Embrace the Changing Investment Landscape

Excellent speakers are not just feeding you with information, summaries or answers, they open your mind, stimulate your intellectual curiosity and teach you methodologies, so that you are well equipped and motivated to search for the answers yourself.

I am grateful for CFA UK society as it has kept me plugged in on what's going on in the City.  My job was to run investment portfolios for private clients from one of London's wealthy suburbs, you could argue that in a digital world with the wonderful Bloomberg terminal, portfolio managers don't need to be physically in the heart of the financial centre to do their job.  You will get the Bank of England announcements simultaneously whether you are next to the Bank of England or in a boat on the Grand Union Canal - well, not a typical office place for a portfolio manager but you get the point.  Having said this, CFA UK offer a platform for people to connect, voice their opinions, and possibly find people to do business with. The people there come from various background, with diverse work experience, different views and goals in life. Endurance is the only thing in common considering everyone has gone through or going through the pain of the CFA programme.  Everyone I met gave me a bit of inspirations in the work I do or the life I lead.  All I needed to do is to hop on the tube to the City and meet these people, at no cost! To me, this is priceless.

One recent event organised by the society was of top quality. It had a rather plain vanilla heading - Succeeding in the Changing Investment Profession, but was packed with brilliant speakers and topics. What are the challenges in this changing world for investment professionals? I would think that the obvious ones are regulations and low rate of returns. These, among other things, have made banks and wealth managers remodel their businesses. For example, due to the higher capital requirements posed by central banks after the financial crisis, investment banks have retreated from certain businesses that are too expensive to operate. On the other hand, the low rate environment also made low-cost passive investing look attractive to investors, and encouraged a lot of new product innovations.

Rather than making this event resemble more of a compliance and regulation briefing, our key note speaker, Peter Harrison, head of investment at Schroders, led us to see the bigger trends: 1) client fragmentations 2) specialisation 3) digital era 4) aging in investment decision makers 5) globalisation.

The first one was driven by the demand of more bespoke services and to some extent by the retreat of certain client services by investment banks. As a result, wealth management boutiques have prospered in the city over the last couple of decades. Peter thinks this may well continue. The second observation is actually a worry of his in that young investment professionals are made to be too specialised too early in their careers. This may hinder the progress to a more general role in management or executives.  Whilst this phenomenon is rather difficult to change, he encourages us to take some risks, seize opportunities to get more general experience and be a little more entrepreneurial.  The third one is a topic echoed a few times in this event, which I frankly didn't give too much thoughts on previously.  Our industry has grown to be very technical indeed.  We probably have the most sophisticated mathematical models, computer programme, and managed to lure a good number of physics PhDs away from their own profession.  In fact, Peter is talking about utilising data and network to analyse patterns, drive investment performance, solve problems, and drive sales.  Like many other industries, we should also be searching ways to use big data and social media. I am fascinated by this topic although not much clue in the practicalities. The fourth one is Peter's observation that people are generally given decision making responsibilities later and later in their careers. With age usually comes experience. But the ability to innovate are not necessarily linked to age. I actually see values in both young and old. In fact, I quite like a team of more experienced with less experienced, male and female, English and French... must be a very stimulating place! The fifth one is to encourage young professionals to gain knowledge and exposure in different countries as there is an increasing demand from clients for global solutions.

So I think these 5 points really talked about opportunities and how you could take a slightly different viewpoint and seize them.  There will always be changes. The reasons why you were successful in the past may not be the reasons why you continue to be so.  Particularly in investment, it is almost impossible to have consistent success without any failure. Therefore, to be mindful of new challenges and be resilient in case of any misstep are the key to a respectable career.

All the speakers of the event shares their reasons to chose and stay in their careers, their tips and philosophies, and their moments of setbacks, with honesty. Poppy Allonby of BlackRock chose energy research in 2000 against all odds (including a decade of oil price bear market), because she had tremendous respects for the investment manager and the team.  Alexandra Haggard of Russell Investments urged young professionals to not only get a broad understanding of economic issues but also be prepared to go deep into the granularities. So when problems need to be solved, you are able to pull it off.  James Waterworth of Lyxor was made redundant in his first job during the financial crisis. He decided to recharge himself by doing a master in applied finance. Looking back, he thought that being fired was probably the best thing ever happened.

The event was concluded by a rather unexpected guest speaker, a neuroscientist.  Dr. Tara Swart, founder of The Unlimited Mind, gave us a brief introduction on how neuroscience can be applied to work.  Until she pointed out, I haven't thought about taking care of or exercising my brain.  If you think this is irrelevant, like I did initially, then ask yourself if you feel comfortable making big decisions when you are sleepy or stressed.   Investment decisions, in my mind, are the result of data analysis, inductive reasoning and a bit of gut feeling.  A complex process as it is, we want to stay sharp rather than having decision fatigues.  I recommend you read her blogs to get one or two practical ideas.

So really how to succeed in the changing investment profession? Try this recipe - to see changes as opportunities, be adaptive, be resilient, be a bit more creative, and apply a few neuroscience techniques. This may well be a recipe for success in any profession :)

Enjoy June!

Learning the piano as an adult? You are not alone

There is a reason why people learn piano quicker when they were kids. Because they haven't got bad habits to break.  As adults, we have been using our fingers in the most quirky way on electronic devices for years. Some examples here, our right index finger is repetitively clicking the mouse, our thumb is stretching uncomfortably on smart phone screens, our thumbs also hit space key too hard (because we enjoy hearing the sound it makes?!), and people who use a lot of short cuts on a computer keyboard may find their left little fingers hurt.  Oh, have you noticed your right hand fingers are bending slightly towards your middle finger as a result of holding the mouse upto 8 hours a day, 250 days a year?

So much for the inconvenient truth. When I started learning piano early last year, one of the hurdles is to get all ten fingers to sound the same by specially controlling the fingers that have been abused on electronic devices in the above-mentioned ways. So for adults, it is harder because our brains know what our hands should do but our hands are resisting the brain's order.  I was lucky that my tutor pays much attention to the techniques and never tolerate a bad habit. So under the proper guidance, a few problematic fingers are more under control. Now I can start to enjoy the sound I can make on a piano. 

To progress, daily exercise is essential, even if it is half an hour. I am a new mom and also work from home. So when the baby takes a nap, I do a few sight readings or exercises.  The baby also gets very excited and makes operatic octave changes when hearing me playing.  He might remember that I took the Prep Test when I was 7 month pregnant.

Yesterday I joined a number of primary school boys and girls to take the ABRSM grade 1 exam.  I set no ambitious target for myself or any grand plan for my child. I embark on this journey just to fulfill my childhood dream.  For readers of my blog who have been thinking about learning a music instrument for some time, my humble opinion is that you should invest your time and £ to give it a go.  Just be patient when overcoming the hand and fingers coordination issues which office workers all seem to have.

Do you have the E-factor? 你是否有创业者气质？

我有幸在2013年底的一次创业者的活动中结识了剑桥汇智教育的创始人兼总裁潘晓菡博士。她毕业于剑桥大学生物技术学院，盖茨奖学金学者。随后加入伦敦一家对冲基金专门研究亚太区股票，四年后成功转型到教育领域，创办了自己的公司 Wedge Education

第一次见面就感觉晓菡有很强的气场。她略施淡妆，齐肩的直发别在耳后，着一条线条简单的深蓝色的长袖连衣裙，除了左手无名指上耀眼的婚戒再没有多余的首饰。她说话底气很足，也非常有条理。但让我印象最深的是她在讲述自己的事业时那种发自内心的快乐。她的经历和理念也让我对教育的意义有了新的思考。她把自己比喻成一个门楔子，用自己的能力帮助有抱负的年轻人打开一道面向世界的门。但她远远不止是一个平凡的门楔子。晓菡在剑桥，牛津，和伦敦金融圈有多年积累下来的资源和关系，使得她有能力邀请资深人士共同打造一流的课程。不同于国内市场上琳琅满目的游学项目的以游为主，晓菡设计的课程会给学员以智力上挑战，观念上的冲击，和社交上的开阔视野。所以我更觉得她是站在一个制高点，把有抱负的年轻人拉上了一个新的平台，把他们的眼光放远拓宽，以达到树立人生目标改变人生轨迹的教育目的。

和我一样，晓菡也是个新妈妈，所以我们有不少共同话题。最近我约她在塔桥附近喝下午茶，聊了聊她的收获和挑战，也想听听她对我的一些想法的建议。很多女性在孩子诞生后在心理和观念上会发生了很大的转变，生活重心毫无疑问会变，而且对自己的责任和角色，都有了新的规划。英国一年的产假可以给很多职业女性一个机会回顾自己的日常工作，梳理思路，并设定职业上新的目标。晓菡在这期间选择转行做教育并不是突发灵感。2009年还在剑桥就读的她组织过一次交换项目，其中一位中国学生感慨到那次经历改变了他的人生。她觉得这一行能综合她多年积累的经验，知识和资源，所以公司成立之初就能请到资深的咨询和得力的合伙人加盟。她认为合适的合伙人需要有相似的价值观，互相兼容的性格，和能力上的互补。有点像选终身伴侣一样！另外创业也非常需要家人的支持，因为毕竟不是朝九晚五，每月固定时间拿薪水。

作为公司创始人，她不仅要考虑如何推广品牌和制定长期的策略，还要有耐心和高效地办妥各种琐碎的事情。她跟我分享了第一期课程中的出现的一些小插曲，毕竟几十号不同背景年龄段的学员从中国到伦敦来生活学习了两个周。如何处理这些“状况“，并达到超出预期的效果，这是在考验她的危机处理能力。

让我欣赏的是她毫无保留地分享她的经验，甚至一些诀窍，让我确实有听君一席话胜读十年书的感觉。我希望她的事业继续发展，让更多的有创业激情的人从她的课程中受益，从她身上学习创业者的素质。难怪剑桥的盖茨学者联盟把她的经验作为典范。

The modern practice of value investing

I do like the idea of value investing. In daily life, there seem to be three types of value. One: "Tesco Value Range",  these products have a lower price point than brands with better quality. Two: Brand Sales, they are good quality products but are on discount for a certain time period. Three: Competitive Brand, they are good quality products at slightly cheaper prices than other brands with similar quality.  My shopping basket is made of a bit of all three - they all make me happy.  The following three managers have all managed superior performance but with very different take on the principles of value investing.

At the end of February, I was invited to an oval table lunch/presentation by two co-managers of the Schroder Recovery Fund,  Kevin and Nick, who are passionate advocates for value investing. They publish investment views regularly through their website and twitter account @Thevalueteam.  They describe themselves as contrarian, disciplined and open-minded. There is historic evidence that biggest annualised return over the last 10 years have been achieved by companies with lowest cyclical adjusted P/E. They believe the biggest driver of whether you make money is what you pay. Therefore, cyclical adjusted P/E is probably the first and foremost thing to look at when they select a stock.  Under this approach, you could end up having stock ideas that are very unpopular, and may remain so for very long time. So, investors of this type of strategy must be hardheads who are able to endure pains and be different to the consensus. What motivate them is the possibility of some stocks making staggering returns. Although the managers don't think the macro is playing important role in their investment approach, it is fair to say that the macro environment has been very favorable to their recovery strategy. The obvious beneficiaries of monetary and fiscal policies post financial crisis are UK bankings and home builders. Low interest rates also allow many small business to survive, or being bought, rather than fall into bankruptcy. I am inclined to view them as deep value investor.

Organised by CFA UK Value Investing Special Interest Group, I joined a talk/discussion led by Tim Sanderson of Sanderson Asset Management  in a pub. They are more along the line of investing in "good companies at reasonable prices" (Buffett).  Recognising the importance of initial purchase price in determining long term return, they place equal emphasis on compound profits' growth at a higher rate thereafter. Guided by this belief, their selection process tend to produce many ideas in the mid cap space. They look for solid balance sheets, proven profit growth over 5-10 years and potential for further growth in profits and dividends. I would say they are more conservative in pursuing returns.

An Investors Chronicle article drove my fascination in value investing higher by studying John Neff's investing approach. He looked for reliable, conservatively valued companies to hold for the long term. Specifically, he screened out the cheapest stocks - the lowest quarter of PE, as well as the most expensive. I would think this is also along the line of good companies at reasonable prices.

The principle does not only apply to stocks. In a fund update given by the country's top bond manager, Richard Woolnough, he shared one example of picking values with me after the event. At the start of the Euro Area Crisis, many institutional investors were selling the whole European stock indices in a heartbeat.  Nestle suddenly flashed on the computer screen in front of him at a price that could't be justified by its valuation. He made a decision to purchase the stock and the rest is history.

Finally, the view from Alex Grispos at Ruffer, who does not label himself as either value of growth but is also very successful, may provide an interesting perspective on this subject. Stock is a share of a business, he must like the business first. Hence his stock selection does not start with a quantitative screening. Surely there are many ways to invest successfully, please feel free to share your views and experience under this post.

Your own brand

I have read the Trump Card by Ivanka Trump again recently.  An heiress who is "happen" to be rich and famous is not at all surprising. Even the fact that she has built a successful career is often viewed as a "dah", considering how much resources and opportunities are available to her. Yes she has the upbringing, the wealth and the last name that people can only dream of, I still admire her being a high achieving woman and entrepreneur.  I recommend young women, and men, read this book, as it gives out tangible career and business advice. Sometimes these pieces of advice do not necessarily need to be novel or fancy. In fact, there are sets of principles that will always apply, whether you are fresh graduates or top executives. These are normally common sense principles, for example, don't be late, check typos in your emails. If you do these, you won't get any extra brownie points but if you don't, you will immediately feel the negative impacts.

What I also like about the book is that Ivanka described the journey she took to discover and establish her own identify and brand when launching her fine jewelry business.  This is inspiring for entrepreneurs who have started but have not really found the edge, or who are still putting together their business plans. I recently asked a group of entrepreneurs, after they decided to launch a business, what was the first thing they did the next morning. The answers include, get a good accountant, register a company (for 20 odd pounds), and find your target market. The answer is unique to everyone.  But no one said that they had a lie-in the next morning, and ended up doing nothing about their business idea.  Well, many people did not have a lie-in but legitimately had a second thought about the business idea. They felt the barrier to entry to too high in the market they wish to pursue, or the market is already saturated.  There people (including me), who simply went through the motions, are not entrepreneurs, yet.

Everyday, things get invented and new business are formed. I recently came cross an article about the set up cost of an asset management business. The first impression was gee, £1 million sunk cost, 5 years to break even! Then I read it again carefully and had a pen in hand to write down the cost items. It turned out, the author went for the maximum you could spend for each item and include items that may not apply for all businesses.  The picture suddenly become less discouraging than the author painted.  The barrier to entry may not be as high as you thought.

Back to the question on what to do the next day should you wish to go on a business venture, my view is you could think about your brand, in other words, what do you (and your business) stand for. We are not the daughter of Donald Trump, but there is a brand for each one of us. It is a matter of finding it out and putting it out there. The "putting it out there" bit is easier considering the number of social media means available. You can hyperlink your LinkedIn pages to a CV document, just to add one more dimension to your otherwise fairly standard CV. Blogger and personal website could also be another good way to brand yourself in front of your clients, employers or business partners. But be sure to have a consistent image via these social media, so that it is memorable.  The rationale is simple, if you open a can of Coke and it tastes differently each time, then you don't have a brand.

OECD Forecasts During & After the Financial Crisis: A Post-Mortem

I attended the titled event at Bloomberg's futuristic London office on 11 February 2014.  Pier Carlo Padoan, Chief Economist at OECD, gave us a keynote on one of the policy notes produced by OECD's economics department. The note was to dissect (to echo the name of the note) the forecasting errors over 2007-2012 with the hope to draw lessons and improve both the data and the methodology of future forecasting.

One of the main findings is that the GDP growth was overestimated on average across 2007-2012, in other word, none of the forecasting models from OECD, IMF or other major international organizations predicted the 2008/9 financial crisis and the 2010 Euro crisis. This is not new news.  The good news is OECD have beat themselves really hard by reviewing where went wrong and have come up with a list of developments so the audience started to feel a little better.  

There are two questions lingering in my mind: First, are we fooling ourselves by believing we can accurately forecast future crises if we had considered all relevant factors and used all the data in the world? Mr Padoan mentioned that their model failed to forecast the Oil Crisis in the 1970's and they have drawn lessons and improved their forecasting technique since. Unfortunately, 30 odd years later, their forecasts failed again. The available data and indicators have grown in both quality and frequency in the last few decades, and forecasters are now even talking about "big data" (suppose they know what it is). But are data really the solution? This lead to my next question, are we using the right model or is there a right model? One of the panelists, Prof. Paul de Grauwe, from LSE argued that the model used by mainstream economists is wrong. This was due to the failure to diagnose what caused this crisis. In his view, the prolonged crisis was caused by demand side problems whilst fiscal policy makers are looking for answer from the supply side.  I am not in a position to agree or disagree with this view but this could partly explain what went wrong in previous forecasts.  

I believe that forecasting is indeed difficult. Mr Padoan pointed out that major international organizations tend to use similar methods, which means they tend to be wrong at the same time.  This is probably why the creditability of these forecasts were called into questions, a bit like the ratings from credit rating agencies. This is also why I personally spend no more than 5 second on a piece of news with "GDP forecast" in its title. Having said all that, I am hopeful that by thinking independently and creatively, these orgnisations could provide invaluable market intelligence, which could assist investors, business owners, and governments in making their decisions.

My mind was tangled with these questions (too high IQ to cope) after the event until my husband asked me an excellent question: what does OECD do.  According their website:

The mission of the Organisation for Economic Co-operation and Development (OECD) is to promote policies that will improve the economic and social well-being of people around the world.

Can a wildly inaccurate GDP forecast contribute to this mission?  To me, what I really hope to get from them is not a GDP number. I hope they could communicate these numbers better by breaking them down and explain what these means. For example, a 2% GDP growth in country A is different to a 2% GDP growth in country B because country A has 2% more people working with 0 productivity growth whilst country B has 2% productivity growth without adding one man in the workforce.  Interpreting numbers is far more important if business and investment decisions are to be made based on them.

Perhaps OECD can educate users on the extend (probability) users should apply to the numbers' accuracy, equip users with data and tool to do their own forecasts.  In a perfect world where individuals have their own forecasts, you may get 50% of the people right and another half wrong. For example, one out of the two exporting business owners decided to increase production in China, which matched the demand exactly.  Whereas, if we have international authorities doing synchronized forecasts, with a poor historic error rate, and users use them without pinch of salt, you could potentially end up having 100% of the people wrong. This means two out of the two exporting business owners decided to increase production in China which exceed the demand, causing overcapacity, financial loss, and etc etc.

The event is nonetheless thought provoking and not a single second has been wasted both during and after the event.