Categories

Manager, Content Marketing, CFA Institute
 
POSTS BY JOSEPH WONG
  • 交易所交易基金(ETF)综合指南

    Joseph Wong    Joanne M. Hill, Dave Nadig, Matt Hougan
    25 Nov 2018
    497
    11

    简介:为什么交易所交易基金会增长?
     
    本书旨在帮助投资者了解和使用交易所交易基金(ETF)。ETF的引入只有25年左右,但现在已经成为投资管理业务增长最快的领域。本书详细介绍了ETF的运作方式、其独特的投资和交易特性,以及它们如何运用于投资组合管理。此外,还详细说明了评估ETF的最佳方式,以确定适合任何特定投资
    或交易目标的正确基金。
     
    交易所交易基金让投资者能以很高的流动性进入金融市场的几乎每个角落,允许任意规模的投资者建立起管理费远低于典型共同基金的机构级投资组合。持仓状况和投资策略高度透明,有助于投资者轻松评估ETF的潜在回报和风险。
     
    本质而言,ETF是混合投资产品,融合了共同基金的许多投资特点与普通股票的交易特点。像共同基金一样,投资者买入ETF的股份,按比例拥有资产池的权益。像共同基金一样,ETF通常由投资顾问收取一定费用进行管理,并受1940年《投资公司法》的监管。但与共同基金不同的是,ETF股票在
    全球证券交易所的连续市场上交易,可以通过经纪账户进行买卖,并且在整个交易日都拥有连续定价和流动性。因此,它们能够以保证金持有、出借、卖空或用于资深股票投资者采用的任何其他策略。
     
    虽然也存在一些可在交易所交易的其他类型共同基金,尤其是传统的封闭式基金,但今天的ETF与它们截然不同。ETF通常在每一个交易日开市时披露自己的持仓情况,因此潜在的买家和卖家可以通过与标的资产的价格比较,评估交易的ETF价格。专业交易商可以在一天结束时,以净资产价值创设和赎回份额,这是一个有助于保持ETF市场价格与“公允价值”相一致的特性。
     
    截至2014年第1季度末,共计1,570只ETF在美国上市,管理资产总额近1.74万亿美元。2013年,ETF占所有共同基金资产的比例由十年前的2%增至超过11%,并且继续吸引个人和机构投资者资产。更令人印象深刻的是,在任何一天,ETF通常都会占到美国交易所美元总成交量的25%至40%。
     
    简而言之,在20年里,这些创新的金融产品已经从新生事物,变成塑造投资者的投资方式和市场自身运行的最重要因素之一。持续增长前景十分向好。在截至2013年的四年中,ETF分别吸引了1880亿美元、1880亿美元、1190亿美元和1220亿美元的净流入。2013年第3季度末,美国证券交易委员会登记了近1000只新ETF。最近,PIMCO等共同基金巨头已经强势进入ETF领域,而包括富达、T. Rowe Price和Janus在内的其他公司也向美国证券交易委员会递交了申请。从贝莱德到麦肯锡等公司的专家都预计,其整体资产将会在短期内翻一番。在第14章中,我们将从投资者应用和产品开发的角度,详细介绍ETF的未来。
     


    This publication qualifies for 5.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
  • FinTech 2018: The Asia Pacific Edition

    20 Nov 2018
    1276
    207

    To bring more clarity to the question of how FinTech will affect the prospects of financial institutions and careers of our members and other stakeholders, CFA Institute has compiled the report FinTech 2018: The Asia Pacific Edition.
     
    This is a continuation of our effort summarized in the report FinTech 2017: China, Asia, and Beyond. The 2018 report is composed of three sections. The first covers the various businesses under the “Fin” umbrella, including banking FinTech, robo advice, insurtech, and regtech. The second section reviews the progress in “Tech” that’s relevant for financial institutions—namely, artificial intelligence, big data, cloud computing, and blockchain. The last section covers major FinTech developments in key Asia Pacific financial markets, including Australia, Japan, India, Singapore, and Thailand, in addition to China and Hong Kong SAR (which are also covered in last year’s report).
     
    The report is a compendium of articles and expert interviews, which can be read in any order. The common threads across the report are as follows:
     
    Artificial intelligence, big data, and cloud computing have made it possible for teams and organizations armed with better technology resources to outperform those that are not.
     
    Blockchain may have profound implications for the way financial institutions operate in the future. The technology is not yet mature and will need to overcome hurdles with respect to developing a sustainable business model and gaining regulatory approval.
     
    China leads the Asia Pacific region in FinTech development with its focus on the newer technologies. In many other Asia Pacific markets, FinTech is still defined by alternative lending, mobile payments, robo advice, and so forth. 
  • 2018亚太金融科技概览

    13 Nov 2018
    466
    19

    引言

    自CFA Institute 关注金融科技以来,如何定义金融科技的问题就一直存在着争议。

    不同的定义反映出人们不同的关注点与诉求。过去的几年中,我们所关注和研究的思路和目标一直在不断的变化。我们对于金融科技的定义也在不断更新。

    早年的经验

    在商业领域,人们总是矢志不渝地探寻尖端领域。正如 2016 年开始关注金融科技的研究一样,我们敲开了一扇令人激动而神秘的大门。

    彼时我们的目标是回答CFA 持证人的疑问:金融科技是否会取代自己?如果答案是肯定的,那么多久会发生?我们采访了许多该领域的从业人员,他们一致认为金融科技给行业带来的影响是:颠覆、颠覆、颠覆。

    我们很快就意识到我们参与的价值所在。当时金融科技还是一个全新的概念,所谓的“意见领袖”大多来自金融科技初创企业。颠覆性的观点反映出他们的使命,也是他们战斗的口号。但其中缺少了在金融科技生态系统中两个重要的利益相关方,即金融机构,以及可能更重要的监管机构。

    随着大家对金融科技生态系统理解的不断加深,我们曾在 2016 年 5 月的一篇文章中指出:“金融科技公司最理想的发展路径是与银行合作。”我们的这一判断包含了两层含义:
    1. 金融机构和技术创新者都具备着对方难以复制的技能,因此,对他们而言,最好的机会是共同合作,双方都关注于自身的强项。
    2. 事实证明,对于大多数金融科技初创企业来说,“企业对消费者”(B2C)模式的成本太高;

    相反,“企业对企业”(B2B)模式则是初创企业唯一的机会。换句话说,初创企业通过提供技术方案与金融机构合作,这种模式更为现实。

    在随后的两年中,我们的观点被多次证明是正确的,我们与该领域的从业者交流时对此感受颇深。对我们而言,最有趣的案例就是微软同华夏基金的合作(中国顶级公募基金之一)。2017 年夏,二者宣布在投资和投资顾问方面展开深入合作,这些领域都非常接近我们此前论述的核心。随后,几乎所有中国大型银行均与主要合作伙伴签订了类似协议。2018 年1 月,沃伦·巴菲特的伯克希尔哈撒韦公司宣布与亚马逊和摩根大通合作,共同进军在线医疗保险领域。

    可期的未来

    之前,我们对金融科技的定义是金融领域的新技术,主要是指区块链、智能投顾、移动支付与P2P 贷款

    目前,这一定义已经远远不能涵盖我们所讨论的内容。因为我们发现,上述新业务并非对传统业务构成威胁,而是对传统业务形成了有益的补充。我们怀着开放的心态去拥抱金融科技,这样一来,金融行业及金融机构便可以具备竞争优势。

    具体来看,大约一年前,我们就已经开始着手人工智能、大数据、云计算、区块链方面的研究,探究其对金融服务所产生的潜在影响,特别是在亚太地区的主要金融市场中贷款、支付、智能投顾以及保险这四大领域所受的影响如何。因而,目前我们对“金融科技”的定义粒度更细,包括“金融”与“科技”的多个方面。

    在过去的一年中,我们采访了很多服务于金融机构、技术创新公司、监管机构、投资者以及研究机构的专家,这本书就是我们合作努力的结果。全书的主要结论如下(剧透警报!):

    人工智能、大数据、云计算的发展使得拥有优势技术资源的团队领先没有技术资源的团队;
    区块链或将对金融机构未来的运营方式产生深远影响。但鉴于该技术尚未成熟,在形成可持续商业模式、获得监管部门批准方面仍存在许多障碍需要克服;

    中国在亚太地区金融科技领域的发展中处于领先的位置,在人工智能、大数据、云计算区块链领域均有涉及。而在其他亚太市场,金融科技目前仍仅局限于另类贷款、移动支付、智能投顾等;

    前瞻

    就在本书付梓之前,我们收到了2018 年普华永道独角兽CEO 调查的结果。调查表明,54% 的受访高管相信,合作是成功的关键;而只有23% 的高管认为内部开发是更好的方式。

    此外,近期普华永道发布的另一份报告中,研究人员发现,与此前广受欢迎的B2C 模式相比,当下采取B2B 模式的企业将成为主流。

    这听起来是不是有点耳熟?很高兴,我们正在正确的道路上前进。再次鸣谢所有对本卷顺利出刊做出贡献的人们。

    1曹实,CFA.FinTech以及金融业的未来.信报,2015. http://startupbeat. hkej.com/?p=29681
    2 FinTech 2017: China, Asia, and Beyond, CFA Institute, May 2017, p.3.
    3 https://www.pwccn.com/en/research-and-insights/pwc-unicorn-ceo-survey-2018.html
    4 https://www.pwccn.com/en/services/consulting/publications/new-trends-technology-enabling-to-b-services-whitepaper.html
  • Understanding the investment fundamentals of the palm oil industry

    Joseph Wong    Eunice Chu, Clara Melot, Joyce Lam, Alan Lok, CFA, Guruprasad Jambunathan
    22 Oct 2018
    1953
    132

    Part of the series "Sector analysis: a framework for investors"

    From cooking oil to biofuel, to the oleochemicals used in food additives, soaps, cosmetics, lubricants, and textiles, palm oil and its refined derivatives touch our lives in many ways. Given the commodity’s ubiquity, we decided to perform some extraction of our own, and provide insights into the factors and dynamics to consider when analysing companies involved in the production of palm oil.

    The report contains a full sector analysis for the palm oil industry and a question bank. 

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.

     
  • Understanding the Investment Fundamentals of Airlines. A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, Guruprasad Jambunathan
    15 Sep 2018
    14472
    570

    INTRODUCTION TO AIRLINE SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

    The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

    Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

    To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

    This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 

    AIRLINE INDUSTRY

    Perhaps it’s the thrill of voyaging to a far-flung, unfamiliar place. Maybe it’s the teasing prospect of a seat or—even better—an earnings upgrade. Whatever our reasons, we remain seduced and frustrated by the airline industry.

    In a 2007 letter to shareholders, Warren Buffett observed that: The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money—think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

    In the beginning, airlines were a must-have sovereign accessory, an essential strategic asset with monopoly powers that conferred national pride and international prestige. That said, packing a soft-power punch wasn’t cheap, and the industry was replete with loss-making state-owned companies.
    To the relief of investors (and taxpayers), economic sanity eventually prevailed and privatisation, together with the introduction of low-cost carriers (LCCs), helped to forge a
    more sensible trading environment.

    Old habits die hard, though, and aspects of a state-owned past haunt the airline industry. Intergovernmental deals dictate which airlines can fly and where they can land, and despite cheaper alternatives, national airlines still locate their hubs on their home turf. Industry pricing is also quixotic: a flight with two stopovers may be 40% cheaper than a shorter, more fuel-efficient, direct journey.
     
    To read more, download the full sector analysis for the airline industry with accompanying question bank below.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
     
  • PRACTITIONER’S BRIEF: THE GOOD, THE BAD, AND THE MOSTLY BENIGN: RECONCILING HIGH-FREQUENCY TRADING’S MISUNDERSTOOD REPUTATION

    04 Sep 2018
    7229
    0

    This article qualifies for 0.5 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits. 

    Based on the paper “Heterogeneity in How Algorithmic Traders Impact Institutional Trading Costs” by Tālis J. Putniņš and Joseph Barbara, available at https://www.arx.cfa/post/Heterogeneity-in-how-algorithmic-traders-impactinstitutional-trading-costs-4550.html

    This paper was recently recognized for excellence by the CFA Institute Asia-Pacific Research Exchange (ARX) at the 7th Annual Financial Research Network (FIRN) Conference. FIRN is a network of finance researchers and PhD students across Australia and New Zealand.

    Traversing the dense, tangled underbrush of an otherwise mostly explored section of securities terrain—the impact of automated, computerized trading—two researchers have demonstrated why it doesn’t pay to ignore the nuances of a complicated subject. Literally, it can cost billions to not heed the observations of authors Putniņš and Barbara, whose paper, “Heterogeneity in How Algorithmic Traders Impact Institutional Trading Costs,” is the subject of this ARX Practitioner’s Brief.

    The July 2017 paper is a wake-up call for institutional investors who may not be as vigilant as they think they are when it comes to getting best execution on block orders, if only because their defenses might well be focused on the wrong bad actors, that is, high-frequency traders (HFTs). HFTs, argue Putniņš (University of Technology Sydney) and Barbara (Australian Securities and Investments Commission), are unfairly stigmatized and singled out among computer-program–based or algorithmic traders (ATs) for driving up big-block trade implementation costs when in reality, according to an exhaustive study of trading data, their impact is negligible.

    In support of their argument, Putniņš and Barbara fully mapped and surveyed an algorithmic trading community comprising both HFTs, who transact a large number of orders at eye-blink speeds, and non-HFTs. In the process, they uncovered a variety of species and motives, some of which are even beneficial to institutions. On the surface, the ground the authors covered would seem cut and dried: grievances about HFTs have been voiced repeatedly, to the point where no one questions who in this narrative wears the black hat and who wears the white.

    What the authors sought to understand was whether the complaints against HFTs had merit. Was there more to the story than what generally has seeped into the mainstream media via books such as Michael Lewis’ Flash Boys?

    WHAT’S THE INVESTMENT ISSUE?
    The rise of electronic equity trading venues at the dawn of the 21st century emptied the trading floors, drove down execution costs, and opened the way for technological advancements, such as order-implementation speeds measured in milliseconds, that few could have ever imagined. By the time of the 2010 flash crash, the fundamental manner by which stocks were traded had radically changed. Although a few die-hard specialists were still clinging to their Big Board posts back on that spring day in 2010, the flash crash made it abundantly clear that algorithms had taken over. At the center of regulatory scrutiny post-flash crash was high-frequency trading, the best-known and most controversial form of algorithmic trading.

    With alpha scarce and trading venues fragmented, fund managers increasingly focused their energy on improving execution costs. For decades, the buy side railed against specialists front-running their institutional orders. Now, institutions face a new predator on their blocks: HFTs. These automated strategies account for more than half of the total volume during any given session, and some institutional investors claim they impede liquidity.

    As a result of concerns about being preyed upon, institutional investors are forced to break large orders into smaller pieces that need to be traded across multiple venues, making them more susceptible to HFTs. In turn, new liquidity pools and networks have been created to provide a safe space. Yet, as Putniņš and Barbara point out, some studies show that, at best, high-frequency trading and algorithmic trading lower spreads and improve price discovery, and at worst, represented a benign force. So are HFTs good, bad, benign, or what?

    HOW DO THE AUTHORS TACKLE THIS ISSUE?
    Putniņš and Barbara created a data cross-section reenacting trading of the largest 200 Australian equities (ASX 200 Index constituents) over a 13-month period (1 September 2014 through 30 September 2015), amounting to 273 trading days.

    Using unique trader-identified regulatory audit-trail data, they identified a subset of 187 of the most active nondirectional traders (AT/HFT) and measured their activity (roughly 25% of Australian volume on any given day) in terms of the impact on the execution costs for institutions, which control about 80% of Australian large-cap stocks. “Origin of order” identifiers, collected by the Australian Securities and Investments Commission, allowed the authors to reassemble smaller (child) orders back into larger (parent) ones.

    Upon close inspection, the AT/HFT gang of 187 proved decidedly heterogeneous. Putniņš and Barbara categorized these traders across a spectrum, ranging from those who drove costs up the highest (toxic) to those who lowered them the most (beneficial).

    WHAT ARE THE FINDINGS?
    The 12 most toxic traders increased the average order-implementation shortfall cost by 10 basis points or nearly double the cost without the harmful behavior. At the same time, the 14 most beneficial traders systematically decreased costs, effectively, in aggregate, countering the negative impact. However, this offset in aggregate would not have come as any consolation to those individual buyers and sellers specifically impacted by the toxic traders. “An investor that disproportionately interacts with harmful AT/HFT faced higher costs,” concluded the authors.

    Interestingly, HFTs were no more likely to be toxic than non-HFTs. And even those ATs/HFTs who drove up costs may have done so unintentionally, merely by trading on the most common entry and exit signals, behavior that could be described not so much as exploitative as lemming-like.

    WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
    First, for buy-side asset managers, it bears underscoring that execution matters. Potentially large cost savings can be realized from trading in a manner that avoids overexposure to toxic counterparties. Such savings could mean the difference between a fund that performs well and one that underperforms.

    Second, in terms of execution strategy, more caution should be exercised in smaller stocks, where toxic traders tend to be more active.

    Third, effort spent avoiding HFTs may be in vain because many HFTs are beneficial and can reduce institutional execution costs. At the same time, toxic non-HFTs should be avoided if one wants to minimize execution costs.

    Finally, from a regulatory perspective, the empirical measurement tools featured in this research could be used to better monitor markets and identify predatory trading behavior.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 

    Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.
  • CFA Societies Asia-Pacific Ethics Survey 2018

    06 Aug 2018
    866
    27

    In March 2018, in collaboration with CFA Institute, CFA Societies in Asia-Pacific surveyed their members to uncover common ethical issues seen in the investment industry, and to identify what resources could support better ethical decision making and a more ethical firm culture.

    The attached reports are the findings from the survey.
  • PRACTITIONER’S BRIEF: CYCLE SPOTTING—HOW AND WHEN MACRO SIGNALS CAN PREDICT CURRENCY RETURNS

    Joseph Wong    Rich Blake, Brindha Gunasingham, PhD, CFA
    30 Jul 2018
    20897
    0

    Based on the paper “Business Cycles and the Cross-Section of Currency Returns” by Steven J. Riddiough and Lucio Sarno, available at https://www.arx.cfa/post/Business-Cycles-and-the-Cross-Section-of-Currency-Returns-3883.html

    This paper was recently recognized as the CFA Institute Asia-Pacific Research Exchange Best Paper at the 7th Annual Financial Research Network (FIRN) Conference. FIRN is a network of finance researchers and PhD students across Australia and New Zealand.


    Originally published in the spring of 2017 and recently updated, “Business Cycles and the Cross-Section of Currency Returns,” by co-authors Steven J. Riddiough (University of Melbourne) and Lucio Sarno (Cass Business School and CEPR), makes a case for a genuine connection between currency returns and the waxing and waning of countries’ business cycles worldwide. According to Riddiough and Sarno, excess returns can be gleaned—and quantified in a risk-compensation context—by buying and selling a crosssection of currencies relative to the strengths or weaknesses of their country’s economic cycles, a finding that flouts decades of research suggesting the absence of a link between
    macroeconomic variables and currency fluctuations.

    Among the drivers of such a strategy is the use of the spot exchange rate, demonstrably more 
    predictable than interest rate moves. Also crucial to understanding the source of returns is the observation that the most robust currency appreciations occur when cross-border business cycles are diverging. Although buying the currencies of strong economies and selling the currencies of weaker ones might seem intuitive, there is no shortage of real or theoretical headwinds facing anyone who might attempt it. The spot market is notoriously and exceptionally volatile, and the nature of forecasting business cycles represents its own deeply explored yet only partially understood pursuit. Empirically, Riddiough and Sarno have tilled new ground.

    WHAT’S THE INVESTMENT ISSUE?
    In their paper, Riddiough and Sarno refer to academic research that supports the notion of a strange disconnect between macro fundamentals and currency exchange rate moves, particularly in short (one month) and intermediate (one year) time horizons. Why wouldn’t a country’s economic growth rate underpin—or indeed, help predict—the fluctuation of its currency, just as a company’s fundamentals would have an influence on share price? With this counterintuitive reasoning as a talisman, Riddiough and Sarno embark on a journey to resolve what others before them have found so puzzling. Employing that broadest measure of macro conditions—the business cycle—they examine how this basic concept gets measured in the first place, whether it even can be measured, and, if so, whether there is some way to harness it for alpha production.

    HOW DO THE AUTHORS TACKLE THIS ISSUE?
    Step one for Riddiough and Sarno was to determine how best to take the extensive data from a cross-section of 27 countries over three decades and come up with a measure of when each country’s business cycles started, when they halted, and how long they lasted. Even arriving at a commonly accepted measure for business cycles—the so-called “output gap,” which is a country’s percentage deviation from its long-term trend—proved challenging. Leaving aside the not-uncommon idea that cycles are too mercurial to pin down, there was the vexing conundrum of sifting through and amalgamating various output-gap measurement techniques (quadratic data-spanning filters versus linear counterparts). The authors needed to produce a drop cloth of macroeconomic conditions
    upon which to portray a currency trading strategy conducted in a long-term portfolio setting. By running numbers through the prism of a series of five simulated portfolios (set up in contrast, with degrees of weak and strong currencies), the authors were able to take into consideration such concepts as relative performance, risk compensation, and diversification benefits that could be associated with currency returns. In other words, this was no carry trade. The question then became, “If business cycles could predict currency returns in a portfolio setting, could an investor capitalize?”

    WHAT ARE THE FINDINGS?
    Spot exchange rate predictability was evident in both a cross-section and a time series analysis of the countries’ business cycles. In summary, buying and selling based on business cycles not only generated high returns but the outperformance was not correlated with the most common currency strategies, such as long Australian dollar/short Japanese yen. According to the authors, “Currencies issued by strong economies (high output gaps) command higher expected returns, which compensates more risk-averse investors in weak economies.” The authors go on to say, “Our research suggests a strong predictive link from business cycles to currency returns, and raises questions as to why our results differ from those in the long-standing international macroeconomics literature.”

    One reason may lie in the use of spot rate moves to extract excess return, and not via commonly used derivatives. In the aforementioned carry example, the trade would remain static; those long and short positions wouldn’t change over time even though business cycles or output gap differentials would.

    “An output-gap investor would have taken long and short positions in both the Australian dollar and Japanese yen as their relative business cycles fluctuated,” the authors claim. Returns, they emphasize, mainly come from the divergence in business cycles. Using data and a rigorous process, investors can define cycles and exploit their turns.

    WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
    Where once investors had only a few “risk factors” to choose from—growth, momentum, size, and value—now they have dozens and must add business cycles to the growing list. Because an output-gap strategy has such low correlation with other currency strategies, investors who once only considered currency exposure as something to be hedged might be open to using it as a source of alpha generation, particularly at a time when large segments of the stock and bond markets are reaching boiling points and perhaps pointing toward the start of a new set of intraglobal cycles to come.

    “At the heart of almost any model of currency returns is a tight link between the macroeconomy and exchange rate returns,” Riddiough explained recently in an email. “But it’s taken a long time to pin down this relationship empirically. In this paper, we’ve demonstrated that the link is real, spot returns are predictable, and the resulting investment strategy is unlike any we commonly employ in currency markets.”

    Riddiough and Sarno have found a relationship between macro fundamentals and exchange rates—a unique, underexploited source of returns. The analysis has been completed using data from markets around the world, including Australia, Japan, and New Zealand, demonstrating that this is not a phenomenon confined to the United States or even the Eurozone. Global and Asia Pacific investors, hungry for diversification, should take note.


    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.

    This article qualifies for 1 CE under the guidelines of the CFA Institute Continuing Education Program. 
    We encourage CFA Institute members to login to the CE tracking tool to self-document these credits.

     
  • Understanding the Investment Fundamentals of the Property Development Sector. A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, Guruprasad Jambunathan
    10 Jul 2018
    2085
    420

    INTRODUCTION TO SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

    The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

    Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

    To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

    This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 

     
    THE PROPERTY DEVELOPMENT SECTOR - LUMPS, BUMPS AND SLUMPS

    In a complex and fast-moving financial world, it’s comforting to know that some sectors remain relatively easy to understand. A case in point is property development. The property developer acquires land and an architect then designs the building and obtains planning approval before passing the baton to the construction team. 

    At this stage, the developer could choose to undertake marketing and sales before construction is complete or wait until the last brick falls into place. Either way, you can then calculate the gross development value (GDV) of a project or profit from the project, of which the sum of GDV, excluding the developer’s liabilities, will yield the value of the development.

    To read more, download the full sector analysis for the Property Development Sector with accompanying question bank below.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
  • Understanding the Investment Fundamentals of Real Estate Investment Trusts (REITS). A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, Guruprasad Jambunathan
    13 Jun 2018
    18071
    473

    INTRODUCTION TO SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

    The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

    Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

    To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

    This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 
     
    REAL ESTATE INVESTMENT TRUST (REIT) SECTOR 

    REITs are vehicles that own and typically operate a portfolio of income-yielding real estate assets. Modelled along the lines of unit trusts, REITs allow for funds to be pooled from a group of investors. Such a structure provides retail investors with several advantages: a low-hurdle of entry and exposure to a diversified pool of real estate assets with a high level of liquidity, which would not otherwise be possible with direct investing. 

    Most REITs are publicly listed, and declare above 90% of their earnings as dividends to fulfil certain benefits accorded to REITs by the local securities regulator. As such, REITs provide a stable source of recurrent income, which serves as a yield play rather than an investment avenue for reaping capital gains. We believe an effective and accurate fundamental analysis can help the retail investor determine if the recurrent income is stable and/or trending upwards over the long term. 

    A REIT generally focuses on a specific category of property for investments.  Some common classifications of REITs include: Office & Commercial REITs, Retail REITs, and Industrial REITs.

    To read more, download the full sector analysis for REITs with accompanying question bank below.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
     
  • Understanding the Investment Fundamentals of the Banking Sector. A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, Guruprasad Jambunathan
    28 May 2018
    9844
    319

    INTRODUCTION TO SECTOR ANALYSIS: A FRAMEWORK FOR INVESTORS

    The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.  

    Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.  

    To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.

    This framework is customised to specific sectors and incorporates interviews with professionals within those sectors. 
     
    THE BANKING SECTOR

    In earlier editions of the Sector Analysis series, we explored the Real Estate Investment Trust (REIT) business model and the Telecommunications sector. In this article, we examine banks and highlight the various factors and lines of enquiry that will help you make informed investment decisions.

    SPHERES OF OPERATION

    The role banks play in our lives is vital. Their activities underpin the efficient working of an economy – indeed, they are often among the most significant constituents of a country’s stock market. When we talk about banks, we are not just referring to the familiar branches we occasionally visit to deposit funds or withdraw cash. Banks is an umbrella term that describes an industry subdivided into several segments, including, but not restricted to Consumer Banking & Wealth Management (also known as retail banking), Wholesale (also known as institutional banking) and Treasury.

    To read more, download the full sector analysis for the Banking Sector with accompanying question bank below.

    This publication qualifies for 1.0 CE credits under the guidelines of the CFA Institute Continuing Education Program.
  • The Next Generation of Trust - In India, Investors are Confident and Trusting

    03 May 2018
    3844
    53

    While Indian investors are the most likely to say they trust financial services versus other markets surveyed, trust for the financial services sector declined in India since our 2016 survey.

    Indian investors surveyed were much more likely to have a financial adviser than those in other markets. Although trust is still the most important factor in choosing an adviser, retail investors are also strongly motivated by the desire for performance. They are also much more likely than the average investor around the world to recommend their adviser to others.

    The top two reasons Indian investors are likely to leave their financial adviser are underperformance and a lack of communication and responsiveness. Indian investors favor personalized products and technology, and they also place high importance on brand. In terms of building trust, adhering to a code of conduct has a great impact on trust in India. Professional credentials also play a significant role in increasing trust.
  • The Next Generation of Trust - Investor Trust in Financial Services in Singapore

    03 May 2018
    1297
    11

    Singapore-based investors expect their advisers to be ethical and well-informed. Almost half of investors in Singapore “completely trust or trust” the financial services sector. Investors in Singapore tend to be significantly younger than those in many other markets. This may partially explain higher trust levels, as younger investors globally are also more trusting of financial services. A majority of investors surveyed in Singapore work with financial advisers, and few investors in Singapore report that they are very confident in their own ability to make investment decisions.

    Some investors in Singapore may question adviser competence. Their primary investment concerns are “My financial adviser making recommendations that result in losses” and “Hiring an unscrupulous financial adviser.” Trust is the most important for investors in Singapore when hiring an adviser. Communication is extremely important to investors in Singapore, and lack of communication is the primary reason they would discontinue a relationship with a financial adviser, although more than half also cite underperformance as a reason for leaving.

    Investors seem to prefer technology solutions over people as a majority say in three years it will be more important to have technology tools to execute their own strategy rather than human advisers. However, when selecting an investment firm, a majority of investors are split between the importance of a “Brand I can trust” and “People I can count on.”

    Read more in the full Market Report PDF below
  • The Next Generation of Trust - People are Trusted More Than Technology in Australia

    03 May 2018
    2286
    21

    Retail investors in Australia are some of the most satisfied among those we surveyed. However, even though Australian investors feel the markets are fair, retail investors are much less likely to work with financial advisers than investors in other markets. Although investors are not very confident in their ability to make investment decisions, many still find little need for professional advice.

    By and large, Australian investors also think that advisory fee structures are fair. However, they have less interest in personalized products than investors in any other market included in the survey.

    As in most markets, trust is the most important factor in choosing an investment adviser. However, in Australia people are trusted more than technology. A firm’s brand is also less important than the competency of its employees, and Australians rely on brand less than investors globally.

    Surprisingly, given the overall level of satisfaction for their investment firms, trust is tested in times of crisis, and Australian retail investors are, on average, slightly less confident that their investment firms are prepared for another financial crisis.

    Read more in the full Market Report PDF below.
  • The Next Generation of Trust - Investor Trust in Financial Services in Hong Kong SAR, China

    03 May 2018
    1538
    9

    Hong Kong is one of three markets in our survey where trust in the financial services sector is declining. Investors in Hong Kong are highly motivated by returns, and they prioritize performance over trust as a factor in choosing an adviser. Well over half of investors would also terminate an advisory relationship for underperformance.

    Hong Kong investors also appear to be less pleased with their advisers, and fewer than 10% believe that advisers put client interests first. However, few investors in Hong Kong are very confident of their investment decision making, which may indicate why many prefer to invest with the help of financial advisers. Many investors are indifferent to using a robo-adviser and human advisers and in three years believe it will be more important to have technology tools to execute their own strategy rather than a human adviser.

    Investors in Hong Kong also place a high value on professional credentials, ongoing professional development, and firms that adhere to a voluntary code of conduct. When selecting an investment firm, the majority of investors prefer a “Brand I can trust” over “People I can count on.”

    Read more in the full Market Report PDF below

     

  • Understanding the Investment Fundamentals of the Telecommunications Sector. A part of the series "Sector Analysis: A Framework for Investors"

    Joseph Wong    Alan Lok, CFA, Eunice Chu, Guruprasad Jambunathan
    10 Apr 2018
    35792
    357

    For investors exploring the telecommunications sector, it is important to be aware of the key economic, operational and regulatory factors influencing these firms. These not only vary from country to country but also from company to company, depending on the kind of service that is being provided – fixed line, mobile or a combination of the two. Common to all are the opportunities afforded by the growth in data and the proliferation of online services. For operators in developing markets, lower penetration rates offer long-term opportunities. Meanwhile for operators in the  developed world, staying relevant by keeping pace with technological advancements is vital. In general, the sector is marked by intense competition, hefty capital expenditure requirements (at least historically) and rigorous regulatory intrusion.

    There are three listed telecommunication stocks in the FTSE ST All-Share index, with a net market capitalisation of S$28.6 billion, and they accounted for 7.5% of the index as at 31 Jan 2018*. Of the three, SingTel is the largest constituent  company, representing about 90% of the Singapore telecommunication sector by market capitalisation.

    The sector analysis for REITs can be found on ARX here: https://www.arx.cfa/post/Understanding-Real-Estate-Investment-Trusts-REITS-Sector-Analysis-A-Framework-for-Investors-5166.html 

    To read more, download the full sector analysis for the telecommunications sector with accompanying question bank below. 

    This publication qualifies for 0.5 CE credits under the guidelines of the CFA Institute Continuing Education Program.
     
  • PRACTITIONER’S BRIEF: A SHOW OF APPRECIATION: WHY SOME FUND MANAGERS NEED THEIR INSTITUTIONAL BROKERS

    Joseph Wong    Rich Blake, Asjeet S. Lamba, PhD, CFA
    27 Mar 2018
    6324
    0

    Based on the paper “The Value of Institutional Brokerage Relationships: Evidence from the Collapse of Lehman Brothers” by Jianfeng Shen, Jerry T. Parwada, Kok Keng Siaw, and Eric K.M. Tan, available at https://www.arx.cfa/post/The-Valueof-Institutional-Brokerage-Relationships-nbsp-Evidence-From-The-Collapse-of-Lehman-Brothers-4536.html

    This paper was recently recognized for excellence by the CFA Institute Asia-Pacific Research Exchange (ARX) at the 7th Annual Financial Research Network (FIRN) Conference. FIRN is a network of finance researchers and PhD students across Australia and New Zealand.

    Institutional brokerage has always been a many-splendored thing. Analyst recommendations, IPO allocations, block order execution, networks for sourcing liquidity—these and other equity-trading–tied services were the lifeblood of Wall Street. Fund managers, via directed trades, lapped it all up and in return fed bank-owned brokers billions in commissions. Then came the Dodd–Frank Act, which led banks to scale back on capital-at-risk, and an even more dramatically disruptive trend: the rise of automated, or algorithmic, trading.

    Today, the interaction between money managers (“buy side”) and institutional brokers (“sell side”) is focused primarily on managers getting access to bank-run electronic trading venues known as “dark pools.” Though the institutional equity trading business has shrunk to a shell of its former self, an unshakable symbiosis remains between the two “sides.”

    One can never underestimate the intangible benefit of a longstanding, trusted relationship. And certain mutual fund managers may want to consider those benefits when deciding whether to dole out commissions or reel them in, according to Shen, Parwada, Siaw, and Tan, whose paper, “The Value of Institutional Brokerage Relationships: Evidence from the Collapse of Lehman Brothers,” is the subject of this ARX Practitioner’s Brief.

    “There is still much that we do not know about how fund managers’ performance is related to institutional brokers because it is difficult to measure relationship capital,” the authors write as they tee up their research work, which cleverly holds a mirror up to one question—“What do brokers really offer fund managers?”—by asking another instead: “How would a fund manager suffer if one of their trusted brokers suddenly was removed from the equation?

    WHAT’S THE INVESTMENT ISSUE?
    Although fund managers have become less reliant on sell-side research, billions in commissions
    still flow from fund managers to brokers. Analysts can’t offer the kind of insider intelligence that they once could (because of the US SEC’s Regulation Fair Disclosure), but information is still to be had, say, from a bank-facilitated meeting with a management team.

    The reality is there are thousands of stocks out there to be covered but only so many analysts a buy-side firm can afford to employ. Unavoidably, fund managers continue to steer trades to institutional brokers in exchange for a bundle of premium services, which may include research, execution, meetings, conferences, and a certain level of recognition on the part of fund managers that they can rely on their trading partners in a pinch. But does all of that translate into better investment performance? If not, what’s the point of having an institutional broker?

    HOW DO THE AUTHORS TACKLE THIS ISSUE?
    The collapse of Lehman Brothers on 15 September 2008 was the largest bankruptcy in US history. For the authors, it was the perfect setting to answer the question, “What happens to fund managers when one of their key brokers goes out of commission?” Using data from US SEC Form N-SAR (through which mutual funds disclose to whom trading commissions are paid), the authors identified more than 730 mutual fund clients of Lehman Brothers just before the crisis; they then compared that group’s performance over a 48-month period (September 2006 through August 2010) to 366 non-Lehman mutual fund clients.

    It is worth noting that Lehman’s brokerage arm did not instantaneously vanish in the collapse. The authors assert a causal impact on the Lehman mutual fund clients not from Lehman’s disappearance but rather from the severe disruption of its brokerage unit. Disrupted is one way to put it: the unit was liquidated and absorbed abruptly and chaotically into Barclays Capital. Trust evaporated. Of 25,000 employees, one-third were let go more or less immediately and another one-third left within two years. Still, one would think that certain key people were retained and to some degree some form of value was rendered. Besides, most fund managers had plenty of other brokers in their stables, and further, what value did brokers even provide in the first place?

    For fund managers, assessing the value added by their institutional brokers had long been a challenging exercise. Perceptions at the time of the Lehman collapse were largely that the value of such brokers had already diminished. And yet …

    WHAT ARE THE FINDINGS?
    The authors found that certain types of fund managers experienced a decrease in performance when Lehman became severely impaired. They pointed to monthly return lags averaging as much as 70 basis points per month relative to those fund managers who weren’t affected. Hardest hit were smaller firms that by design had exceedingly concentrated brokerage networks; also hurt were those firms that specialized in small-cap investments and thus were overly reliant on the deeper breadth of sell-side research. Put another way, these types of small/small-cap–focused firms were the ones extracting the most value from their broker relationships. Portfolio managers, especially smaller ones, strategically channeled a large portion of orders to a few brokers to get more bang for their commission bucks. And this reliance came at a risk. Damage to one key broker resulted in a reduction in alpha.

    WHAT ARE THE IMPLICATIONS FOR INVESTORS AND INVESTMENT PROFESSIONALS?
    Human capital shouldn’t be underestimated. Trusted brokers leverage myriad relationships built up over time to incalculable effect—sometimes you really don’t know what you’ve got until it’s gone. Downsizing doesn’t always pay dividends. It’s still important, particularly for small-in-size/small-cap–focused fund managers, to maintain close ties with institutional brokers. Although certain funds may resort to establishing new relationships, doing so involves significant switching costs and the forfeit of any relationship capital developed in the prior relationships. Overall, relationships still matter—perhaps to an ever-lessening degree in equities, but they still matter. Lehman’s collapse made for a fine experiment. But now, 10 years later, the authors’ findings, while surprising, nevertheless ring increasingly irrelevant with each passing day as more buying and selling occurs autonomously via algorithmic trading.

    The authors challenge their peers to take up similar research in fixed income, where trusted human capital remains truly valuable. The give-and-take between sell side and buy side in fixed income would seem exceptionally rife for further exploration. But that is another story.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Summarized by Rich Blake. Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News and Institutional Investor. The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the authors’ employers.