2016 CFA Annual Conference (Montreal) – An overview

In a nutshell

The bad news is that we are living through a VUCA world (volatility/uncertainty/complexity/ambiguity)… the good news is that forecasting is difficult especially about the future. Changes/challenges and therefore threats/opportunities are everywhere: oil prices between $25-$150 and up, passive investment continues to grow with active investors thankfully working to eliminate pricing inefficiencies, China’s economy in turmoil but following a well trodden path to developing country success, Middle-East in crisis driving new players’ involvement to protect interests, US political system disintegrating but still relatively well positioned economically, US public pensions in crisis might learn from (so far) successful Canadian model, monetary policy driven low interest rate based financial repression has spent its effectiveness forcing governments to consider fiscal measures (e.g. Canada in front), and the financial industry is being shaken up by robo-advice, passive investing, regulatory (e.g. DOL fiduciary) changes, demographics, low-interest rates, bond market liquidity fears, and more.

Best practices of Canadian public pensions (represented by OTPP-Ontario Teachers and CDPQ-Caisse)

Differentiated by: independence (from unions/government), governance, internal investment management (and skills), low cost and clarity of goals/focus. OTPP manages assets and liabilities, while CDPQ only assets. Liabilities managed with realism by continuous mark-to-market transparency of the impact of dropping interest rates and rising longevity on liabilities. Asset allocation affected by extended QE dealt with by replacing much of fixed income with real estate, government regulated utilities, infrastructure and private equity. Next 20 years will be totally different than last 30. The scale of these pension funds allows them to benefit from distressed valuations. Canadian public pension model cannot be ported to US due to their (US plan’s) smaller scale (at least an order of magnitude smaller) and political interference.

Interest rates/QE

Interest rates approaching zero and even nominal negative in some countries (and real negative in many more), but monetary policy has run out of gas and negative interest rates won’t work and to make it work cash may have to disappear. Helicopter money is not the same as QE.

Oil prices

From an energy expert’s view: adjusted for inflation oil has been fairly stable around $25/bbl (except recent run-up followed by crash), peak oil is dead and long term trend continues to be non-inflationary, earlier belief that oil is an appreciating asset in ground now replaced with view that keeping oil in the ground makes no sense, peak demand (rather than supply) is new view and technological advances (e.g. fracking) made oil extraction like a manufacturing process which can benefit from technology driven cost reductions. (Not just extraction technology but e.g. Ford CMax hybrid gas engine with small 20 mile range plug-in rechargeable battery which can deliver to many users 65% of the miles on battery…so even if only 50% oil replacement can be achieved for 80% of cars, this simple technology could dramatically reduce auto oil consumption by 40%…of course a little larger battery could do even more.) However, looking at oil prices from a geopolitical perspective, another prognosticator argues persuasively for at $60-$70 ceiling in N.A. and $150 floor in the Far East. (see A New Middle east below)

Active vs. Passive

Little or no mention of passive investing (almost as if this is a given), but several papers on active investing advocating a whole range of approaches: contrarian value investing (focus on quality of business vs. stock price, screen on risk for value trap or permanent capital impairment), to smart-beta the new home of active management (e.g. Wisdom Tree’s factor proxy of dividend investing).

Private Equity

Rubenstein co-founder of Carlyle, now largest PE fund at over $200B, views 15%/year return going forward as being sustainable. He believes that carbon based energy (despite recent carnage), health sciences in general, pharma customized to patient’s genetic make-up, and emerging markets (now about 50% of world GDP) will continue to deliver superior returns.

Bob Geldof (singer, songwriter, activist, philanthropist and investor in Africa, who by the way argued that one should not assume that growth is the only way to measure human progress) made pitch for investments in Africa and challenged the financial community to go and see the opportunities for themselves. He is chairman of (small) $200M PE firm “8 Miles” which he claims to be getting 15%/year return in Africa without paying bribes or with investing in extractive enterprises.


Betterment, the largest robo-adviser, with $4B of assets for 150K clients, is a fiduciary adviser which believes that they will be able to meet DOL fiduciary requirements for retirement accounts and plan to deliver a product aimed at that market. Currently <0.2% of the market has fiduciary advice. It achieved this by providing robo-advice which is: Aligned (just like RIAs, DOL fiduciary for IRA/401(k), appropriate rather than sold products and aligned with client goals), Intelligent (stock allocation corresponding to horizon of 3/15/25 years of 40%/ 81%/90%, including guidance to saving requirement, low-cost investment, and preview of tax-impact), and Accessible (those with <$2M assets, simple to use, delivering an answer not just a tool). This could be even helpful to advisors with back-office automation.


China expert Pettis described four stages in the evolution of a developing country: removing constraints (in China initially only 5% land was allowed to sell produce but achieved immediately doubled productivity), expanding investment (by financial repression of households with forced savings at very low interest rates to allow borrowers access to loans at negative real rates), growth accelerating to exceed productivity while debt service capacity models work, but then stop working when economy can no longer absorb investment (with household sector share of China’s GDP at 30-35% rather than typical developed country of 65%) and final required stage to raise household share of GDP & reduce debt (achieved by wealth transfer/liquidation of state assets to consumers, but fought tooth-and-nail by established elites, e.g. by privatization). Signs of SOEs (State Owned Enterprises) being cleaned up for sale are an indication that privatization is coming. Growth rates might drop to as low as 3% after decades of about 7%.

Future of Work, Skills, Careers

Tracy Wilen discussed how technology is changing work. As people live longer, they also have to work longer. This leads to workplaces with 3, 4 or even 5 generations of co-workers, with each generation having different ideas about work, technology and how to deal with a world characterized by VUCA (volatility, uncertainty, complexity, ambiguity). The growing on-demand economy where highly skilled people are available for as little as $1/hour (see Upwork.com) and the impact on current employees of the firm is changing everything in the workplace. Individuals who figured out how to succeed with on-demand gigs world often refuse to return to full time employment, even when offered. To succeed, individuals must become CEO’s of own job! Career planning starts with writing down one’s GOALs… (As the old sayings go: “if you don’t know where you are heading, how will you know that you arrived” or “if you don’t know where you are going, then any road will do”)

Smart Indexing

The Wisdom Tree perspective was that a dividend based index correlates highly with value/size/momentum/profitability factors used by other smart-beta strategies, and it is a good way to tap into these return premia. Their implementation includes an annual rebalancing to reflect changes in the dividend/($ contribution) based weight (and presumably components). This approach turns out also to be highly correlated with the capitalization weighted US large cap market, but will have a larger dividend! (E.g. DTD with $500M assets yields around 3% and is highly correlated with US large capitalization weighted S&P500 index). Wisdom Tree also argues that there is “ample investment capacity” in this space (though only time will tell if that is so and of course if it is highly correlated to US large-cap index it will have similar volatility to it), but until then enjoy the ride (sounds like a possible replacement or complement to large caps but less compelling as a fixed income replacement from a downside protection perspective).


“The Future of Finance is not about the future of finance, but about Value and Values”

“Passive bond ETFs are silly!”

“Future of Finance is…revolution…much fewer will be employed in this field.”

Paradigm Shift: The changing global bond market (Panel discussion)

The 2016 bond world would have been unimaginable in 2005. There are concerns about: liquidity, technology enabled bond related instruments (including ETFs), where are interest rates going to settle out (unlikely above 2.75-3.75% in Canada). We are in an unprecedented place: 23% of sovereign debt at <1%, we are in a deflationary environment and demographics will guarantee continued low rates (downside risks are China and EM). Many parts of the world are just trying to manage their long-term decline, and EMs are only hope, but EM high-yields are a value trap. There is much pain in this financially repressed low interest rate world but at 3% interest, the growth rates (and stock markets) would be a lot lower. The effectiveness of monetary policy is essentially spent, negative nominal rates is grasping at straws and it is a “raw deal”; cash may be going next, as most investors unlikely to buy bonds with negative rates. It’s time, for all countries which can afford it, to turn on the fiscal stimulus tap because growth problems are structural. Not all countries can afford it, but helicopter money needs to be targeted at those who need it. Helicopter money, of course, is not the same as QE. What the low rates have achieved is high stock markets, with corporations borrowing for no good reason just to pay special dividends and do share buy-backs. Liquidity is worse than expected and would be further aggravated by FX liquidity problems. Greatest systemic risks: populism/nationalism, rising GINI coefficient (measures income inequality), high level of indebtedness.

The New Middle East

Breton Woods agreement after WWII was created to align interest of non-communist world with USA in the fight against communism; it was of least benefit to the US where exports represent only 8% of GDP. American political system is collapsing. Americans leaving M-E, but not just M-E, as the US sentiment is increasing isolationist (back to the 30s?). Boomer demographics supercharged the investment world while they were saving for retirement, the bust is coming soon. Canada over the next 6 years will turn from most capital rich developed country to the most capital poor one (?). In 15 years the US will still be the largest consumer and N.A. has essentially achieved energy independence, while Europe has no growth, Brazil is aging fast and China has 10-15% excess males. Middle East has three problems: terrorism (largely local problem, though not exclusively so), demography (15-25 year old males are the trouble makers, but the group peaked in Iran and Saudi), and US dependence (US will retreat further into isolationism). Saudi/Iran competition means: oil price war with Saudi trying to bleed Iran economically, Iran’s most credible option is to attempt to close the Gulf because the US no longer cares to be involved to solve the problem. Likely near-term (4-5 year) outcome is to that new players enter the arena: Russia (helping to create chaos in the region and generating millions of refugees invading/destabilizing Europe), NEA4 (China, Japan, Korea and Taiwan) forced to get involved in new war because oil is the oxygen of their economies and if they want oil they have to use naval/military power to keep channels open and make sure that oil gets to them. Oil prices will become a tale of two worlds: a $60-$70 ceiling in N.A. (energy independent and $150 floor elsewhere because they will have to spend massively/militarily on securing supply channels. Manufacturing is coming back to N.A. because while transport was cheap/reliable it will no longer be so, and supply chains will be too fragile/expensive.


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