

Cavus, Semra

Ceroni, Michela, IMCMichela holds a degree in business and economics and a master’s in marketing and consulting management. She has worked for several top international fi nancial companies and she is currently involved in a project for a major British bank.

Chadha, Danisha

Chan, Kelly

Chan, Kin Hang Henry

Chana, Angela, IMC

Chaudhry, Naveed, CFA

Cheng, Eddie

Cheng, Chia Hao

Chin, Li Lynn

Cho, In-Hyung

Choy, Stephen, CFA

Christou, Angela

Chrobog, Fabian, CFA

Clark, Graeme

Clarke, Christopher

Clohesy, Paul

Cooper, Benjamin

Cooper, Ian

Copeland, JamesJames is an ACA, working for Mazars LLP in its assurance division. Since working there, he has had exposure to energy, retail, media, and investment management industries.

Copeman, Shaun, CFA

Cordaro, Salvatore, CFASalvatore is a director at Credit Suisse Asset Management, responsible for the construction and management of institutional portfolios of hedge funds in the EAFE region. Before joining Credit Suisse in 2004, Salvatore was a senior hedge fund research analyst with BSI SA (Generali Group) and worked as a treasurer with Merloni Ariston International SA. Salvatore earned an MD in economics and business law in 1998 from Bocconi University, Milan. He is a CFA and CAIA charterholder.


42 S U M M E R 2 0 1 0

Cornwell, AlastairCorrigan, RobertCotton, EdwardCreamer, MatthewCrockett, EdwardCrockett, ClaireCull, DavidCunnie, ChristopherCurtis, Peter, CFAD’Alete, FabrizioDaryanani, AshvindDavidson, Graham, CFADavies, Malcolm, IMCDavies, GarethDay, Sarah, IMCDe Tervarent, RodolpheDean, AlastairDeeks, ColinDeering, LauraDelannoy, LorraineDelruelle, FredericDescamps, Xavier, IMC

Desira, ChristianChristian is a director at RocaFund, focusing on real estate transactions and investments in the UK and emerging European markets. He has experience developing property and sourcing and purchasing real estate, in particular leisure and hospitality properties. Before this, he was a hotel valuations consultant with HVS International and Jones Lang LaSalle Hotels. Christian holds an MBA from Cornell University and has a bachelor’s degree from University of Nottingham. He is currently studying for the CFA Program.

Devani, Niroopa

Dimaras, Theodore

Dinnie, Andrew

Dobinson, Lee

Doorey, Shelley, IMCShelley heads the management offi ce of investment products & services at UBS. Before this, she founded and ran an employee share option business. Shelley attended London’s Guildhall University and qualifi ed as a chartered secretary. She is a fellow of the Institute of Chartered Secretaries & Administrators as well as the Royal Society for the encouragement of arts, manufacturers & commerce. Shelley was previously a visiting lecturer at London’s Southbank University for their master’s in corporate governance. She completed the IMC in January 2010.

Doran, Kevin, CFA

Dovey, Samantha, CFA

Dragalova, Maria, CFA

Dreyer, Deon, IMC

Drobek, Maria

du Plooy, Anton

du Toit, Johann

Duale, MunaMuna has been an investment manager within the private banking division at FBN Bank (UK) Ltd since 2008. Her primary focus is advising HNW clients who are based in Nigeria.

Dumuschat, Dirk, CFADirk is a quantitative analyst at Landesbank Berlin. He has experience in trading, hedge fund investments, risk analysis and programming. Dirk has a diploma in mathematics from Technical University, Berlin.

Dunn, Lee

Eades, Russell

Eather, Toni

Edmonds, Tyron, CFA

Edwards, Mark

Ellwood, HaydnHaydn is a director at Yellow Capital Wealth Management. He previously worked for PSG Consult Ltd as an IFA and is currently a discretionary manager in the City with Independent Portfolio Managers. Haydn has a certifi cate in fi nancial planning from the CII and has passed the IMC exam.

Emile, Stephanie

Enwo, Ibe

Evans, George

Faraji, Fataneh

Favre, Julien

Fawkes, Steven, IMC

Featherstone, Matthew, CFA

Fedorkiw, Nicholas, CFA

Feng, Hengyi

Ferraresi, Antonio

Filippov, Andrey, CFAAndrey is an associate in Bank of America Merrill Lynch’s European leveraged fi nance group. Before this, he worked in its European M&A team. Audrey joined the company after completing a master’s in international business in 2005. His previous experience includes an analyst role at the Central Bank of Russia.

Fillary, Neil

Fisk, Robert

Fradley, Taryn

Fraeb, BjornBjorn is an associate director in the real estate equity team at Lloyds Banking Group. He has had exposure to deal origination and investment management in the European private equity market, including MBOs, LBOs, restructures and refi nancing. Bjorn has a bachelor’s degree in business administration and holds an MBA from Durham Business School. He is currently a CFA Level I candidate.



NEW MEMBERS

Francioni, Donna

Freeman, Clare

Fricker, David, CFA

Frohnert, Dirk, CFA

Frost, Stephen, CFA

Fruehauf, Jennifer

Fu, Stanley

Gandhi, Vishal

Garrett, Andrew

Gaston, Robert

Gemal Neto, Alberto

Ghedini, Paulo Rodrigo, CFA

Gheewala, Romit

Gill, Jonathan, CFA

Gill, Daniel, IMC

Gilligan, James, IMC

Gilmartin, Oliver

Goel, Sanjay, CFA

Gold, Alexander

Goldthorpe, Christian, CFA

Gong, Jing

Gopal, Thanasekaran

Greaves, John

Green, James

Green, Stephen

Grieve, Harriet, CFA

Grunwald, Kai

Guennouni, MouadAfter completing a master’s in global banking and fi nance at the European Business School, Mouad joined FCT Group of Companies as a fi xed income derivatives trader in January 2007. Mouad is currently studying for the CFA Program.

Gupta, Prashant, CFA

Gupta, Manvendra

Gurkov, AlexanderAlexander studied in the Russian Federation and graduated from University of Exeter in 2009 with an MSc in fi nance and investment. He is currently a CFA Level II candidate.

Gurney, Christopher

Hadfi eld, Brent

Hagenbuch, Lars, CFAAfter working as an actuary in South Africa, Lars moved into fund management. Most recently he worked in London for Barclays Global Investors and Man Group, where he acted as product development and marketing specialist for various hedge fund and fund of hedge fund products. He currently manages his own portfolio. Lars is a fellow of the Faculty of Actuaries (Scotland) and he holds both the CFA and CAIA charters.

Haggarty, Lisa

Hamilton, RossRoss is an analyst at Alliance Trust Equity Partners, investing in European buyout funds. He previously worked for Deloitte and The Royal Bank of Scotland. Ross is a chartered accountant and has a degree in accounting and fi nance from Strathclyde Business School. Ross passed the IMC in October 2009.

Hanna, LailaLaila is a banker with experience in fi nancial control. She previously worked for HSBC Bank Egypt. Laila has an MSc in banking and fi nance from Stirling University and is currently studying for the CFA Program.

Harris, Grant

Hartmann, Lucas, CFA

Hassane, YoussefYoussef has a BA in business and french from the University of Westminster and Institut Superieur de Commerce. Until recently, he was a research analyst at GE Capital, Corporate Business Development (M&A). Before this, he worked as a research editor at Dow Jones Factiva and an economic analyst at the Royal Saudi Embassy in London. He is currently studying for the CFA Program.

Hatt, Tim

Haxby, Victoria Jane

Hay, James

Haye, Julien

Heath, MarkMark is a senior loan trader at Commerzbank where he is responsible for cash and derivative products, covering both leveraged and investment grade loans. Mark graduated from the University of Oxford with a BA in economics and management before joining Dresdner Kleinwort in 2005. Mark is currently a CFA Level II CFA candidate.

Heenan, Charles, CFACharles is a founding shareholder and director of Kennox Asset Management. He previously worked on the Asia Pacifi c (ex Japan) and global emerging markets equity teams at First State Investments. Charles has been a CFA charterholder since 1995. He has a BA from McGill University in Montreal, Canada.

Henry, James

Herriger, Julian

Herskovits, Claude, CFA

Heydenrych, Jaques

Hibbert, Thomas

Hillman, Robert, CFARobert is the president of RLH Consulting LLC. He has more than 20 years’ experience in structured fi nance, asset management, fi xed income strategy, foreign exchange and public service. He previously worked for Bank of America Merrill Lynch and Barclays Capital. Robert has an MBA from the NYU Stern School of Business and a BSc in electrical engineering from MIT. He was awarded the CFA charter in September 2002.


44 S U M M E R 2 0 1 0

Holst, Lars, CFA

Howells, David, CFADavid is a senior investment analyst at VenCap International where he focuses on investments in venture capital funds. Before joining VenCap, David completed a DPhil in materials science at the University of Oxford.

Hull, Shaun, CFA

Humphry, David

Hunt, Matthew, CFAMatthew is the principal of Prospect Wealth Management, a discretionary investment management business which he set up in 2006, and previously he was the managing director and founder of Close Wealth Management. Before this, Matthew was CIO at Coutts and the managing director of Chemical Bank’s global investment company in London. Matthew has an MBA from the London Business School and a degree in history.

Huson, Geoffrey, CFA

Hutchings, Justin, CFA

Hyde-Smith, Luke, CFALuke is a fund analyst at Brompton Asset Management. He has worked in the fund management industry for fi ve years, with previous roles at New Star and Société Génerale. Luke graduated from Manchester University in 2003 with a BA in international business, fi nance and economics.

Hyland, Paul

Inegbedion, Eronmonsele

Irving, Stuart

Irwin, Kevin

Islam, RaisulRaisul is an assistant consultant for an independent consultancy, conducting a gas sector analysis on Bangladesh for investment viability. He previously worked for Cairn Energy Plc and has experience in fi nancial/investment analysis. Raisul has an MSc in money, banking and fi nance from University of Birmingham and is currently studying for the CFA Program.

Jagani, Jeegar, CFA

Jain, Heemanshu

Jani, Santosh

Jarvis, CarolineCaroline joined Kleinwort Benson in September 2008 as an aspirant private banker, working with both private clients and charities. Caroline has a double honours degree in history and politics from Mary Washington College. After graduating, she worked in the American charities sector, specialising in medical, educational and military charities as a business development and donor relationship manager. Initially born in the UK, Caroline moved back in 2007 to complete her MBA from Cass Business School

Joanes, Neville

Joel, Michael

Johansson, Richard

Johnson, Paul Christopher, IMC

Johnston, Scott

Jones, Daniel, IMC

Jose, Sherene

Kaktina, Karina, CFA

Kanbar, Blair, CFA

Kanza, Raphael, CFA

Karmally, Asif, CFA

Karwa, Akash, CFAAkash is an associate director in Grant Thornton’s M&A advisory team, specialising in transactional work and identifying critical transactional issues. Akash has more than nine years’ mid-market corporate fi nance experience, advising both public and private companies, as well as private equity experience on a wide range of corporate transactions in the UK and the US. Akash graduated from UCLA and he is also a CPA.

Kaura, Vinay

Kawol, Alison, CFA

Keane, Simon

Kells, John, CFA

Kershaw, David, CFA

Kesavan, Rahul

Ketteringham, Frances, IMCFrances joined Jones Lang LaSalle’s EMEA research team as a senior analyst in April 2007. She focuses on offi ces with particular exposure to the UK, Scandinavian and Russian markets.

Khakhar, PradipPradip is an independent business analyst and IT consultant. He assists small businesses by helping them increase their online presence, develop their accounting and business planning, and improve the information fl ow between departments. Pradip is currently a CFA Level I candidate.

Khan, Naureen, CFA

Kilminster, Paul David, IMC

Kilroy, Lucy

King, Ian, CFA

Kirtley, Robert, CFARobert is a supervisory analyst at JPMorgan. He previously worked for UBS as a supervisory analyst and, before that, at Deutsche Bank and ING as an equity analyst covering mining stocks. In addition, he worked as an analyst at a frontier market hedge fund, with responsibility for African and MENA equities. Robert has a BSc from Wits University, an MBA from Wits Business School, and he completed the CFA Program in 1997.

Kornasiewicz, Katarzyna



NEW MEMBERS

Koryak Claes, Oksana, CFA

Korytkowski, Marcin

Kostantopoulou, Ioanna

Krieg, John, CFAAs the managing director for EMEA at Northern Trust, John has regional oversight for international business development, client service and product development. Previously, he was the company’s global head of product management. Before joining Northern Trust in 2002, John worked for TimesSquare Capital Management in New York, Credit Suisse Asset Management, and BEA Associates. John has an MBA from DePaul University and a bachelor’s degree in fi nance from the University of Illinois at Champaign-Urbana. John is a CFA charterholder and a CAIA charterholder.

Kurland, Michael, CFA

Kutner, Nicholas

Kverneland, Haavard

Lamb, Tamryn, CFA

Larsson, Mark, IMC

Lee, Randy

Lee, Timothy

Legesi, Kenneth

Lehleiter, Matthias

Lemniei Khouli, Sara

Leung, Ho Ching

Lewis, James

Li, Yijing

Liao, Cecilia

Light, Christopher

Lim, Willis

Lim Shin Chong, Jean

Lin, Jia

Lin, Ching-Yi

Littlewood, Ian

Liu, Hong

Liu, HuiHui is a currently studying for an MSc in investment analysis at the University of Stirling.

Loiseau, Harold

Lucas, Rebecca, IMC

Ma, Da

Ma, Yuke

Macaulay, Ewan

MacDonald, Sheldon, CFA

MacKenzie, Rebecca

MacRaild, Katie

Malkin, Nicolas

Mallya, Ramanath

Manganelli, Antonella, CFA

Manivannan, Harini

Mapara, Rahul, IMC

Masters, Simon, IMC

Masud, Aly

Mathews, Jonathan

McCurdy, Daniel

McDermott, Gerald, CFA

McEwan, Neil

McGowan, Harry

McQueen, Colin David, ASIP

Mezan, Adam, CFA

Mhonyera, Vimbai

Middleton, Lindsay

Miralles Acuna, SebastianSebastián is in the senior leadership program at the multilateral development bank CAF, where he advises on regional policy and bank operations. Previously, he worked at Morgan Stanley within global value strategies and at Kroll within fi nancial intelligence and strategy. Sebastián has an MBA from IESE and is currently studying for the CFA Program.

Misztal, PiotrPiotr is an MBA student at Judge Business School, University of Cambridge. His primary interest is equity research, with particular focus on the pharmaceutical sector as well as central and eastern Europe. Piotr has seven years’ experience in pharmaceutical market research.

Mitchell, Ross, CFA

Money, Giles, CFA

Morton, Jenny, CFA

Mourey, Clarisse

Muhammad, Farooq, CFA

Murdock, Ian, CFAIan has been working for Barclays Capital for four years. Before joining Barclays, he worked for RBS (formerly NatWest) for eight years. Ian has extensive experience in credit risk management and he became a CFA charterholder in 2007. Ian recently returned to London after spending two years in Barcalys Capital’s New York offi ce.

Murphy, Charles Robert

Murphy, Robert, CFA

Naayem, Joseph, CFA

Nadarajah, Kalvi, CFA

Nagi, Kunwar

Nagstrup, AndreasAndreas is a fi xed income analyst at Vanguard Investments UK Ltd. Before this, Andreas spent four years with Ernst & Young in the transactions advisory services group, focusing on M&A and due diligence advice for private equity funds and corporate clients. Andreas is a chartered accountant and holds a master’s degree in economics and business administration from Copenhagen Business School, Denmark. Andreas is a CFA Level II candidate.


46 S U M M E R 2 0 1 0

Nataraj Dongre, Vishnubhat

Natsis, Nicolas, CFA

Ndoro, Elwin

Neale, Daniel, CFA

Neary, Graham

Neill, Rachel

Newall, Philip

Nicholls, Maisie, CFA

Nicholls, StuartStuart is an assistant vice president within the international propositions and strategy team at Barclays Wealth. He previously led an offshore relationship manager team and, before this, he worked for Higham Dunnett Shaw (now Capita). Stuart has experience in new market entry, client acquisition and business strategy. He has a degree in mathematics from the University of Leeds and has passed the IMC and FPC exams.

Nicklin, Susannah, CFA

Nicola, Daniela

Nicolson, Colin

Norman, Robert

Norris, Peter, CFA

Norton, Stephen William

Novoa, Daniel

Nsekela, Gwamaka

Oberoi, Rahul, CFA

Ohrn, AlexanderAfter completing his studies in economics and social anthropology, Alexander joined BNY Mellon Asset Management in 2006 and now works with institutional marketing. Alexander has completed the IMC exam and is currently studying for Level II of the CFA Program.

Okonji, HenryAfter completing a degree in chemical engineering at the University of Port Harcourt, Nigeria, Henry started working for PINL Marine & Oil Services Ltd as a project engineer. There, he managed and executed landmark EPC projects in oil and gas. Henry now works for BGL Securities Ltd as a deputy associate in charge of their South-South Region operations. Henry is studying for the CFA Program.

Oliver, David

O’Loughlin, AnneAnne joined ALICO three years ago and is currently a senior relationship manager for the North and Midlands. She has more than 20 years’ experience in the fi nancial services industry. Anne is a graduate of the University of Manchester (Institute of Science & Technology) with a BSc in maths and statistics. Anne passed the IMC exam in November 2009.

Onodarho, Oghenetega

Oram, Sarah, CFASarah is a manager at PricewaterhouseCoopers. She previously worked for Goldman Sachs JBWere and has experience in valuations and strategy. Sarah has a bachelor of commerce and bachelor of arts from The University of Melbourne. She completed the CFA Program in June 2009.

O’Regan, Isabel

Ovaa, Maurits

Pakhomova, Tuyaara

Palmer, Gabrielle

Pang, Thieng Hwi, IMC

Park, Miso, CFA

Park, Saehwan

Pashkovskiy, Oleg

Paska, Pavlo

Patel, Rakesh

Patel, Samir

Peat, Charlotte

Pegge, Andrew, CFA

Perry, George, CFA

Petersen-Overleir, Sofi e

Philipps, Andrew

Pillay, Avien, CFAAvien is an investment analyst at AllianceBernstein on the emerging markets team. He previously worked for Investec Asset Management and BOE Asset Management and has experience in the EMEA region. Avien has a business science degree from the University of Cape Town and is a CFA charterholder.

Pope, Ross

Porter, Adam, IMCAdam is currently studying for an MSc in investment analysis at the University of Stirling, with the aim of becoming an equity research analyst. After graduating from the University of Edinburgh with an MA in economics and accounting, he worked in fi nancial statement preparation for an accountancy fi rm. He has now turned his interests to fi nancial statement analysis. Adam completed them IMC exam in February 2010 and he now intends to start the CFA Program in the near future.Preibisch, VickiPrice, Aubrey, CFAPritchard, Natalie, CFAProctor, Andrew, CFAQuaderi, LaurieRadanovic, Oliver, IMCRajah, Sathish KumarRammal, Ahmad, CFARasmussen, Matthias, CFARaymond, JonathanRaza, Matine



NEW MEMBERS

Reeves, Colin

Reidy, David

Rein, RaffaelaRaffaela works in BlackRock’s global client group. She holds a BA in business fi nance from Durham University and is currently a CFA Level I candidate.

Reyes-Hulme, Martha, IMC

Richmond, Kristian

Ritchie, IainIain is a trainee actuary with Hewitt Associates in St Albans. Iain has a degree in mathematics, statistics and fi nance from the University of Strathclyde and an MSc in actuarial fi nance from Imperial College.

Rittner, Hugh

Rive, Kurtis

Rode, Johan, CFA

Rolender, Michelle

Rossouw, Andries

Rowe, Chris

Rybackova, Marketa

Sacca, Angelo

Sadler, Ian, CFA

Samsonoff, Paul, CFA

Sarma, Sally, CFASally has a law degree from Oxford University. She is a CFA charterholder and also holds the CAIA and FRM designations.Schiller, Bryan, CFAScholl, Todd, CFAScholz, Sabine, IMCSchreider, EugeneSelby Smith, MarianneSeldon, Adam RichardShah, JunaidShah, JayminShah, Avni, CFAShah, Ketan, IMCShah, Paras, CFAShah, Shailin, CFAShanahan, MichaelSharma, Satish

Shaw, David, CFADavid works in interest rate derivatives at RBC Capital Markets in their product control team. He previously worked for Barclays Capital on their ACA rotation programme in various roles within the fi nance department, including equity derivatives, cost control and structured fi nance. Before joining Barclays Capital, David worked at Deloitte in assurance and advisory. David is a chartered accountant and has an economics degree from University College London. He is a CFA charterholder.

Shenton, Adam, CFA

Shihn, Amandeep

Shishkin, Dmitry, CFA

Sianturi, Marco Rene HumoltaMarco is a fi nal year student at the University of Glasgow, studying for an MSc in International fi nancial analysis. Marco is also preparing for the CFA Program.

Siddiqui, Muhammad

Singh, Bhupinder

Sison, Gerardo Jose, CFA

Sivakumaran, Shivaganesh

Skinner, MarkMark is an associate in the product development and range management team at BlackRock. He previously worked in performance analysis at BlackRock and, before this, at State Street Bank. Mark has a BSc in physics from the University of Bath and is currently studying for the CFA Program.

Slabbert, Neil

Sloggett, Justin

Smart, LeaLea has a fi rst class degree in chemistry and maths from the University of East Anglia. Since graduating in 1996, Lea has worked in fi nance. He has been an IT developer at Barings for nearly ten years with a technical focus on front offi ce systems, particularly portfolio and order management. Lea passed the IMC exam in April 2007 and completed the CFA Program in June 2009.

Smerczak, Gregori, CFAAfter completing his business science degree at the University of Cape Town, Zak started working for Deloitte LLP, UK. He is currently a manager within its post merger integration and operational due diligence team. Zak is a qualifi ed chartered accountant with the Institute of Chartered Accountants of Scotland and he is a CFA charterholder.

Smith, Mark, IMC

Smith, Christiaan

Smith, Daniel, CFA

Smith, Michael, CFA

Solazzo, Giacomo

Spalton, James

Sparg, Andrew, CFA

Stanesby, MatthewMatt is a client relationship manager at Northern Trust. Before this, Matt worked within its fund accounting team and was involved in the successful migration of a large fund administrator. Matt previously worked for The Bank of New York where he gained experience in fund administration, specialising in the administration of derivatives. He is currently studying for a BSc in banking and fi nance from the London School of Economics. Matt passed the IMC in March 2010 and he has also completed the IAQ (Investment Administration Qualifi cation).


48 S U M M E R 2 0 1 0

Steen, Preben

Stephany, Paul, CFA

Stevenson, David

Stewart, David, CFA

Stone, RupertRupert graduated from the University of Edinburgh in 2007 with an MA in economics. He then joined Psigma Investment Management, working alongside a team of private client fund managers.

Subedar, Aisha

Sula, Neila

Sun, Lei

Sun, YiYi is a compliance researcher at ICE Futures Europe. She holds an MSc in operational research and performance management from Aston Business School. She also has a BSc in business management sciences from University of Hertfordshire. Yi is currently studying for the CFA Program.

Sutter, MirjaMirja works for Alliance Bernstein in London as a client relations associate for the CEMEA countries. Before joining the fi rm, she supported the Swiss and Italian advisers at Lombard Odier in Zurich, Switzerland. Mirja started her career at Boehringer Ingelheim and worked in HR and internal communications at Zurich Financial Services. Mirja holds a master’s in communications sciences and PR from the University of Lugano, Switzerland. She is a a CFA Level II candidate.

Szaja, Laima

Szymanski, Kamil

Tan, Xiaohe

Taverner, Patrick, CFA

Taylor, Hugh

Temple, Angela

Thomas, Tina

Thombre, Prasanna, CFA

Thompson, Richard, CFA

Thomson, Linden

Thomson, Jeff, CFA

Thorne, Matthew

Ting, Kenneth, CFA

Triboix, Fabrice

Tsai, JennyJenny is a business analyst with British Sky Broadcasting (BSkyB).

Tumur, Gunchimmaa

Uvarova, DoraDora is a head of research and development at IBDG. She has a master’s in investment banking and securities and is currently studying for the CFA Program.

Vadjawe, Karamoko

Valensise, Marino, CFA

Van Staden, Hanlie

Van Straaten, Uys

Varty, Luke

Vasani, Nikhil, CFA

Vashisth, Atishma

Venugopal, Deepu

Vieira, Pedro

Villa, Vittorio, CFA

Visser, Schalk, CFAAs director, investor services, Schalk is responsible for raising investment capital from institutional investors in the UK and Europe for CB Richard Ellis Investors - a specialist, real estate investment manager. Schalk completed the CFA Program in 2001.

Vokins, James

Vose, Luke, CFA

Vowles, Jayson, CFA

Vu, Ngan

Wadiwala, Kabir

Wagner, Ryan, CFA

Walawalkar, Deepa

Waldman, Alejandro, CFAAlejandro is head of risk management at Antarctica Asset Management. Previously, he worked for Mizuho Corporate Bank, the World Bank and Shell. Alejandro holds a master’s in international affairs and economic policy management from Columbia University and a bachelor’s degree in business economics from Universidad Torcuato Di Tella, Argentina. Alejandro is a CFA charterholder and a certifi ed risk manager by GARP. He has been a member of the London GARP committee since March 2009.

Walker, Stephen, CFA

Walker, AndrewAndrew is a senior account manager at Scottish Widows. He previously worked for other life insurance companies and has experience as an independent fi nancial adviser. Andrew holds the certifi cate in fi nancial planning and is currently working towards the diploma. Andrew passed the IMC exam in February 2010.

Wallace, Janice, CFA

Wang, JohnJohn recently completed his PhD viva in electronic engineering at Queen Mary and Westfi eld College, where he was a recipient of Westfi eld Trust Scholarship. He is currently a CFA Level III candidate. John has been offered a summer internship at Citigroup and looks forward to a career in fi nance.

Wang, Dake

Ward, Matthew



Wassermann, Michael

Watanabe, Ayako

Waters, Andrew, CFA

Watts, DavidAfter graduating from the University of Stirling in 2002 with an honours degree in management science, David completed an MSc in fi nance at Queen’s University Belfast. He subsequently joined Kerr Henderson (Consultants and Actuaries) Limited as a member of the defi ned benefi t pensions team. He now sits on the company’s governance team. David is an associate of the Pensions Management Institute, he holds a diploma in International employee benefi ts, and he recently completed the IMC exam.

Webster, Jessica

Weller, David

West, Daniel

White, Ian

White, Martin, CFA

Wilkhoo, Parvaij

Wills, David

Wilson, Paul, CFA

Wong, Man Pan

Woo, Jong, CFA

Woodcock, Christopher, CFA

Woodford, Mark

Wright, Christopher

Wu, Ting, CFA

Yang, Judy

Yessimbekov, Bauyrzhan

Yu, ChunxiChunxi has been a senior fi nancial analyst at Select Service Partners since 2007, a world-leading travel catering company. Before joining SSP, he worked as accountant and marketer. Chunxi completed his MBA in 2005 and a master’s in accounting and fi nance in 2008. He is a qualifi ed chartered accountant (ACCA) and he completed the CFA Program in 2009.

Zhang, Xinyin

Zhang, Xiaodan

Zhang, Tong

Zinyowera, Zviito

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