CFA Society Madison

A Member of the CFA Institute Global Network of Societies


Jun 01
Now What? How Should Investors be Positioned?

​Thursday, May 18, 2017

Speaker: Doug Ramsey, CFA, CMT, Chief Investment Officer of The Leuthold Group, LLC, and Co-Portfolio Manager of the Leuthold Core Investment Fund and the Leuthold Global Fund

1.    The bull market touches new highs with most market groups (in terms of capitalization etc.) participated in that high. Leuthold's Major Trend Index is bullish since last spring driven by the momentum/breadth/diversion category.

  • The Very Long-Term (VLT) Momentum (Coppock curve) technical outlook reveals that the VLT issued its first (since May 2009) "long-term low risk Buy" signal in May 2016.
    • That signal we only typically get after a cyclical bear market (typically triggered by an economic recession) which was not the case and that was unusual;
    • Historically, that signal failed only a few times since 1930th, the most recent failure was in Dec 2001;
    • Once you get that signal, generally the market is going to continue growing in the next 18-24 months with average historical market gain of 59.4% to a subsequent market high;

2.    Percentage of public companies with rising y-o-y EPS - "Earnings advance/decline line".

  • When Percentage falls below 55% - historically means recession.
  • The calculation includes 4,000 companies which is considered representative.
  • In Jan'16 the line dropped below the recession threshold, however that was not considered as a recession indicator (even though Leuthold was bearish on the market at that point) mainly because the pipeline growth throughout the economy was low.
  • Once the line turns up, generally the upward trending continues for quite a while.
  • Annualized S&P 500 performance comprises 12% after any monthly increase in Percentage and roughly 4% after any monthly decrease in Percentage – a good technical support for positive outlook for the next 4-6 months.

3.    ISM Liquidity Index = New Orders Index minus Prices Paid Index.

  • This indicator has the highest R2 in terms of forecasting stock market returns.
  • If the Index is above zero - bullish for stocks, below negative 20 - bearish for stocks.
  • Latest reading of negative 11 is the lowest since June 2011.

4.    The past year's market rebound should lift federal revenues.

  • In 2016, federal revenues (12M moving total of federal net receipts) declined y-o-y for the first time outside of recession.
  • The correlation coefficient between S&P 500 (12M percentage change in 12M moving average, lagged 6 months) and federal revenues (12M percentage change in 12M moving total of federal net receipts) for the period starting 1980 to date was 0.68.

5.    Valuations and analysis.

  • GAAP reported earnings - historical comparability and consistent reporting, the companies have been required to report quarterly earnings since mid-30th.
  • Initial valuation threshold for everything Leuthold has been looking at is 30th - 70th percentile territory. If the market goes above that line it breaks into an overvalued zone.
  • P/E on trailing earnings.
    • S&P 500 P/E on trailing 12M reported EPS is 25.3x now;
    • Historical data 1936-to-date: median - 16.5x, 70th percentile – 18.6x, 30th percentile – 12.5x.
  • S&P Industrials Price/Sales – a valuation measure that clearly entered the "Bubble Zone".
    • Current value is 1.94x (close to all time high of 2.31x in March 2000);
    • 30th -70th percentile: 0.79x - 1.21x.
  • Broad market valuations look less extreme than large caps - high but certainly not bubbling.
    • Leuthold 3000 Universe Median P/E on 5Y Normalized EPS current value of 25.7x is 10% lower than Jan 2014 value of 28.3x when FED started its "tapering" program and 20% lower than a peak of 30.2x in Mar 1998 or two years before the market peak in March of 2000.

6.    Does it really feel like 1999 Tech Bubble today?

  • The market characteristics of what is valued/overvalued today compared to 1999 are very different.
  • Low volatility stocks (with defensive economic models, stable income and consistent dividend payments, e.g. electric utility, drugs etc) today vs High Beta stocks in 1999.

7.    Tech sector – not even close to a bubble in terms of valuations.

  • Tech sector despite a tremendous growth has not yet managed to get back to a total market cap of 2000.
  • Scary headlines about a new tech bubble of 2017 mirror the 2014 headlines – some people remembering the market crash of 2000 tend to post scary headlines every time the market breaks out to a new high with tech sector leading.
  • Tech sector current valuations are well below the 2000s levels:
    • S&P 500 Tech P/Cash Flow of 15.2x is a quarter of the Bubble's value 60.0x in August 2000;
    • S&P 500 Tech P/E on 12M trailing EPS of 24.7x is less than a third of April 2000's 79.4x value.
  • Tech sector margins peaked in 2010 at 15.3% but have managed to hold firm since then.
  • AAPL's current weight in S&P 500 of 3.9% is larger than four sectors – materials, telecom, utilities, and real estate. ​

8.    Energy sector – negative outlook for the sector, Leuthold is likely to be completely out of the energy sector.

  • Energy stocks are no longer confirming the strengths in crude oil prices - a pattern that also appeared in the year leading up to the 2014-15 oil bust.
  • Energy stocks & oil prices rarely remain decoupled for long despite of all technology used (positive correlation of 0.86).​


​​​​1.  When you go back to 1936 you're incorporating a timeframe when inflation, interest rate etc. were very different from what they are today, do you worry about the relevancy of the 30th and 70th given those different environments, e.g. different environments vs longer history?

  • We do. Our convention is to be agnostic – the best agnostic way is to incorporate everything we have.
  • We have a set of valuation metrics that take into account extremely low interest rates and inflation. 

2.  ​How much is the composition of Tech indexes the same now and in 2000?

  • Some of the companies have gone away some have grown into companies with very robust earnings growth and the same market cap- the market was correct that tech companies would be a long-term market dominator just overpaid for them. It is very different but there is a lot more fundamental underpinnings for growth now than it was 17 years ago.

 3.  You said that Leuthold is 67% invested. If for some reason you are 80% invested what is the one metrics that you would keep your eyes on?

  • In our tactical funds our normal range of equity exposure is 30% to 70%, we are very close to our max.
  • The market action has been relatively bullish for a while as well as the economic composite that we track – there is nothing in that dataset that may indicate a recession in the near term.
  • Highs in S&P 500 and Dow have recently been joined by transportation, small-caps, and financials – if we see these sectors underperform that would be a negative signal.
  • Markets are hitting their new highs - at some point the valuations may get high enough that we should be pulling back to neutral and eventually underweight.

 4. Putting in a 6 to12 (or probably 18) month timeframe, is there a window at which you feel a lot more comfortable for a bullish view?

  • Probably that window is not even that long. Talking about VLT (very long-term momentum) and its bullish 12 to 18 market outlook, we need to understand that we are already about 12 months into it.
  • We may see market fracturing, extreme sentiment readings, growth in accounts opening etc.
  • Looking at where the main trade index is, I don't think there is going to be another 18 months rally.

 5. The VIX has gone a long-term low do you have any ideas on that?

  • The VIX to some sort reflects how low the actual volatility has been. However, the relationship between implied through the options market and actual volatility is not very strong.
  • VIX has been a good indicator at the market bottoms, when market tends to make a spike low, but not at market tops – they unfold over a period of time. 
May 08
Assessing the Outlooks for a Recovery

​​Tuesday, April 18, 2017

Speaker: Elizabeth Johnson, PhD, Managing Director, Head of Brazil Research Team, TSL Research Group

1.    2017 Outlook

  • 2017 is still going to be a year of economic transition in Brazil:
    • despite a 7% decline in GDP over the last two years, 2017 is not expected to be a year of rapid recovery due to very few growth drivers within the economy,
    • New President Michel Temer is a very skilled politician but his popularity among population is low,
    • Political tensions are to continue - there is still a risk Temer could be removed from office due to ongoing corruption investigation very favored by the country's population which wants to reduce corruption and make Brazil more transparent society.
  • Brazil is thought as a commodities country - it is the largest global exporter of iron ore, sugar, and coffee, and the second largest soy exporter.
  • The economy of Brazil now is a consumer led economy - households spending accounts for 65% of Brazil GDP. Households are heavily leveraged and interest rates are extremely high implying no rapid growth in households spending in the near term.
  • Brazil is trying to change its consumer based economy model to an investment based growth model though unsuccessfully so far – investment as a percentage of GDP reached the lowest level in the past decade, the sentiment improved last year but it is still very weak.
  • Economic recovery is slow – 0.5% GDP growth in 2017E.
  • Inflation is down from 10% to 4% - the lowest since 1992.
  • Unemployment rate is 11.9% (12.1 million of people) up from 4% three years ago.​

2.   The biggest challenges to look for ahead

  • Pension reform is inevitable
    • "Pension expenditures balloon" – Brazil being a very "young country" is currently paying in pensions same percentage of GDP as Japan, public workers retire with full salaries, private sector workers retire with full salaries after 30 years of contributions.
    • Life expectancy and birthrate are close to the developed world's average, but the pension system is built on much lower expectations.
    • Pension system is unsustainable in short, medium and long run – without pension reform Brazil will have one retiree for every active worker within the next 25 years; by 2060 without the reform we may see all of the government spending going to pensions.
    • The market expects that pension reform will pass in some form already this year – that is why we've seen currency strengthening, some market recovery (despite low economic growth).
  • Corruption investigation
    • The massive corruption investigation has been going on since 2014. It involves over a dozen countries.
    • Recently the list of politicians investigated has been announced. It includes 1/3 of Temer's Cabinet, 1/3 of the Senate, congressmen from 26 parties implying practically every political party is involved.
    • The investigation is positive for Brazilian long term, however it led to a situation when politicians may lack credibility from population to pass the pension reform.
    • The corruption scandal has affected so many key companies that there is also an economic risk going forward.
    • Temer's mandate is in question (due to investigation of 2014 elections financing, court hearings are in early May), and that has still not been priced in by the market.​​ 

3.  Temer's reforms

  • Despite Temer's weak popular support he had moved ahead with a lot of important measures and policies.
  • State-run Petrobras and Electrobras, the largest oil and gas producer and utility company:
    • Significant changes in management,
    • Much more willingness to let the private sector take an active role in these sectors,
    • Sale of assets to reduce debt,
    • Changed regulations in an effort to improve these markets making them less susceptible to political influence.
  • Real push for privatization - airport, transmission lines, railway, oil and gas tenders with much more open rules etc,
  • Chinese participation – China is Brazil's most important trade partner, and has increasingly become the most important investor in Brazilian infrastructure (major hydroelectric projects, power distribution and transmission companies). China has also been investing more in Brazil's agricultural supply chain.​​

4.  Leading indicators to monitor

  • Fiscal
    • State debt renegotiations (Rio de Janeiro as model),
    • Pension reform,
  • Politics
    • How the ongoing corruption investigation will influence the 2018 elections – in municipal elections last year Brazil went for the outsider candidates,
    • The current Mayor of Sao Paolo João Doria from center right party could emerge as a real presidential candidate.


​​​​1.   Which sectors of Brazil economy offer the best investment opportunities?
  • Agriculture – record soy harvest, strong meat exports (JBS, Brazil Foods),
  • Pulp & Paper sector,
  • Consumer stocks should take time to show a real recovery,
  • A lot of improvement with the state-owned Petrobras and Electrobras, however those companies are highly leveraged and need more time to recover.
​​2.   What is your bear case?
  • Base case: some reform will pass, Temer will last.
  • Bear case: no pension reform, Temer removed from the office - basically a muddle through scenario for the next nearly two years.
  • Bullish case: strong version of pension reform is passed - the minimum retirement age is set at 65 years with slow transition to that age from current 52, public sector workers are paid percentage of salary in pension vs full salary now.
​​3.   Are the conditions in place imply investment spending growth?
  • We see moves towards development of infrastructure financing program that involves the private sector, however it needs time to convert into real investments growth.
  • Private investments in companies' capacities are low:
    • A lot of industries are operating at 75% of installed capacities,
    • Tax benefits are given to companies for keeping workers vs. firing them – a move that has made Brazil unproductive and made investments much more driven by the state rather than by the private sector.
​​4.   Is it because the Brazilian Real has weakened so much we see so high interest rates?
  • Real has weakened a lot, and recently it has strengthened again - Brazil has been working out some of the currency control policies;
  • Why the interest rates are so high is very much due to legacy of inflation;
  • The goal is 6% real interest rate implies there is still a room for 125bp cut;
  • Brazil's debt has lost investment grade;
  • Brazil's high debt to GDP ratio will continue in the short term due to almost 10% primary deficit.​
​​5.  Is there a political appetite to increase royalties rather than taxes on natural resources to cover the deficit?
  • New mining code – now there is much more investor friendly environment for it;
  • Oil – states have tried to increase royalties due to their financial problems, however the Supreme Court overruled it. The tendency is to move back to "1998 oil model" rolling back the nationalistic reform passed in 2010 by Lulu administration;
  • Current government philosophy is to create a business friendly environment to attract investments:
    • No tax increase on natural resources,
    • Changing attitude towards private sector friendly economy. 
Mar 28
Are You a Great Analyst?

​Wednesday, March 15, 2017

Speaker: James Valentine, CFA, author of the book "Best Practices for Equity Research Analysts"

1.    Worth of Analysis

  • Actively managed domestic equity mutual funds see a massive outflow of assets to indexed mutual funds and ETFs.
  • What defines a sell-side or a buy-side firm is a proprietary research – it communicates to a client: "Pay us fee because we are going to do a deep research to get return beyond what you can get in an index fund".
  • Portfolio manager get frustrated when it comes to analyst because over 80% of research is worthless – gives just information and provides little insight to generate alpha.​

2.    GAMMA PI Framework is about how to become a better analyst

  • G – Generate informed insights.
    • Get away from providing just information, try to get unique insights.
    • Focus on two major questions:
    • What are the factors that are going to drive your stock?
    • Where can you get unique insight on these factors?
    • EPICTM Stock Calls framework require critical factors to meet all four criteria:
    • Exceeds materiality threshold;
    • Probably going to occur;
    • I'm good at forecasting;
    • Consensus is poor at forecasting.
    • HELPTM framework for identifying critical factors:
    • Research Historical data and documents – very often critical factors that will drive a stock in the future are the same once that drove it in the past.
    • Explore Emerging data and documents.
    • Validate/refute assumptions with Live sources.
    • Prioritize factors using EPICTM framework - defined critical factors help focus, manage time and do deeper research in critical areas.
    • ASPIRETM framework to gain insight:
    • Make Assumptions for critical factors;
    • Seek Sources of insight – review industry public sources, interview, analyze information from private forecasting service, conduct survey;
    • Prepare to approach and interview – ICETM questioning framework (Identify, Calm, Entice);
    • Introduce and interview – use good influencing skills (PRACTICETM influencing framework), read body language;
    • Respond with follow-up;
    • Evaluate benefit.
  • A – Accurately forecast.
    • Forecasting is not about just using Excel (tools), it is about converting the right insights into numbers (skills).
    • Analysts tend to put too many focus on tools without getting any insight.
  • M – Make accurate stock recommendations.
    • Based on survey responses, the weakest point here is being challenged to explain how your recommendation differ from consensus.
    • 4-step process every good analyst is going through – TIER framework:
    • Target realistic prices,
    • Identify catalyst(s),
    • Ensure ideal entry point,
    • Review performance and thesis).
    • Spend more time to identify the right multiple, try to understand what drives the ups and downs for the stock. In theory, time to develop a price target should be split equally between building a financial forecast and identifying the right multiple; in reality, it is split 95% to 5% with the forecast taking most of the time.
    • Make sure to use scenarios in valuation.
    • Make sure to have superior valuation or multiple or superior view about the market sentiment (or both).
    • Monitor trading data to understand the motivations of the current stock holders – learn behaviors.
    • To avoid psychological pitfalls when possible either talk to a trusted colleague or an investment committee, share your thoughts about stock recommendation to put your thesis under scrutiny.
  • M – Motivate others to act.
    • Based on survey responses, "When communicating a stock recommendation, I provide upside, downside, and base-case scenarios" - this is the area analysts think they fall short the most.
    • 3 step for communicating stock recommendations
    • Ensure content has value;
    • Make sure to use the optimal channel to communicate (in-person/telephone conversation, email, etc);
    • Ensure that message has value – ADVICETM framework (Aware, Differentiated, Validated, Conclusion-oriented, Easy-to-consume).
  • A – Acquire buy-side votes (sell-side only).
  • P – Productivity.
    • Based on survey responses, "I process emails and voicemails as they come in (rather than batch process) is the weakest point in productivity – time management is a huge problem in the investment industry.
    • Most of analysts play Defense game (not focused, filling their calendar with unnecessary meetings) and only 20%-25% of them play Offence game (keeping their calendar clear and focusing only on critical factors and meetings).
    • For playing offence  - maximize offensively-focused activities, stop or minimize defensively focused activities, hold a weekly meeting with yourself
    • For working efficiently – batch process emails, schedule your week, set time limits, use to-do list, learn Excel short-cuts
    • For reducing distractions – shut-off all pop-up boxes (they are huge time wasters).
  • I – Individual Characteristics.
    • Balance your coping strategies (e.g. taking responsibility, distancing);
    • Manage stress;
    • Think of your self-monitoring and social abilities, thinking style.


​​​1. How do you handle a situation when a government or company's official voluntarily and unintentionally gives you a material non-public information?
  • Don't talk to anybody from a company you are researching (e.g. local managers or anybody who may possess such information). It may sound radical but it will get you out of such problems.
  • In terms of government, try to talk about sector specific issues and avoid talking about company specific issues with regulators.

2. It has been a while since I've seen analysis stated that historically sell-rated stocks massively outperformed buy-rated stocks. Is that something you have tracked or monitored, and where have the trends been lately?

  • StarMine that reported that statistics does not publish it anymore.
  • Less than 30% of portfolio managers outperform the benchmark in a typical year, and less than 10% for a 3-year timeframe.

3. In a slide that you showed Public vs Unique information the bulb for the public information mentioned "Sell-side reports" as a source of information and the bulb for unique information mentioned "Sell-side analysts (for the buy-side)". Could you explain why do you have a difference there?

  • Sell-side report have been easily accessible and widely disseminated nowadays.
  • If you have a good relationship with a sell-side analysts you can use them as an industry consultancy. A conversation with them may help you better understand the critical backgrounds, provide you with a unique insight, and that can be beneficial.

4. On the one hand, we tend to cover way too many stocks (you mentioned that in your presentation and your book). On the other, there are situations when a portfolio manager (PM) says: I need more ideas, You are not providing enough ideas, etc. As an analyst or even as a PM, how do you communicate to a firm that you're covering too many names and that you can't necessarily come up with a new idea every day or every week just because you're there every day? How do you manage to convince your senior to find ways to ameliorate those problems?

  • Example: Out of 50 stocks an analyst is responsible for take 30 stocks and index them, the remaining 20 stocks cover deeply and find something unique (dig unique insight, find critical factors) on a regular basis. If that doesn't work – change the process or change the personnel.

5. We have a tendency of "selling stock too early". Some stocks can compound over a long time period. How do you think about duration question and a choice between the best idea vs. activity?

  • Analysts should do more research on their own, try to find industry experts/consultants, somebody who can help them to figure out the deeper insight on the company's business and outlook and, as a result, the stock performance. ​
Feb 27
UW-Milwaukee - CFA Society Madison 2017 Research Challenge Winner

​The University of Wisconsin – Milwaukee (Team 1) has won the local competition of the CFA Institute Research Challenge and now advances to the Americas Regional where they will compete against universities from the United States, Canada, and Latin America.

The UW-Milwaukee team consists of undergraduate students Cody Ampomah, Jesse Klink, Abdus Mahmood, Francisco San Emeterio, and Chad Schoening. The team's faculty advisor is Dr. Kevin Spellman, CFA and their Industry Mentor is Doug Peck, CFA – Northwestern Mutual.

Cody Ampomah, Francisco San Emeterio, Abdus Mahmood, Chad Schoening, and Jesse Klink

The following universities competed with UW-Oshkosh at the Madison Challenge:
Marquette University (Team 1 & Team 2)
Milwaukee School of Engineering
University of Wisconsin – Eau Claire
University of Wisconsin – Milwaukee (Team 2)

Each university sent a team of four to five students to participate in the local challenge. The CFA Society Madison Local Challenge was the first step of two for a local team to advance towards the global final in Prague. The winning team will now match their wits, analytical skills and presentation abilities against teams at the Americas Regional in Seattle on April 6-7.

The students presented their analysis and buy/sell/hold recommendations on Strattec Security Corp.  Their presentation at the Local Finals was the culmination of months of research; interviews with company management, competitors, and clients; and presentation training.

Comments from Advisor Dr. Spellman -
The competition offers the students a great way to showcase their stock research skills and to hone their presentation skills. We are very appreciative of the involvement of the CFA Institute, CFA Society Madison, judges, and the students' industry mentor, Doug Peck from Northwestern Mutual, for this solid learning opportunity.​​

Feb 23
16th Annual Forecast Dinner - Global Market Outlook

​Wednesday, February 8, 2017

Speaker: Jeffrey Kleintop, CFA, Chief Global Investment Strategist, Charles Schwab &Co

1.    Economic Revival

  • 2017 is going to be the first year since 2011 when all of the top 20 global economies are growing.
  • In 2017, the global nominal GDP is expected to be over 5.0%. With the sales growth for companies in MSCI AC World index tracking the nominal GDP growth, it means that the companies' sales growth is going to be positive for the first time in the last four years.
  • The gap between earnings expectations and actual results is the largest since 2009 – 23%.
  • The stock market has been tracking analysts' earnings expectations.
  • For the last 50 years, every time the US Treasury yield curve inverted we saw the US stock market peaked and the recession began within 7-14 months.
    • Current yield curve shape tells us: "There is nothing to worry about – no recession this year".
    • The yield curve is downward sloping and moves toward zero as Fed hikes rates. However, the Fed has been very slow in raising rates meaning it may take at least 2-3 years for the yield to get to zero. So we may see a recession in 2020-21, but not in the next few years.
  • Risk of a recession in the next 12 month around the world is low.

2.    The CURE for a calm market is coming up

  • The period from election date to inauguration date for the stock market has been the calmest in many administration turnovers in the US.
  • The coming months will be accompanied with more volatility in the stock markets.
  • C. is for China – potential volatility ahead for China growth?
    • China's GDP growth tracks Chinese government infrastructure spending by 1 year.
    • In 2016, China spent a $1.6 trln on infrastructure, and its economy rebounded.
    • However, they pulled back sharply on infrastructure spending in 2H16 and early 2017, which implies a possible GDP growth deceleration in the coming months.
  • U. is for the UK
    • UK Brexit negotiations are about to take a hard term as soon as the UK officially announces it is leaving (Article 50).
    • There is no incentive for the EU to offer a "sweat deal" to the UK. Plus, there are elections in France and Germany, and none of the politicians wants to be seen easy on the "sweat deal" and the UK leaving.
  • R. is for Russia
    • Russian stocks usually track oil prices.
    • We may see the market disrupted as we approach the summer when Russian sanctions are due to be renewed - Russia could try to increase its negotiating leverage through participation in geopolitical conflicts.
  • E. is for European Election – a lot of political risk, potential for vote pattern to repeat?
    • This is the biggest risk the market faces in the next 6 months.
    • Due to political risks we may see a selloff of European stocks ahead of elections (in France and Germany) as it was with Brexit vote and US presidential elections.

3.    Trade

  • A trade war is unlikely, however increasing trade frictions with regard to specific products with specific countries are quite possible
  • Better global economic growth should transform into a 3.76% growth in world trade according to IMF even with continuing protectionist rhetoric.

4.    When to Invest?

  • The future is not what individual investors use when they invest. They buy what has gone up and they sell what has gone down in the past – five-year returns tend to shape buying and selling.
  • Based on a performance of a 5-year rolling returns in global stock market, individuals will be buying stocks in 2017, for the first time in the last 2.5 years.
  • Past turnarounds in investor behavior (towards buying) preceded strong gains. In the last two times when we saw a turnaround in investor behavior, the returns 6 months later were in between 10% to 40%, 18 months later they were in between 40% to 60%.

5.    Where to Invest?

  • Home bias – individual investors tend to stick to their home country, e.g. invest in stocks that are based where they live.
  • The average US investor's portfolio owns 75% of US based stocks.
  • Canadian market trends correlate highly with the global Energy sector.
  • The Japanese equity market trends correlates highly with the world Financial sub-sector.
  • The US equity market trends correlate highly with the world Information Technology Index.
  • Therefore, in order to really diversify investors need to be global – the global diversification will be more valuable than it has ever been.​


​​​​​1. What are you feelings about the US national debt?

  • The US debt is our most popular export – the demand for the US debt is still high even despite the enormous amount of debt outstanding which may suggest slower economic growth.
  • Japan is at risk in this regard – their debt is growing faster than their economy, their population is shrinking, they are going to have to devalue their currency or "cross out" the debt.
  • In contrast, the US remains one of the least concerned country in terms of its debt level at least for the next few years or even for a 10-20 years horizon while US dollar remains the world's reserve currency

2. Other than economic recovery what is the outlook for energy?

  • Supply is growing in excess of demand, but the demand is ramping up very rapidly to the point where we need another advancement in technology for the supply to keep up with the demand growth.
  • Amazing demand for energy is coming from emerging markets where the 80% of the world's population lives that are adopting western lifestyles, e.g. the emerging middle-class in China and India has finally got sufficient spending power to make a difference.
  • As a result of this demand, the price for energy is upward trending. IMF predicts $60/barrel, some analysts predict $70/barrel for oil in the next 2-3 years from now.

3. What happens recurrently to a country when a border adjustment tax is put into the place?

  • There are few historical examples but they go way back and are irrelevant to today's market.
  • Theoretically, when the tax is put in place the domestic currency is supposed to immediately adjust – there are countries where it did, but it is unlikely to happen with the US dollar which is a world's reserve currency.
  • Schwab's expectations - 2-3% dollar appreciation in 2017.

4. What do you think about the bonds?

  • Rising interest rates will drug the bond market returns in 2017.
  • However, even though bonds may not provide any return this year they still will serve as an instrument of diversification, especially in a view of anticipated increasing stock market volatility.

5. Will we see millennials suffer "posttraumatic stress disorder" from what they went through in the last ten years in the stock market as much as those who experienced the great depression?

  • Millennials are less aggressive investors than their parents were at their age, but they save more and save earlier than baby-boomers.
  • They are cautious about the stock market, but their overall perception seem to be that in the long term the market will get higher.

6. Let's assume the EU elections go well. Where are we in terms of the economic cycle compared to Europe?

  • The rest of the world is relatively early in its economic cycle, but their economic growth has plateaued a little bit – Euro-zone (1.5% GDP growth), Japan (1%), and the UK (2.2%) are near their "speed limits" in terms of economic growth.
  • The US (while is much later in its cycle) has seen a mid-cycle economic slowdown and now is ramping up into the last few years of the cycle. It's reported 2016 1.6% GDP growth as well as 2.2%-2.5% growth expected in 2017 are still well below its speed limit.
  • GDP does not equal to what markets are doing - 2/3 of a time when international markets outperformed US market the US GDP growth was faster.​​
Jan 25
Robo-Advising: Implications for the Private Wealth Industry

​Tuesday, January 17, 2017

Speaker: Michael Wong, CFA, CPA, Senior Equity Research Analyst, Financial Services at Morningstar Institutional Research, Chicago

1.    Why is everyone interested in robo-advising or digital advice?

  • Robo-advisors market share is still very low – at the end of 2016 the total assets under management of robo-advisors combined was only $70B
  • Two main reasons why people are interested
    • Tremendous growth - robo-advising companies saw their assets under management tripled between 2014 and 2015, and grew by another 100% between 2015 and 2016
    • Entry and adoption of robo-advising and digital advice by leading financial services market players, e.g. Blackrock, Charles Schwab, BOA Merrill Lynch etc.

2.    Position in the private wealth management landscape

  • Robo-advisors fill the niche in between the discount brokerages (DIY trades and DYI long-term investors) and the full service wealth management
  • To keep their clients, companies operating in those two channels have to differentiate themselves from the robo- and cyborg-advisors. For example, discount brokerage firms may be concerned with losing their DYI long-term investors (cost conscious and relatively underserved), while full service wealth management may lose their cost conscious overserved clients
  • A full-service wealth management firm has a competitive advantage over robo-advisors by means of a so called advisor gamma, which measures an additional value that comes from intelligent financial planning
  • Morningstar estimates that financial planning of a retirement income that incorporates the concepts of financial planning, including total wealth asset allocation, dynamic withdrawal strategy, annuity allocation, liability relative investments, asset location and withdrawal sourcing, may generate an estimated potential 23% more income when compared to a base scenario of 4% withdrawal and a 20% equity allocation portfolio
  • Other ways for full-service wealth management to differentiate themselves from robo-advisors include offering of services like alternative assets, participation in IPOs, insurance, tax planning, behavioral or emotional coaching ​

3.    Robo-advisors business models

  • Robo-advisors' fees are estimated at 0.25% - financial services firms usually do not have equivalent Expense/Client Asset ratios until around $40B in assets under management
  • Minimum needed expenses to establish a robo-advisory firm are estimated at $30-$40 million annually
  • A robo-advisor will need an estimated at $16 to $40 billion of assets under management in order to break-even, which looks reasonable compared with trillions of addressable market, however it may take years to attain the break-even point
  • Account/assets growth requires significant marketing investments. Marketing costs to add a new client are estimated at $300/Gross New Account and about $1000/Net New Account which implies a payback period on advertising of 3.0-10 years with operating income of 10bps given an average account size is $100k. However, given that robo-advisors' operating income is far from 10 bps now, it could take them decades to recoup their marketing expenses
  • Vertically integrated robo-advisors has significant competitive advantage over stand-alone robo-advisors:
    • they have higher revenue yields – they may charge zero management fees but earn on ETFs and net interest (from cash allocation within their intelligent portfolios)
    • they can compete on costs (Schwab model)
  • Any firm thinking of adopting a robo-advisory business model should consider a potential for value-added or cannibalization
    • Asset managers: potential cannibalization if active fund yield is greater than passive funds + robo management fees; tough choice for active fund managers but a good choice for passive fund managers
    • Banks: net interest margin of 3% and robo may cannibalize, however, may give a good platform to cross sell or to get additional wallet share
    • Insurance: likely accretive on cross selling
    • Wealth management: need to differentiate themselves through products they bring to the table and by emphasizing that there is a value that could be added via active management and financial planning (alfa and gamma) for a client vs purely beta-return provided by robo-advisors
  • The potential growth of B2B robo-advisory would be similar to a growth rate of separately managed accounts at the full-service management firms, while the growth rate of B2C robo-advisors closely correlate with the potential growth of target-date and lifestyle mutual funds

4.    DOL fiduciary rule and robo-advisors

  • The DOL fiduciary rule has shaken out across the financial sector having both positive and negative implications for the market players:
    • Beneficiaries - fintech and information service providers (including robo-advisors), discount brokerages and index and ETF providers;
    • Mixed effect – active asset managers and full-service wealth management firms;
    • Challenged by the rule - alternative asset managers and life insurance companies
  • The DOL fiduciary rule may increase the cost of servicing clients, and then clients may have to choose a different investment services offer
  • If robo-advisors would be able to capture even a fraction of the client assets that could be potentially forego from the full service wealth management firms due to the fiduciary rule (estimated at potential $250bn of household assets and 600bn of IRA funds), it would mark a turning point for the whole robo-advising industry
  • The DOL fiduciary rule will accelerate the movement to lower-cost passive investment products, as well as the movement to fee-based accounts

5.    Recent and future developments in digital advice

  • Move beyond the strategic asset allocation with passive products towards strategic/smart beta products, active funds, tactical management
  • Service expansion and enhancements, including account aggregation, behavioral finance, budgeting, financial planning
  • Changes to charging and business structures (direct B2C platforms, emergence of a virtual advisor, technology enabled traditional advisor)
  • Divide between vertically integrated and independent robo-advisors
  • Robo-advising may be a distribution channel of the future


1.  Is there any reason to think that the ability to acquire clients is cheaper or different for robo-advisors than for traditional firms?

Even though at first sight, marketing costs for robo-advisors may seem low as they appeal to social media, use word of mouth etc, a closer look reveals that they have also started using traditional marketing channels as social media and word of mouth had played out –"low hanging fruit" has already been collected, and if they want to get into a reasonable scale where they can be profitable they have to spend heavily on advertising

2.  Does the Schwab model (revenue yields and costs) survive fiduciary rule?

Schwab may have to change it a little bit. It may have to adopt a similar charging method to FidelityGo fee offset charging scheme, which qualifies under the DOL fiduciary rule​

​​​​3. On one of your slides attempting to demonstrate a value of financial planning compared to robo-advising (23% more potential income), was that difference net or gross of fees?

  • That was a gross potential income difference, it did not include fees.
  • Many academic studies apart from Morningstar prove that financial planning does have additional value even after controlling for other factors, including fees. ​​

​​​4. Do you know what percent of the money that flow into robo comes from qualified finance?
  • At the moment, it is probably very very small. Some robo-advisors will not even take retirement assets at the moment
  • Big players (for ex. Goldman Sachs) are trying to introduce robo-advisory at retirement space
​​5.You said that robo-advisors are taking a niche between the two well established business models. What about the size of that niche, is it changing, is there any growth in that niche, or is it something pretty stable?
  • Robo-advisors appeal to cost conscious investors, for example, DYI long term investors underserved by discount brokerages, which makes the discount brokerages adopt robo-advisory (even under threat of cannibalization) in order to keep their clients
  • We also see a general generation shift - robo-advisors are seen as a toolkit for millennials and emerging generation ​

​​​​6. How do you think robo-advisors would perform in a down market? Personal financial planners usually help individuals protect their assets, however robo-advisors haven't seen down markets, is there might be a scenario where all those trends stall or shift the other way?
  • We have some proof that the growth rate of robo-advisors stalled in 2016 due to base effect, and comparatively flat stock market (without strong upward movement) for much of 2016
  • Additional volatility and downtrends in the market will definitely slowdown the robo-advisory growth 
Dec 21
2016 Financial Compensation Survey Results

​CFA Society Madison strives to serve its members by providing them the resources to aid in their professional and career development. For the second year in a row, we are excited to announce the highly anticipated findings of the 2016 Financial Compensation Survey.  To view the survey – click here!

In conjunction with CFA Society Milwaukee, the online survey was deployed to known financial professionals in the region represented by the two societies, including email subscribers and LinkedIn group members.  The self-reported survey was structured so all data gathered was anonymous with no identifiable information requested.

The ongoing focus of the survey is to identify and define compensation levels of financial professionals in the Madison and Milwaukee region and seeks to examine the impact of variables such as tenure, title, CFA designation, education and other factors.  For the best understanding of the reported data, please read the detail on the methodology used to derive the survey results and the associated assumptions.

For those who participated in the survey, I thank you for your contribution to this important market resource.  We wish to acknowledge the efforts of the CFA Society Minnesota who spear-headed the efforts to re-establish this survey.

As always, we welcome your comments and suggestions on the survey and the Board's service to you.


Chris Reed, CFA

Dec 20
Retailing – An Update on Secular Trends and Holiday Shopping

​Monday, December 12, 2016

Speaker: Dana Telsey, CEO and Chief Research Officer of Telsey Advisory Group (TAG), New York

1.    Macroeconomic & Consumer Environment

  • Consumer spending is driven by promotions, product innovation, multichannel consumption, and currency trends
  • Retailers focus on capturing millennials wallet share, represented by 27% of population with about $1.1 trillion in spending by 2035 (e.g. enhancing social media presence), capitalizing on product trends, and leveraging big data and technology
  • Given their preferences and lifestyles, the millennials favor access over ownership which leads to the shift from goods to services
  • Overall US retail sales growth has been insignificant, despite strong growth in selected categories (e.g. e-commerce, sporting goods, and personal care)

2.   Current Retail Landscape

  • Retail Sector Perspectives​
    • Specialty Apparel – desperate prospects due to increasing competition from fast fashion retailers
    • Department Stores – losing share to off-price retailers, specialty stores, discounters; footage growth has been stagnant; multichannel platforms are key
    • Off-price Retail – well positioned for shift in consumer attitude toward value; offers differentiated brands and extends categories; e-Commerce at early stages
    • Hardlines Retail – solid housing trends to continue in 2017, omni-channel remains a priority
    • Discounters – well positioned to meet demand from low-income households, international growth is a key for top-line performance, e-commerce at early stage of development
    • Food Retail – healthy food is a new obsession
    • Luxury Retail – slower industry growth, greater focus on store remodels
    • Footwear – athletic footwear sales growth remains robust, better margins in 2016 thanks to stock optimization
    • Activewear – impressive sales growth and share gains from regular apparel due to increasing usage for multiple occasions and social events​
  • Key Retail Trends
    • The growth in e-commerce and m-commerce has been changing market shares – the "invisible' threat. A new generation of high-growth retailers with developed online and mobile-based business models (consignment, pureplay retail, subscription, rentals, lodging, grocery delivery) are gradually taking market shares from established players
    • Omni-channel and technology are influencing consumer behavior and changing retailer priorities
    • Consumers shift from goods to experiences and services – "experiential" retailers, "eatertainment", fitness; this trend is particularly visible among millennials
    • The growth of activewear and athleisure continues to drive market growth and innovations – activewear is a new everyday wear
    • Space is being redistributed between struggling and growing retailers
  • Winning in an Evolving Retail Landscape
    • Total sales growth and pace of technology involved - are the new key performance metrics
    • Omni-channel distribution is a key to success – the store goes to the customer instead of the customer going to the store
    • Changing demographics and focus on millennials
    • Structural changes in consumer spending patterns and channels of distribution imply a greater need for speed to market – companies must invest in supply chain, integrate technology and CRM (about 40% of total capex has now been spent on systems and technology vs. opening new stores)

3.    2016 Holiday Perspective

  • TAG projects a 3.3% y-o-y growth (3.8% excluding Walmart) in total sales for the 2016 holiday season,
  • Decent season in sales growth and even more so in margins because inventories are lean
  • Online shopping is strong, two extra shopping days between Thanksgiving and Christmas in 2016, convenience is a key, mobile shopping has been rising
  • The main interest was in the following categories – electronics, apparel (denim, velvet), giftables
  • Holiday winners: BBY, JCP, LULU, M, PINK (LB), TGT, ULTA

4.    Outlook

  • Positive for Athleisure, Cosmetics and Home, neutral for Apparel, and negative for Jewelry
  • The future of retail is determined by
    • "ization" (personalization, localization, and customization),
    • fast and convenient omni-channels,
    • global reach – "the world is big and small",
    • different brick-and-mortar business that blends off and full price, efficient store size (smaller in size and smaller in numbers) that offers new types of services and entertainment tenants


​​​​1. What are the biggest changes you see in terms of household formation? Where the consumers live: urban vs suburban?
  • Millennials are expected to move from cities to suburbs over time as they have kids, similar to their parents, and we've begun to see some of that in cities around the country. The difference is that they will have more services available to involve conveniences that their parents didn't have

2. What are the product categories do the off price retailers offer opportunities in?

  • Cosmetics
  • Technology
  • Home
  • Activewear
  • One of the biggest changes with the off price retailers is the fact that they reallocate labor hours changing labor schedule in a way to reduce consumers' time in line

3. Is there any sector of the brick-and-mortar stores that could be eliminated by the online threat?

  • Luxury will never be eliminated
  • Basics, basic apparel – we are going to see a shrinkage of department stores because a lot of basics offered by department stores just isn't as relevant to the core consumer as it was in the past
  • Food – unlikely, as people like to look and choose produce by themselves
  • Electronics – is under threat, but there is an example of Best Buy that has rejuvenated themselves, what makes the difference is "brands matter"
  • Office supplies – that is the category to watch the most as it does not have as much appeal to go on shopping in the store rather than have supplies delivered to you. You may see Staples and Office Depot shrink the number of stores

4. Retailers seem to go in and out of style almost like by the season, what do you think retailers need to do to stay on top?

  • To stay on top retailers need to remodel, reinvent, and rejuvenate every 5-6 years, e.g. reinvest and redo the store, update website, introduce new logo, concept etc. If a retailer doesn't become more modern it becomes old, and no one wants to be old. The retailer has to be able to think "forever young"

5. You mentioned that Macy's and JCPenney were doing great in terms of traffic drivers this holiday season, what are they doing great vs other department stores?

  • Macy's – major promotions, in addition, they introduced change to technology, brands, whole departments (introduced Apple department, changed apparel department concept, etc.)
  • JCPenney – appliances are helping, in-store Sephora drives traffic along with updated center court area

6. Managing labor costs

  • Restaurant companies have the biggest impact on labor costs and minimum wage
  • Off-price retailers have a lot of hourly paid employees
  • As for the rest, for the most part they are earning commission which allows them to balance the part-time and full-time sales hours

7. What do you think are the reasons for athleisure success, is there any type of behavioral change, how long will that cycle last?

  • The level of same store sales growth has already been decelerating from double digit growth 3-5 years ago to mid-single digit growth for the same stores
  • Continuing sales growth will depend on what functionality a retailer can incorporate in order to drive excitement – good example Lululemon​
Dec 01
Congratulations to our 2016 New Charterholders

Chris Reed, CFA - President, Doug Giageos, CFA - New Charterholder, Brian Hellmer, CFA, CIMA - Vice President

Chris Reed, CFA - President, Thomas Bowes​, CFA - New Charterholder, Brian Hellmer, CFA, CIMA - Vice President

Nov 28
Current Trifecta Impacting Markets: Inflation, Growth & Populism - November 1, 2016

​Speaker: Olga Bitel, Economist, William Blair

Introductory Comments on Recent Big Trends:

  • Energy Industry is transitioning from an Extractive to a Technology Industry
  • Deflation due to technology disruption – impact on industrials, but now the services sector too
  • Brazil & Russia – macroeconomic improvement now taking place

1. Inflationary Trends are Rising

  • ​US Exchange Rate and Implied Inflations are signaling a buildup in inflationary pressures
  • Industrial inflation are were present; Benefits of Services deflation now abating (i.e. Uber and AirBnb).
  • Core PCI Inflation (excluding energy & food) is now rising following a period of low cyclical trends.
  • Global bond market yields still low, but inflation now reflected in local bond markets (i.e. US bond yields began repricing in May 2016).
  • Energy prices have rebounded yty.
  • Healthcare base costs continue to rise.

2. Growth is Accelerating

  • Auto sales (i.e. SAAR) remains high vs. historical levels and have rebounded from slowdown.
  • Energy sector investment no longer a headwind, recovering with rebounding prices.
  • Home Sales (new and existing) rebounded from depressed levels.

3. Rise of Populism: Will it Continue?

  • Brexit Vote - Vote to go back in time to a more homogeneous society, but still a minority view.
    • Shock to the Elites who are now developing a response
    • Socio-Economic Class – less educated and lower income voted to Leave (60%+)
    • Older voters voted to Leave (60%+)
  • Reasons Cited by Leave Voters:
    • Multiculturalism (29.6%)
    • Social Liberalism (23.8%)
    • Globalization (15.9%)
    • The Internet (23.5%)
    • Capitalism (48%)
    • Immigration (29.6%)
    • Cultural Beliefs as a Force for Ill (40%)
  • Recent Global Political Trends
    • Populism Rising in France, Germany, Netherlands
    • Spanish voters reject Leave party
    • ​Italian reform vote (uncertain)
  • Response to Populism is Materializing


How will Chinese Growth slowdown impact the Global economy?

  • China is moving not from a manufacturing to a consumption based economy but from a manufacturing to services-led economy.
  • Chinese deceleration is behind us despite recent GDP growth slowdown due to fiscal efforts.
  • Rebalancing & associated debt restructuring/workout remains ahead of the Chinese.
  • Chinese economy is decoupling economic from credit growth.
  • China will remain closely watched as it had contributed 50-60% of global growth.

Where is trade liberalizing?

  • Brazil – micromanagement is being reversed.
  • Russia – banking system is being reformed
  • EU – slow mover towards more open-ness
  • Canada – free trade agreement with the EU.

Risks to Optimism?

  • Bond market correction
  • Indonesia & Indian growth slowdown
  • Geopolitical problems (i.e. Syria & Iran)

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