CFA Institute 2010 European Investment Conference

By Anne-Louise Fogtmann

The single greatest threat to a wealthy family's legacy isn't underperformance in the financial markets; it's intra-family conflict, says consultant Barbara Hauser, principal of Barbara R. Hauser LLC. Unfortunately, the statistics on enduring legacies aren't promising: As Hauser told attendees at last week's Third Annual CFA Institute European Investment Conference in Copenhagen, large families "generally fall apart within three generations." But the odds can be improved considerably, she said, by having a good family governance system in place.

Good governance is "part of risk management," Hauser asserted. Its role may be especially key for families with operating businesses. "It's not just the markets that affect the business," she said, "but also the family behind the business."

What exactly is family governance? Hauser's definition is "a system of making decisions together." One best practice, she explained, is to create a family council by having the full family elect a representative group to make decisions that might include overseeing investment strategy; selecting money managers; coordinating with the family office (if there is one); educating family members about investments; and developing investment plans for each generation.

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By Ed Bace, CFA

Lars Christensen, chief analyst and head of emerging markets research at Danske Markets, a unit of Danske Bank, offered attendees at this week's Third Annual CFA Institute European Investment Conference a ray of sunlight that stood in contrast to the somewhat dreary Danish weather. The outlook for Central and Eastern European (CEE) economies, he said, was "surprisingly good."

Christensen — a monetarist who authored a book in Danish about Milton Friedman and who co-authored a 2006 paper foretelling Iceland's financial and economic collapse — said that recovery in the CEE economies has continued apace over the last couple of months, supported mostly by a recovery in the manufacturing sectors as well as a strong rise in exports. His macro forecast suggests overall positive GDP growth in the CEE economies this year, with the exception of Latvia and Hungry. Growth in the region in 2011, he maintained, would exceed that of 2010, with little risk of asset bubbles.

The strongest performance in the region, Christensen noted, has been in Poland, where private consumption has been "nearly unaffected by the global credit crisis" and inflation is well under control.

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By Len Costa and Line Wolf Nielsen

Well-timed bearish calls have made a star out of Nouriel Roubini, professor of economics and international business at New York University’s Stern School of Business and chairman of Roubini Global Economics, a web-based consultancy. To judge by his closing keynote address today at the Third Annual CFA Institute European Investment Conference in Copenhagen, he isn't about to dramatically alter his dreary outlook. Still, in predicting a V-shaped rebound for emerging markets (ex northern and southern central Europe) and a U-shaped recovery for most advanced economies, his Dr. Doom moniker may be wearing thin.

That's not to say that Roubini has become an optimist — not by any stretch. He described his current views as "more bearish than consensus," and opened his talk by citing the "huge amount of economic, financial, policy, political, and regulatory uncertainty." For now, Roubini said, "risk is on," and asset prices are rising. But he argued that there are plenty of downside risks to the global economy that could lead to a correction in risky assets as well as in the real economy. 

Roubini predicted that a period of balance sheet repair will lead to several years of sub-par, anemic growth in most advanced economies. However, he said that investors still cannot rule out the residual risk of a double-dip recession in the United States, Japan, or the periphery of the eurozone — and he put the odds of that happening at 25%-30%.

Potential triggers: (1) another bout of sovereign risk fears in Europe, this time in Ireland, Portugal, or Spain, that feed back to the real economy; or (2) economic growth that surprises on the downside, raising fears of a double dip that become self-fulfilling as heightened risk aversion leads to higher volatility, a stock market correction, and widening credit spreads. 

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By Anne-Louise Fogtmann

In a session yesterday at the Third Annual CFA Institute European Investment Conference in Copenhagen, analyst Willis Sparks of consulting firm Eurasia Group highlighted key political fault lines that will shape international finance in the coming years. He focused on emerging markets, which his firm defines as countries where "politics matter at least as much as fundamentals in shaping market outcomes."

In China, Sparks argued that "political survival" is the key driver of government decision-making, which Eurasia Group founder Ian Bremmer has labeled "state capitalism." Topping the list of the regime's imperatives: creating the 10-12 million jobs needed each year to maintain stability.

Although the Chinese are much more open to foreign direct investment (FDI), Sparks said, investors need to understand where the government wants FDI and where it doesn't if they are to prosper. In the latest Five-Year Plan, for example, one objective was clear, Sparks said: creating geographically balanced growth by supporting underdeveloped areas of the country. Key sectors currently favored by the government include high tech and light rail.

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By Charlie Henneman, CFA

At the Third Annual CFA Institute European Investment Conference in Copenhagen today, Kostas Iordanidis, managing partner at KI Capital, a Swiss financial advisory firm, explained the dynamics of market liquidity and the causes of the 6 May “Flash Crash,” in which the U.S. Dow Jones Industrial Average plummeted roughly 600 points, only to recover within minutes. He also recommended some changes that might prevent similar events from occurring in the future. That objective, of course, is currently a hot topic among regulators.

Iordanidis defined the three aspects of market liquidity as (1) market breadth, or tightness in the bid/ask spread; (2) market depth, as measured by the volume that can be executed with limited price slippage; and (3) market resilience, or how fast prices move back to equilibrium following a large transaction.

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By Anne-Louise Fogtmann

How much debt is too much debt? It's a question on every investor's mind these days. In a session yesterday at the Third Annual CFA Institute European Investment Conference in Copenhagen, Matt King, global head of credit products strategy at Citigroup, offered up his analysis. 

He began by noting the sheer level of uncertainty surrounding debt and its impact on markets. "It’s striking how confused everyone is right now — no one has any confidence," he said. The uncertainty we all feel as investors, King argued, is a function of debt.

King described forecasts for GDP growth in the United States, the United Kingdom, and the eurozone as "below par, but not disastrous," and noted that various recession indicators, including yield curve inversion, tight lending standards, high inventories, and below-trend savings rates "aren't blinking."

Nonetheless, despite low rates and quantitative easing, the accelerator isn't working, to borrow King's metaphor.

Corporate leverage has already fallen sharply, he noted. However, non-financial debt is "as high as ever." And it's the accumulated debt that creates the uncertainty, King said.

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By Ed Bace, CFA

Asset/liability management is a commonly understood framework in the world of pension funds. In a session yesterday at the Third Annual European Investment Conference in Copenhagen, EDHEC Business School professor Lionel Martellini — who also serves as the scientific director of EDHEC−Risk, a research institute — presented strategies for applying asset/liability management to the business of private wealth management, providing a much-needed framework to help facilitate the challenge of meeting client needs and expectations.

Although all clients have their own objectives and constraints, an asset/liability strategy can accommodate them, Martellini argued, given that full client profiles can be incorporated into portfolio construction.

In a private client context, “liabilities” are consumption objectives, which the portfolio matches to assets while still preserving wealth, as in any liability-driven investing (LDI) strategy.

Then, two additional paradigms are overlaid on the framework: life cycle investing (LCI) and risk control investing (RCI). This step involves dividing the portfolio into two distinct parts (the “fund separation theorem”). The first portfolio is the standard maximum Sharpe Ratio (MSR) performance-seeking one (PSP), while the second is the dedicated liability-hedging core portfolio (LHP), equivalent to a risk-free asset (mainly hedged against inflation, using inflation-linked instruments). The sum of these two represents the total portfolio.

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By Charles Ferro

In a session yesterday at the Third Annual European Investment Conference in Copenhagen, GeoEconomica's Sven Behrendt, formerly a visiting scholar at the Carnegie Middle East Center, recapped the substantial scope and reach of sovereign wealth funds (SWFs); discussed political reactions to their growth in recent years; and reviewed the efficacy of the Santiago Principles, which established a governance and accountability framework and were published in September 2008 by 26 members of the International Working Group of SWFs.

Looking to the future, Behrendt predicted that more countries would establish SWFs as “part of a broader nation-state building process." However, the growth of SWFs and their investment activities outside their own countries' borders have raised a considerable degree of unease around the globe. Governments continue to wonder, as Behrendt put it succinctly, "Are they in it for monetary gains or [geo-] political advantage?” 

Today, SWFs are estimated to manage around $2.3 trillion in assets, although there are many transparency issues and analysts have some questions about the actual size of the asset base. Roughly two-thirds of the estimated total is allocated to fixed-income securities and equities. As Behrendt pointed out, “many analysts would throw their hands up in horror" because of the mystery surrounding the balance.

Is the recent concern about the growth of SWFs based on fears of a dominant China, given the size and reach of the China Investment Corporation, the third-largest SWF by asset value?

“Yes, there are U.S. concerns of shuffling the balance of power,” said Behrendt, in response to the question. “And I believe policymakers in the west are generally concerned.”

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By Charles Ferro

Ulrik Dan Weuder, a portfolio manager in the BETA group at ATP, the Danish pension fund, considers the investment opportunities in infrastructure to be a simple question of supply and demand. Some governments will come under pressure to create, expand, or improve infrastructure, he said, while others will do so as a social duty. Either way, governments will increasingly be willing to allow “outsiders” to invest and earn a return, creating opportunities for those who understand how to evaluate the risks.

Where to look? Weuder highlighted utilities and transport — two of the most well-known in the sector — as well as social infrastructure services such as healthcare, schools, and "law and order" investments. Also in the mix were what he termed “exotics,” such as lotteries, service stations, parking lots, and ferry lines.

Some infrastructure investments, such as airports, create a cash stream from the start and offer the potential for enhanced performance through innovation. Other opportunities — such as the restrooms that Weuder's employer, ATP, owns along German highways — reach their value once they are built and cannot really be optimized. Returns vary from 7-10% for hospitals, schools, government buildings, and transport to 12-18% for greenfield opportunities and general and non-regulated infrastructure, according to Weuder's presentation.

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