What are your club’s big initiatives?
The UBC MBA finance club has had five major initiatives this past year: (i) provide students with practical skills to compliment the mostly theoretical lecture-based material taught in class, (ii) introduce students to portfolio management via an investopedia portfolio competition, (iii) provide mentoring/interview preparation for students applying for jobs in the finance sector, (iv) provide information on professional designations that are considered an asset in the finance industry, and; (v) provide small-scale networking events with local finance professionals.
Who is the most exciting speaker you have had this year?
The Sauder School of business puts on regular speaker series referred to as the “Dean’s Speaker Series”, which all finance club members are encouraged to attend and discuss post lecture. One of the most thought-provoking speakers was Dominic Barton - the Global Managing Director of McKinsey. Dominic prefaced his conversation by requesting that none of what he said be re-printed, I will honour that request but provide you with my favourite quote (paraphrased) from his talk: “you should go through life with a microscope in one eye and a telescope in the other”. Dominic attributed this quote to the late Jim Flaherty. The quote has relevance for the finance sector; where public companies can become myopically focused on quarter/quarter expectation driven results while losing sight of long-term strategy.
What is the best asset class to invest, in the current global situation? (Equities, bonds, commodities, cash, antiques, wines and commercial property?)
The answer to this question undoubtedly is – it depends. It depends on personal situations and accessibility of investment options. The majority of retail investors have access to stocks, bonds, and commodities. Alternative investments such as: collectables, real estate, and accredited investor products (ie. Private equity, hedge funds, VC funds, etc) – are available to only a small proportion of the investing public. In the current global situation of an unknown fallout from “shadow banking” concerns in China, turmoil in Russia and Ukraine, fragile and demographically un-balanced recovery in Europe, and a US bull market passing its fifth year - its hard for an investor to sift through the information to make a prudent investment decision. Recall the Jim Flaherty quote “go through life with a microscope in one eye and a telescope in the other”. The near term headwinds are personally concerning to me, the long-term looks assuredly positive. The “pivot to Asia” and “shift to Africa” motions are well underway in the former and in the early stages for the latter. These transitions are believed to include 100x the people and occur 10x faster than the Industrial Revolution. To make “telescope” based investment decisions keep the following driving forces in mind: (i) the rise of emerging markets, (ii) resource scarcity, (iii) massive urbanization – the largest migration the world has ever seen, and; (iv) population growth.
Have the financiers learnt the lessons of the financial crisis of the last six years?
Yes and No. Once again it depends on location. If we are talking about North American based investment banks, new regulation and capital requirements under Basel III have limited certain “risky” operations while providing more protection to the downside. That is not to say all risk has been mitigated, as the JPM London Whale fiasco has proven, banks remain difficult to regulate. The oft touted “too big to fail” may be one issue, the other may well be “too big to regulate”. With respect to other jurisdictions, China appears to be entering a situation that may feel similar to some market-watchers from the 2007 era. The rise of shadow banking and a housing market many experts are anticipating will crash leaving many home-owners underwater on their mortgage. However, China is not the US and has many unique considerations. For example, China’s largest banks, by assets, are state owned enterprises – which brings a whole new twist to the “too big to fail” discussion, try “too connected to fail”.
Is the CAPM still the Holy Grail for understanding risk and return on investment assets?
The CAPM is still taught and used to estimate the equity cost of capital. The component parts of the CAPM model – risk free rate, Beta and equity risk premium – are areas that are misused and remain moderately subjective. Whether one uses a regression-based beta, a “raw beta” as posted by Bloomberg, or a bottom-up approach to calculating Beta can have a large impact on the calculated cost of equity. Likewise the method for calculating the equity risk premium remains varied in practice, do you use: an Ibottson or Duff & Phelps ERP report, a long term geometric average of the market return, or an average of the market return using a truncated historical period? All of these considerations leave the CAPM open to multiple interpretations. Furthermore, what you use the CAPM for is important. For the purpose of equity valuation the following models are important: (i) FCFE DCF, (ii) Adjusted present value (“APV”), and; (iii) Real options.
Would the financial markets need regulation if financial institutions were allowed to fail whenever they made catastrophic mistakes?
The short answer is yes. To me the argument falls on a misalignment of incentives between stockholders and management. The argument goes something like this: in an unregulated environment senior executives, with significant upside potential from options, would make risky business decisions because the upside potential is a large payoff while the downside is small in comparison. A good historical example of a large bank that aligned management with shareholder interests is the Medici Bank (a 14th century Italian bank). Each bank branch was its own entity with managers of that branch owning equity in it. This proved valuable for two reasons: (i) managers engagement and attention to risk/reward scenarios was prudently assessed as they were meaningfully impacted by each decision, and (ii) the parent company, the Medici Bank, had protection to the downside as each branch operated as its own entity and one fail did not have a material impact on the firm. In today’s banking world, my belief is that regulation is needed to protect all stakeholders.
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