2010 Charter Financial Analyst Institute Conference
Boston, Massachusetts – May 16-19
Julie Bryan, Vice President, Research
MKG Financial Group, Inc.

Contemplations about the Past, Present and Future

As we go about our day-to-day life, we sometimes are presented with the opportunity to step back and look at events in historical perspective, assess what we think about the present, and try to frame our outlook for the future. The Chartered Financial Analyst (CFA) Annual Conference is just such an opportunity for those involved in financial investments and portfolio management. The Annual CFA conference was held May 16-19 this year. Approximately 1600 attendees from 65 countries attended this year. The CFA Institute, which organizes this event, seeks to add value to furthering the excellence in financial analysis, portfolio management, corporate governance, and ethical behavior within the profession.

The theme of the annual conference this year was: REFOCUS – Your thinking, Your networks, Your profession. The topics included analysis of past crises to risk management to investment opportunities to financial regulation to rebuilding the financial services industry. Currency outlooks, sovereign debt issues, potential hedge fund regulation, geopolitics, and equity/fixed income analysis were key components of the topic discussions.

I have attended a number of the conferences in the past and appreciate the opportunity both to listen to some of the industry’s leading professionals present their thoughts on topical issues and to discuss these issues with my peers over the approximate 3 days of this conference. My key conclusions from this conference are as follows: the sovereign debt issues will likely continue for some time to come and the consequence will be muted global economic growth; I believe the euro will survive, but not without pain; China will be a powerful economic force with growing global influence in an increasingly nonpolar world; and more, rather than less regulation is coming in order to stem the fall out that comes from greed that is systemically enabled. As Dr. George Akerlof of UC Berkeley so graphically depicted, when children are let out of a playpen, one needs to watch them more carefully…”appropriate regulation keeps animal spirits under control” (Dr. Geroge Akerlof).

Over the last few years, behavioral finance has increasingly been an area of focus with respect to the financial markets. While the efficient market hypothesis asserts that all public information is efficiently priced into the market, human emotions such as fear, greed, and “groupthink” suggest that both fundamentals and behavioral factors may play a role in stock price movements. As well, given what appears to be more rather than less geopolitical concerns over the next few years, sovereign risks, and potentially lumpy economic growth, recent volatility in the financial markets may become more of the norm as the global economy sorts through the issues. Interestingly, however, in contrast with the sovereign debts issues, many U.S. corporations have shored up their balance sheets and reigned in spending to protect cash flow quite expeditiously since the financial crisis of 2008.

After listening to various speakers, the outlook for China seems to present both opportunities and risks. Ken Rogoff, the Thomas Cabot Professor of public policy at Harvard University, shared some of his findings from his book “This Time is Different”, which brings quantitative analysis to the history of crises into focus. He pointed out how economies do not bounce back crisply after a financial crisis, while stock prices do. The United States has, to date, followed a fairly typical path in historical context. As we look at China and the enthusiasm for its growth prospects, the potential for bubbles, as well as the potential for 8% plus growth over the next few years suggests both opportunities and threats. History demonstrates that circumstances and particulars change, yet the notion that economic principles will not hold because “this time is different” generally turns out not to be the case. Ian Bremmer from the Eurasia Group shared some of his thoughtful insights on China. He noted that the state is becoming a principle actor in the global market rather than corporations. That suggests that U.S. corporations will have to either adapt to that market or provide a service/product that is absolutely necessary to China. Over time if China intends to become more independent within the global economy, its longer term possibilities include: diversifying its exports, moving up the value chain and keeping more of the profits at home, and/or building out the Chinese consumer.

Lastly, but very importantly, the topic of regulation and rebuilding the financial services industry offered some key takeaways. After listening to Mary Shapiro of the SEC, strategic regulation that is investor focused appears to be in the offing. This includes working toward global accounting standards, increased financial transparency, management accountability, and aggressively pursuing market/management abuses such as Ponzi schemes. One of the last speakers was John Bogle who founded the Vanguard Group. He has spent his professional career advocating for investor focused agendas and good stewardship. He was joined by Christopher Davis of Davis Advisors, and the topic was “The Way Forward, Rebuilding the Financial Services Industry”. Their presentation, in conjunction with other presentations during the conference, suggest to me that reducing complexity, adding goal oriented regulation, and increasing management-shareholder aligned incentives will go a long way toward rebuilding confidence in the financial markets and the financial services industry.