Indexing is a Series of Active Decisions
May 21, 2025
Written by Alec Hubbard, CFA
A part of being a CFA charter is interrogating not only why we structure investments the way that we do, but the underlying mechanics of those investments. On May 21, to interrogate the mechanics of passive investment vehicles, CFA Society St. Louis heard from Rob Harvey, an investment strategist and vice president at Dimensional Fund Advisors at the Frontenac Hilton, who presented ‘Indexing is a Series of Actie Decisions.’ With Rob’s experience working as a portfolio manager dating back to 2016, an MBA from Burkley, a CFA charter, and a thorough understanding of indexed products, Rob was able to detail why passive investments aren’t as passive as they seem.
The predisposition of investment managers to prefer passively managed indexed products (investments that choose a benchmark such as the S&P 500 and replicate that index’s holdings as cheaply as possible) to active investment products (investment strategies where management chooses their investments with less adherence to the underlying benchmark) is often defended with two arguments. The first is that passively managed products offer a cheap access to market beta. The second is that, as passive products, they are easy to justify to clients and management. Yet, both of those arguments are not as infallible as they are often treated. Rob developed several arguments that passively managed index products are neither as cheap or as passive as they are made out to be.
Rob surveyed the room on how many indexes there were. While the highest guess was 30,000, the reality is, with all of the combinations of investments available, there are actually over 3,000,000 indexes. In each of those indexes there are active decisions being made by the index providers. The first is a macro-level asset allocation decision. Whether one chooses large cap, small cap or to stash their money away under a mattress, Harvey argued they have made an active decision. In that way, Rob pointed out that active decisions are inescapable. He argued that even in a “Core-Satellite” approach to investing, where a passively managed “Core” portfolio in areas of the market conventionally thought to be more efficient is complemented by actively managed “satellite” investments in areas of the market conventionally thought to be less efficient, investment managers should question what their “Core” portfolios consists of. What index product you choose and how you evaluate those indexed products are important decisions.
To demonstrate, Rob showed the S&P 600, the Russell 2000, and the CRSP Small Cap index. Even though each index sought to represent small cap stocks, there was a tremendous disparity in returns with the average difference per period of 4.9%. At a 4.9% dispersion rate, Rob pointed out that they don’t look like they cover the same asset class in a given year. The takeaway is that, when choosing an index, one should dig deeper than costs because the constituents of the indexes, even ones covering the same asset class, can look very different.
Even if an investment manager defends their decision to choose a passive product on the merits of cost, Rob pointed out that if they choose an index that underperforms for 5 years it can test client patience as they wait for mean reversion in the very long run. Rob further criticized the merits of cost by pointing out that in no other area of our lives is ‘cheap’ associated with ‘good.’ He concluded that when selecting investments, managers should always think of the quality of what you receive in exchange for the cost you pay.
When thinking of the quality of a passively managed product, Harvey pointed out that there are costs that come out of performance that are not expressed by fees. The first of these costs exist as a result of the reconstitution effect. Because indexes tell market participants the trades they are going to make in advance, they are prone to being front run by hedge funds and other traders who know that they will have a captive buyer for a stock on the day the index is set to buy the position. Rob compared this to playing poker with your hand face up.
The second hidden cost is style drift. If you allocate to areas they think will outperform with an index product, if that investment doesn’t deliver on accessing the factors you expect it too, you will pay in performance. This style drift can manifest itself as a lag to add investments. Rob pointed out a number of examples such as Tesla, Apollo, and Workday. These companies were not added to their respective indexes until months after being eligible and in that waiting period, they outperformed their respective indexes. Rob noted that the lag to add high performing investments in their investable universe can cause index fund to fail to deliver on the complete exposure they are often assumed to have. Style drift can also occur because indexes don’t reconstitute with high frequency. Rob pointed to periods where 15-35% of the Russell 2000 index’s investments were either small or mid cap by Russell’s own definition, while Russell only reconstitutes once per year to adjust itself.
Harvey highlighted that the added challenge to these lags in performance is that they are difficult to measure. Because indexed products are evaluated with their tracking error to their index, as opposed to performance, their managers’ incentive is to minimize the tracking error. That incentive motivates behaviors that harm performance such as influencing the prices of new investments towards worse outcomes on the specified trading day, so that the price at which the indexed fund obtains a new position is the one reflected by the index provider’s record. Taking on tracking error by outperforming, to an indexed product, is just as bad as underperforming.
Rob provided statements from Index providers where they, seemingly aware of these drawbacks, have insisted that they do not have a fiduciary responsibility when asked by the Securities and Exchange Commission. Yet these index providers make decisions on what securities belong in their index in a modern investment environment where more investment products track an index than actively manage their own investment selection.
Because these decisions on index constitution are decisions, Rob encouraged the audience to think of ways to make better decisions. While building a portfolio that is close to an index isn’t conceptually difficult, Rob challenged the audience to think about the commonsense ways to avoid the pitfalls of blindly following an index and consider investment options that address some of the pitfalls investment managers can stumble into when not thinking critically about the contents of their investments.
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Appraisals and Evaluations
May 14
by Khurram Naveed
As part of the CFA Society of St. Louis' Investment Inspiration Speaker Series, attendees gathered at the Hilton Frontenac to hear from Tim Luke, CAI, BAS, MPPA, ISA-AM, the Executive Vice President and National Managing Director of Appraisals & Valuations at Hindman Appraisals. With extensive experience in the auction and appraisal industry, Tim shared valuable insights on the intersection of comparable sales, value determination, and tax court.
Key Takeaways:
- Industry Experience and Background
- Tim discussed his extensive career, including leadership roles at Christie's Auction House, television appearances on Cash in the Attic and Antiques Roadshow, and his current position overseeing appraisals for Hindman. His experience spans high-value art, collectibles, and personal property, providing a unique perspective on the appraisal process.
- Importance of USPAP Compliance
- Tim emphasized the critical role of the Uniform Standards of Professional Appraisal Practice (USPAP) in producing credible, defensible appraisals. He explained how USPAP compliance is essential for estate, gift, and donation tax filings, noting the financial and legal risks of non-compliance.
- Real-World Case Study:
- One of the highlights of Tim’s talk was the Estate of Eva Swanson Holzman v. Commissioner case, which underscored the risks of relying on auction estimates without proper appraisal methodology. This case involved significant tax disputes due to improperly valued Old Master paintings, highlighting the importance of accurate, data-driven appraisals.
- Practical Advice for Financial Advisors
- Tim offered practical guidance for financial advisors, including the importance of maintaining comprehensive asset inventories for high-net-worth clients. He stressed the need for accurate documentation to support tax filings and reduce audit risks, particularly for unique assets like fine art and luxury goods.
Final Thoughts:
Tim’s presentation provided valuable insights for financial professionals, emphasizing the critical role appraisers play in managing client wealth and mitigating tax risks. For those unable to attend, we hope this recap captures the key points from the session.
Exemplifying Executive Communication
March 4
By Alec Hubbard, CFA
One of the benefits of engaging with a local CFA Society is the opportunity to expand one’s professional skills. Although the CFA charter has won global acclaim by demanding a rigorous understanding of the mechanics of financial markets, soft skills demanded in a lot of professional environments can prove just as valuable to career outcomes. Recently, CFA Society St. Louis members heard from Liz Haberberger, owner of Dale Carnegie St. Louis, on the topic of ‘Communicate to Lead’ at Hilton Frontenac.
Haberberger began her presentation by illustrating an example of a particularly poor speaker she had witnessed at a prior event. While the speaker was covering a topic about taxes that was inherently useful to the audience of business owners, the speaker gave a poor performance, including staring at her slide deck instead of looking at her audience, having no enthusiasm in her voice and not engaging with the audience’s questions. Liz emphasized the importance of connecting with the audience because, regardless of how useful the content had been in that situation, the people present immediately disregarded her content. When we communicate, it is important to avoid the risk of the audience thinking “No way, I’m not listening to that person, their message doesn’t seem credible.” Managing that risk is an important way to create productive interactions with clients, co-workers, managers and firm leaders.
Liz proceeded to the first of the evening’s learning activities, in which charterholders deliberated on what made an effective speaker. Some of the proposals put forward by the tables at the conclusion included being empathetic and humorous, keeping good eye contact, providing content of value, speaking at the audience’s level, listening and knowing what drives the audience and having good energy. Liz pointed out that most of these examples--in addition to other aspects of really good presentations-- is not about WHAT people say, but about HOW they say it. How a presenter makes you feel about a thing can carry more weight than the object of the presentation itself. Haberberger stressed that this should be encouraging, because it means you can obtain the skills to deliver good presentations without a prerequisite understanding of the subject matter.
During her presentation, Liz outlined the two types of communication. The first is Linear Communication, which explains how when you send an email, you can’t be interrupted. The second is Interactive Communication, like phone calls and meetings, where there is a back and forth to the interaction. While discussing the pros and cons of each, Liz pointed out that a lot of organizations defer to linear conversation because it is faster or easier. She coached the attendees to be careful not to overuse linear communication, because it misses subtle communication cues like tone, hesitancies or trepidations. Because the INTENT of a message is not the IMPACT of a message, and because perception is reality, Liz suggested the ultimate measure of a presentation was the recipient’s perception of that presentation. She pointed out that about 93% of messages come from tone and body language. She demonstrated this by complimenting the vice president of CFA Society St. Louis’ jacket in a way that was genuine, and then in a way that was clearly sarcastic. While the interactive communications can inform messaging and interpretation, it also comes with challenges that Liz coached the audience on how to address.
First, there are Filters. Filters are preconceptions that an audience brings into a meeting that bias their interpretation of a message. Filters can be external things, such as looking at emails during a presentation or getting distracted by a dog on a Zoom call. They can also be internal, rooted in personal preconceptions. Liz brought up an example of someone apologizing after a presentation she had given early in her career, because he had incorrectly assumed she was just a beginner who didn’t understand his line of work. After Liz had participants discuss their experience with filters in their own jobs, Liz proposed ways to reduce filters by asking questions, being earnest, honest, and open, and focusing on the needs of your audience.
Haberberger pointed out that communication is more about LISTENING than talking. She pointed to surveys that indicated that participants enjoyed talking with people who asked them lots of questions, rather than talking with those who didn’t ask questions. She then walked the audience through an exercise where they asked increasingly thorough questions of one another and demonstrated how being more thorough changed how the participants were listening. The exercise illustrated Selective Listening, Attentive Listening and Empathetic Listening. Liz told the audience that listening well, like speaking well, is a skill that can be practiced. She pointed to a study in which teenagers who spent two weeks at summer camp without access to technology were better able to identify emotions in their peers after the camp ended than before.
Liz then made a case for being delivery-focused rather than content-focused. She explained that after a one-hour meeting, most people will only remember 50% of the meeting, and after 24 hours, people will only remember 10% of the meeting. The caveat is that you can’t choose the 10% that people will remember after those 24 hours. What people do remember tends to depend on how the content was delivered, rather than the content itself. Liz pointed out that people can remember more when they are emotionally invested. As an example, she asked the audience if they could recall the weather on an arbitrary day in the past. When no one could, Liz pointed out that she could remember perfectly, because that day had been her wedding day.
Liz suggested using props to help with evoking emotional responses. As an example, she gave a quick speech about using A.I. to save money, using a $20 bill as a prop. She explained that there are psychological advantages to props, because if you can incorporate a physical thing, it stands out in peoples’ memories.
She also suggested presenting three examples of need to help the urgency of your point stand out. Liz then provided the following roadmap to an effective presentation:
1) Opening
2) Statement of need
3) Provide example of need (3 examples)
4) Discuss possible solutions (including advantage and disadvantage for each)
5) Present the best solution with evidence on why it is better than other possible solutions
6) Closing
Liz encouraged starting a dialogue to help the audience arrive at your desired solution organically, and described how she uses check-in questions to facilitate that dialogue.
She ended her presentation with a quote from Dale Carnegie: ‘Take a chance! All life is a chance. The man who goes farthest is generally the one who is willing to do and dare.’
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CFA Society St. Louis
Charity Showcase: Feb 27, 2025
Written by Alec Hubbard, CFA
There are many opportunities between local investment communities and charities. Charities provide investment professionals ideas for their clients who are looking for opportunities to donate. They also provide volunteer opportunities for investment professionals looking to engage with their local communities or to hone their leadership skills through board opportunities.
Last month, CFA Society St. Louis hosted its 2025 Charity Showcase at the Hilton Frontenac to showcase organizations that work to better the St. Louis region, and to make connections between those organizations and the local investment community.
The event itself was an open environment with 15 organizations hosting tables to share their contributions to the community and opportunities for involvement.
IFM Community Medicine
IFM’s mission is to bring primary healthcare services to the most underserved of the underserved. They partner with 25 organizations to bring healthcare services to where people have need and discussed opportunities to donate to their donor investment fund.
Foster Together
Foster Together’s mission is to support and equip children and families impacted by the foster care system. They presented opportunities for board memberships, volunteer opportunities and giving opportunities, all of which sustain their effort to support more than 100 children and their caregivers every month.
Our Lady’s Inn
Our Lady’s Inn provides a safe haven for pregnant women and children in need of housing and supporting services. Their goal is to help those families transition from crisis to independence and security. In addition to providing a year of residence, they provide 3 years of care and support to extend a runway to success. They touted the continued connection they have with their alumni and celebrated the success of their newest board member who was a former client.
Independence Center
The Independence Center’s mission is to help adults with severe and persistent mental illness find hope and transition back to school or back to work. They’re a one-stop-shop to help adults adversely impacted by conditions like schizophrenia and bipolar disorder. They stressed that money is the most productive way to help because, while Medicaid pays for their services, the rates Medicaid pays do not cover the delivery of services. They are seeking to secure employer partners which could help people return to work, and good landlords which could provide affordable housing. They have a retail shop that is open to the public and accepts donations like Goodwill does.
The Fisher Home
The Fisher Home serves veterans’ families by providing a home while veterans are receiving care. They have 20 suites in a setting like a hotel, but more open with a huge kitchen, a laundry room and community area. Their motto is ‘Because a family’s love is good medicine.’
SSM Cardinal Glennon
Cardinal Glennon’s Foundation, the funding arm for the Children’s Hospital on Grand, was present and discussed opportunities for donations and volunteer opportunities, such as setting up and tearing down event equipment. They touted the importance of always having a network and highlighted the new hospital being built in the area as a catalyst for future opportunities for partnership.
St. Louis Area Diaper Bank
The Diaper Bank is an organization that distributes diapers and period supplies to families in need each month at six library branches. They partner with 70 organizations to distribute the diapers and supplies, and have volunteer opportunities in their warehouse. Their representative noted that a lot of organizations partner with them by doing diaper donation drives. As a part of their mobile mission, they will also take diapers and period supplies to groups of volunteers who help pack supply boxes for deliveries.
Champ Assistance Dogs
Champ Assistance Dogs is an organization that supports veterans and adults with traumatic brain injuries through the placement of service dogs. The cost to the people they support is free, but the cost to train an effective service dog was cited as $35,000. Champ’s representatives stated that they see a lot of opportunities for increasing awareness of what they do and are seeking help from the community.
Buddy Fund
Started by the sportscaster and St. Louis Native, Buddy Blattner, the Buddy Fund works to raise money to buy sports equipment for at-risk youth. They partner with organizations like schools, the YMCA, and around 150 other programs in order to effectively distribute their equipment. The representatives from the Buddy Fund highlighted two big events they host each year: a golf tournament that they host in Forest Park, and a kickball tournament they host in April. They stated that in addition to funding, they are always looking for volunteers to run auctions and to serve as referees.
Marygrove
Marygrove’s mission is to help children and youth who were exposed to trauma in their young lives by helping them overcome mental and behavioral health challenges to live self- sufficient, productive adult lives. They cited opprotunities for partnerships with donations, hands-on volunteering opprotunities on their campus and a mentorship program. They also mentioned opprotunities for board positions and a young professionals group.
Miriam School and Leaning Center
Miriam’s mission is to help kids who learn differently to gain the skills to gain success. They serve children with learning differences in K-12 by connecting them with integrated therapy opportunities. Miriam Switching Post, a store that funds their mission, collects donations of anything that is home-based and resells it to provide financial aid. Miriam School is also looking for sponsors for their events.
Center for Hearing and Speech St. Louis
The Center for Hearing and Speech St. Louis’ mission is to transform lives by empowering communication through audiology services, speech language therapy, hearing screenings, and visual screenings. They provide hearing tests and hearing aids to people who can’t afford them or don’t have health insurance.
Chads Coalition for Mental Health
Chad’s mission is to help prevent suicide in young people. They conduct prevention programs with young people and help individuals understand the signs and symptoms of teenage suicide. Chad’s representatives discussed opportunities for partnership in the form of donations, grants and the opportunity to partner and network with other individuals.
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Promise and Payback
CFA Society St. Louis Forecast Dinner 2025
January 30, 2025
Written by Alec Hubbard, CFA
While CFA societies evolve their offerings to align with an ever-changing industry, certain events remain enshrined in the expectations of participating charterholders. One such event is the Annual Forecast Dinner, and to rise to those expectations, on January 30, CFA Society St. Louis hosted its 2025 Annual Forecast Dinner at the Hilton Frontenac. Drawing a wide crowd of investment professionals, the event began with the Society’s president, Ryan Tomlinson, CFA, celebrating the Society’s achievements and sponsors. This included First Trust Global Portfolios, Greenbacker, Guggenheim, and Tri-State Capital. He then highlighted the Society’s upcoming events (which can be found here:) https://www.cfasociety.org/stlouis/events/calendar?CommunityKey=5a6cbe4d-4bc2-470a-b8cd-0185e47e811c.
Dr. Nong Lin, CFA then presented the winners of the Bull’s Eye annual forecast competition, and board member Dan Connor, CFA introduced the next generation of the forecast competition, the Virtual Stock Picking Game (Registration is still open:) https://www.stocktrak.com/members/register?sessionid=319030.
Wrapping up introductions, Vice President and Program Chair Sean Stout, CFA then introduced the featured speaker, Andrew Opdyke, CFA. A senior economist with First Trust, Opdyke’s team is consistently rated well by Bloomberg in their proficiency at forecasting economic indicators, and in 2022 was ranked Number 1 in GDP Growth and CPI. He works on First Trust’s ‘Monday Morning Outlook’ which is a weekly publication that, in 2017, won an award for being the most read/shared thought leadership. Andrew, like many in attendance, is a CFA Charterholder and he spent time outlining the state of the economy in 2025.
Opdyke opened with a stark reminder that the logic behind the theory of how markets are supposed to work can play out differently than anticipated. He demonstrated this by highlighting that the Federal Reserve, with more than 400 Ph.D.s versed in market theory on staff, admits uncertainty about what comes next even while they express confidence with their course of action. He pointed to a history of forecast efforts on the Fed’s part that has been less than accurate or impressive compared to other organizations and reminded the audience of the Fed’s notorious claim that inflation in the COVID era would be ‘transitory.’ He spoke on just how challenging the Fed’s task is by reminding the attendees just how many relevant variables happen in a complex global economy that a central bank cannot control. For example, in 2022 the Fed was anticipating 3 rate hikes. In reality, the increased interest rate was 17 times higher, in large part because Russia’s invasion of Ukraine represented a significant geopolitical incident that they couldn’t anticipate or control.
Opdyke described COVID as a metaphorical car crash for the economy where the economy ‘broke its legs.’ In a car crash, paramedics would check your vitals, but in this metaphor the Fed was a doctor who gave the patient morphine. Opdyke then exclaimed, “If the doctor asked how you are feeling with your broken leg, it is not the doctor’s job to send you home if you say you feel great!”
Transitioning from the Fed’s predictive and prescriptive abilities, Andrew pointed to areas in the economy where he sees potential for disruption. President Donald Trump seeks to address taxes, immigration, and trade. In his first administration, he had the same focus areas, but the markets didn’t respond to them intuitively. The predominant example used was that the 2018 tax cuts rocketed earnings over 20% but the financial markets that year were tough. Opdyke described how finding savings to extend the tax cuts would be difficult. He alluded to the Grace Committee’s effort under the Reagan administration in 1982, who were only able to get 5% of the budget cuts they proposed through Congress under a similar mandate. He also cautioned that spending pullbacks will lead to short-term pains before realizing gains and will have economic consequences because Federal deficit spending has supported GDP Growth.
With respect to tariffs, Opdyke pointed out that the U.S. currently has a lower tariff rate than many of its major trading partners. He also proposed that while the tariffs on China were understandable, given their troubled relationship with copyright law, he believes the Canada and Mexico tariffs are posturing, because the USMCA trade deal is coming up for renewal, and he warranted this belief by stating that Canada and Mexico have come to rely on the U.S. with 87% of Canada’s exports being to the U.S. and more than 80% of Mexico’s exports. Another mitigating factor to the impact of tariffs, Opdyke pointed out, was the last Trump administration’s implementation involved an 11-month lead time and opportunities for companies to apply for exemptions. Finally, under Trump’s protectionist first term, the U.S. saw purchases from abroad increase, not decrease. Even in areas where China suffered from U.S. trade policy, countries like Taiwan and Malasia were large beneficiaries. That said, Opdyke reminded the audience that the big difference this time is supply chain concerns that were raised during COVID and the demand to reshore. Finally, Opdyke demonstrated that, while tariffs can cause inflation in specific categories, they don’t do a lot broadly. Combined with an emphasis on immigrants leaving the U.S., the economic shifts in the coming years will be influenced by changes on the supply and demand side.
Opdyke then moved to make some interesting points about jobs. Over the last 18 months, he pointed out, 60% of job gains were in government and healthcare. In fact, he showed with Bureau of Labor Statistics Data that in only 2 months of the last 18 months, had the job growth of all of the other areas combined to surpass Government and Healthcare alone. He also pointed out that while we have seen job growth, the quality of jobs is a point of contention. Again using Bureau of Labor Statistics data, Opdyke showed that while job growth has recovered since the Pandemic, there has been a decline in full time employment. Opdyke made a case that this data is very important, despite being less than pronounced in the Bureau’s reports, because every other time full-time job growth has gone negative, historically, we have seen a recession.
Opdyke covered inflation by pointing out that production of goods ramped up during the COVID Pandemic, because the cost of production was heavily subsidized by low interest rates and the incentive to take advantage of government subsidized loans. The increase in production was not following economic fundamentals, because factory orders and production were both down. Now that COVID lockdowns have ended, inflation is being seen much more prominently in services. He estimated inflation in the coming year will likely be in the 2.5-3% range.
Opdyke also covered the changing capital markets. Because lenders can now get paid in the fixed income market, he detailed that the cost of capital has increased. In spite of that, equity markets have gotten greedy expressed through heavily concentrated markets with P/E ratios far above historic averages for the largest companies. Markets are now more concentrated than they have been since 1930, and more concentrated than in the early 2000s when the catalyst driving them was the internet. Opdyke reminded the audience that even though investors vastly underestimated the impact the internet would have on modern society, investors were not especially good at investing in the internet in the early 2000s where the big names at the time were Cisco, GE, Exxon and AOL. Opdyke reiterated that A.I. represents a tremendous opportunity, but asked “what if instead of running to the same door, you expanded your reach?”
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