Unformatted text preview: Carnegie Mellon MBA
February 2003 Contents
Recent Developments in Accounting 01
An Interview with Dr. David Blitzer 03
Have Stock Buybacks Really 07
Can Banks Manage Money? 09
Euromarket Basics 10
Student Profiles 11
Daniel Bradley ‘03
Tanya Sander ‘03
Gus Glyptis ‘03
Scott Horrigan ‘03
Ain Vale ’04
Alumni Profile 15
Charles Thomas ‘91
Dreyfus Corporation Graduate Finance Association Review
Volume 1 • Number 1 Welcome
The Graduate Finance Association is a collection of Carnegie Mellon University
Master in Business Administration and Master of Science in Computational Finance
students committed to developing their knowledge of finance, accounting and
strategy. This is our first publication; one that we hope will serve to bridge the rift
that intermittently develops between academia and application.
Designed for monthly publication, each volume will offer research or opinion pieces
by current Carnegie Mellon business professors and students, profiles of students and
alumni and finally, a brief update on recent events at our institution. Future
publications will include but a brief introduction to each piece with directions to its
online address at our new website, which is to be rolled out in early March.
Should you wish to contribute content or learn more about our organization, please
visit us at our online address detailed at the end of this publication. If, instead, you
have questions or comments about a specific article, please feel free to contact the
The GFA Leadership News 16 Recent Developments in
By Dr. Jonathan Glover Over the past year, accounting and accountants have received more attention (mostly
critical of current practice) than they have in recent history. I think this attention will
serve accounting scholarship well. Accounting professors have been presented with a
significant stimulus for new ideas, and there is increased interest in accounting from
economics, finance, organizational behavior, psychology, and other fields outside of
accounting. This article presents a few ideas related to the recent attention given to
A common reaction to the scandals is that we need to find a way to stop earnings
management—to get managers to report true unmanaged earnings. However, the
concept of unmanaged earnings has little practical value. We have only reported
earnings, which are always influenced by managerial judgments such as estimates of
future bad debts associated with current credit sales. It seems impossible to
distinguish between managerial judgments and attempts to manage earnings within
the constraints imposed by Generally Accepted Accounting Principles. Moreover,
accounting and firm performance are reflexive in the sense that they depend on each
other. The measurement of firm performance changes that very performance. “The inclusion of increasingly
difficult-to-value assets and
liabilities has resulted in income
being more manipulable.” Despite some inherent manipulability, accounting has traditionally been seen as a
harder information source than many others. Also, accounting has been viewed as a
good discipliner of softer information sources. Information contained in accounting is
often available elsewhere first, but accounting’s hardness helps make the earlier softer
disclosures more credible. This comparative advantage of accounting is due in large
part to its emphasis on historical cost and verifiability.
Over the past 30 or so years, financial markets have placed increased pressure on
accounting measures of performance such as earnings-per-share. During the same period, accounting regulators have devoted their attention to adding items to the
balance sheet. The inclusion of increasingly difficult-to-value assets and liabilities
has resulted in income being more manipulable. Including softer information in
accounting has, arguably, decreased accounting’s comparative advantage.
Going back to accounting of 30 years ago is probably not a good solution. An
alternative would be to emphasize hard information in the body of the primary
financial statements but to provide supplementary disclosures of softer information.
Another feature of accounting is inter-temporal rigidity: (i) accounting catches up
with managers in the sense that overstatements in income are eventually (and
sometimes quickly) followed by equal understatements in subsequent periods and (ii)
the choice of accounting methods can lock managers into the accounting treatment of
subsequent economic transactions. The broader point is that a useful way to think of
accounting is as an information source with an unusual structure—one that
incorporates limited flexibility and very particular rigidities. We should keep that
structure in mind as we try to improve accounting.
The recent Sarbanes-Oxley Act of 2002 requires, among other things, that accounting
regulators study the possibility of principles-based accounting as opposed to rulesbased accounting. An example of rules-based accounting is the 3% rule for special
purpose entities that has received so much attention because of Enron. I have thought
a little about trying to develop a model in which accounting principles are viewed as
incomplete contracts. By an incomplete contract, I mean a contract that does not
specify how all future contingencies are to be dealt with. The Sarbanes-Oxley Act is
itself a highly incomplete contract. “regulators’ implicit role is to
increase the informativeness of
earnings smoothing by making
it sufficiently difficult” Most papers in the incomplete contracting literature start with an exogenous
incompleteness—it is simply impossible to foresee and contract on all contingencies.
Instead, I have in mind a model in which incompleteness arises from within the
model. Such an endogenous incompleteness might arise in one of two ways I have
thought of so far. First, if there are other things that can be observed by owners but
inherently cannot be contracted on such as a CEO’s ethics, principles-based
accounting may be optimal. Second, principles-based accounting may be optimal as a
way of making institutions more robust to changes in and misspecifications about the
environment. Of course, it is important we make sure the institutions (for example,
the judicial system) we count on to complete the contracts will do so in a way that is
I conclude with some provocative ideas from information economics about corporate
governance that are typically left out of policy debates and popular press articles. One
such result is that the right kind of earnings management can be an optimal way to
mitigate a moral hazard problem between shareholders and managers. By making
earnings smoothing something that only hardworking/expert managers can do, a
smoothed stream of earnings is better (less costly) to use to motivate a manager than
an unmanaged earnings stream, even if the unmanaged earnings stream can be
obtained by shareholders for free.
Under this view, regulators’ implicit role is to increase the informativeness of
earnings smoothing by making it sufficiently difficult. If earnings management is
something both hardworking and lazy managers can do equally, it only makes the
incentive problem worse (i.e. more costly to solve). A smoothed earnings stream can
also convey more information about the long-term prospects of the firm than an
unmanaged stream, similar to stock price charts which often show 60-day, 90-day, or
180-day moving averages.
In general, we should be suspicious of corner solutions. Eliminating earnings
management is just one example. Another is the view I have seen expressed in some
of the popular press that the best board of directors is one completely independent of the CEO. Such a requirement seems unlikely to be a good way to attract and motivate
a talented CEO. There is a difference between ex post efficiency, what is optimal at a
later date, and ex ante efficiency, what is optimal to commit to at an earlier date.
Also, a board of all independent directors may not work well as a team with the CEO
– a team that freely shares information – or have the required expertise to help with
decisions. Board members provide not only monitoring but also bring their own
experience to the table.
Dr. Jonathan Glover
Associate Professor of Accounting
[email protected] An Interview with
Dr. David Blitzer
Chief Investment Strategist,
Standard & Poor’s
By Reid Steadman Dr. Blitzer, the Chief Investment Strategist at S&P, is regularly rated among the top
ten investment strategists on Wall Street. In 1998 he was recognized as the nation’s
top economist by the Blue Chip Economic Indicators for most accurately forecasting
the leading U.S. economic indicators for four consecutive years.
RS: How important of a role does the S&P 500 play in the financial world?
DB: I think it plays a very significant role. That’s the
very easy answer, the commercial answer. But I think it
does. There are three interrelated uses of the S&P 500.
The first one that comes to the mind is as a measure of the
market, a benchmark. The second is as a way to invest.
We estimated at the beginning of the year that roughly a
trillion dollars were indexed to the S&P 500 – the number
is now probably smaller because of the market. This
means that a trillion dollars are managed to exactly match
the index. We add a stock, we take out a stock – and there
is a trillion dollar portfolio that mimics whatever we say.
It is big enough to move stock prices. This is what is
called the index effect. The third area (the S&P 500 plays
a role in) is risk management through futures and options.
Dr. David Blitzer “if you ask somebody who
makes his living managing
people’s money, he will
look at the S&P 500” In terms of the first (role), the S&P 500 as a measure of the market shows up all over.
It is one of the leading economic indicators. It is probably the standard that virtually
every professional investor uses to look at the U.S. market. The Dow Industrial,
which is trained to calculate a price-weighted index, I call a “television index.” You
see it on CNBC. The NASDAQ is a nice technology index. But if you ask somebody
who makes his living managing people’s money, he will look at the S&P 500. That is
the benchmark he looks at. If you want to know whether the market is overvalued or
undervalued, look to the price-to-earnings ratio of the S&P 500. Virtually anytime
you want to gauge to the U.S. stock market or see what it tells you about the U.S.
economy you look at the S&P 500.
In terms of managing money, there is of course close to a trillion dollars in portfolios
directly mimicking or targeting the S&P 500. And probably another three or four
trillion dollars in institutionally managed money where (managers) are being
compensated by how much they are ahead or behind the S&P 500. They are not
exactly mimicking the index but they are watching it closely.
And last is risk management. Whether it is futures or options or a hedging group of
exchange traded funds, this is sort of a mega-use of the index. So the S&P 500 shows
up there too. So in terms of the financial markets, the S&P 500 plays a significant
part. Calls we get tend to confirm that. RS: You talked about the S&P 500 being the standard and benchmark. Does the
S&P 500 brand have room to grow? Has it reached a premier position and now it
is just a matter of maintaining that?
DB: There are all of these markets and submarkets, and it is difficult to measure
market share. But clearly any time you look at an organization or a brand that has
north of 80 percent market share, you are in the type of position where you spend a
certain amount of time maintaining or preserving your market share. Probably more
time is devoted to preservation than to growth.
First, I think what you do to preserve (market share) and what you do to grow it is
very close to the same thing. Second, I think there is room. By our estimates, less
than 10 percent of U.S. equities are indexed.
Years ago I decided not to worry about “what if they are all indexed.” (Equities) are
never all going to be indexed. Greed springs eternal, and there is always someone out
there who thinks he can beat the market. I hate to tell him this, but the chances of him
doing it for any consistent period of time are pretty slim, and there are plenty of folks
out there who have learned that the hard way in good markets and in bad markets. “Greed springs eternal and
there is always someone out
there who thinks he can beat
the market.” I think that there is room to grow it there. If one looks a little beyond the S&P 500 to
some of our other indexes, there is one spot where there is clearly room to grow and
where the growth has proven beneficial to investors. There is a myth out in the land
that small cap investing active management works – that good managers can beat the
index consistently. We are finally beginning to realize that doesn’t work. Most of the
time small cap performance is linked to the Russell 2000, which is a competitor of the
S&P Smallcap 600. Most of the time the Russell 2000 underperforms the S&P 600.
In fact, since 1995 there was only one year where the Russell 2000 did better than the
S&P 600. When you look at mutual fund performers with the Russell 2000 as the
benchmark you can come away believing that, yes, active managers can beat an index,
when in fact the majority of them cannot.
When you use the S&P 500 as the benchmark, you come away believing that a
majority of active fund managers cannot beat the index. So that expansion of the
brand, as it happens, is clearly beneficial to investors. Picking stocks isn’t easy in any
corner of the market.
RS: Since coming here, I’ve noticed that in marketing the indices, there is talk of
performance, and then there is talk of the indexes in terms of their accuracy as
indicators of market. Are those messages at all contradictory? Are you building
the index for superior return or for superior accuracy as indicators?
DB: We are building the index to be an accurate reflection of the U.S. stock market.
We do not build them for performance. The S&P 500 is 500 stocks that are targeted
at the large cap segment of the market. The index also represents something like 75
or 80 percent of the U.S. market. So when we target the S&P 500 at large caps, that
75 or 80 percent of the market, you are going to behave like the market. It becomes a
measure of the whole market and it is often used that way.
In selecting stocks for the index, we do have requirements. Companies have to have
profits for 4 quarters in a row. Some of the most notorious dot.coms did not make it
into the index because they didn’t have profits for that period of time. But the criteria
serve as guidelines, not to target performance. Stocks are sometimes removed for
what people might describe as concerns about performance but I think that I would
describe them as, first of all, concerns about whether they are significant enough to be
included in the S&P 500. Second of all, a recognition that index fund managers, if
asked to trade a small amount of representation on one hand, give that up in order to
have a better chance of not having a bankrupt company in the index, will almost
always take the trade and give away a little representation in order to avoid any
chance of bankruptcy. Bankruptcies make portfolios pretty messy. And as a result, we take stocks out when they are really scraping the bottom of the barrel. “our track record is what I
would call frighteningly good” Lately, our track record is what I would call frighteningly good because a majority of
the companies who have been removed from the bottom over the last year have
subsequently filed for bankruptcy. We will have some celebrated misses, of course.
But I think the other thing when one looks at performance is – and this goes back to
the work of economist Bill Sharpe many years ago – everyone in the market averages
out to the market. You add up all the pieces you have to look like the whole. And the
index, when it is properly representative of the market will be the market’s
performance. That is what the S&P 500’s job is, and I think it does it very well.
Before we start adjusting for fees, half the active managers do better than the index,
half the active managers to worse than the index. The active managers tend to take
fees of a half to one and a half or two percentage points. The index managers tend to
take fees on the order of zero to one-half percentage point. So the active managers
start out of the gate with a one-percentage point penalty. In the days when the market
went up 25 percent per year, who cared about one percentage point! In the days when
the market goes up three percent per year, you really do care about one percentage
point. So I think that simple arithmetic, as Sharpe suggests, tells you right away, if
you are throwing darts at active managers, you might as well just put away the darts
and buy and index fund.
If you believe that active managers tend to consistently be in the right half of the of
performance of the bell curve with a normal distribution, then that’s fine, you ought to
find one of those active managers and do that. It does not seem to be the case,
however. The longer the amount of time, the smaller the amount of active managers
there is outperforming the index. When you get to five or 10 years, all of sudden 65
percent underperforms the index. When you get to 10 or more, all of a sudden it is 70
percent underperforms the market. This tells me that there is a high degree of
randomness in this kind of process. It is hard to find the guys that consistently
outperform the index. One or two do and get celebrated. However, if it were so easy,
there would be a lot more and you would not get celebrated if you beat the index.
The Legg-Mason Value Fund, run by this guy named Bill Miller, has this fantastic
record – they probably have real talent. And he has outperformed the index
something like 10 of the last 12 years or better. He probably takes much more risk
than the index does because he tends to be more concentrated in certain stocks. The
percentage of his fund in the top five, top ten stocks would tend to be higher than the
index, so I think that he has less diversification and therefore more risk. And yeah,
there may be real intelligence in what he is doing. But there is only one of him. And
I can’t tell you who the next one will be.
RS: Recently you’ve made a huge change to the index by replacing seven foreign
owned companies with seven U.S. companies. Does this improve the S&P 500 or
just make it different? “it is hard to find the guys that
consistently outperform the
index. One or two do and get
celebrated.” DB: I think that it improved it. We would not have gone through the effort, the
background work if we didn’t think that it was an improvement. We did a good deal
of research, which we published on our website at the time. We went through our
research, and everything we saw confirmed to us that this change was the right way to
do it. We started seriously looking at these issues in the middle of February and we
did not set the date and cast the vote until the middle of June. So we had 4 or 5
months to work on it.
As investors looked at the markets and investing, they increasingly want indexes that
are targeted to identifiable markets and identifiable segments of markets, so when
they are hedging or when they are investing or using index funds to implement asset
allocation programs, they know exactly what they are getting. Increasingly, in the last decade or so, index users, pension analysts, pension
consultants and so on have been telling us that the presence of the non-US companies
in the index first make it more expensive to trade the index because the stocks were a
little less liquid and harder to trade. It also made the index a less accurate
representation of the U.S. markets, which it is supposed to do. Looking at that, it
became clear to us over the last few years, if we could find the right moment to take
out the non-U.S. markets we clearly should.
This year there has been very little M&A activity, which drives a large number of
index changes and turnover. Also, before July 9, there were an unusually large
number of large qualified companies to go into the index – Goldman Sachs, United
Parcel – not recent IPOs. Goldman Sachs has been around since 1868, so these are
not exactly new dot.coms that appeared on the horizon, but established organizations.
The United Parcel service similarly has a very long, long history. There was
Prudential Financial, Prudential Insurance, a recent demutualization, Principal
Financial, another recent demutualization, and then a couple of other companies that
are new, including Ebay, which is at a different end of the economy. But certainly
there was a large supply of companies available for the index. The way index funds
operate, it is pretty much easier if you can replace the market cap. So, between low
turnover and the supply of companies to go in the mix, this looked like the right
moment to do it and we did.
RS: For companies, inclusion in the S&P 500 is a status symbol. Obviously the
companies that were dropped must have been disappointed. It is a hard part of
your job to explain to CEOs why their company has been dropped? “my impression of CFOs …
has improved” DB: It certainly isn’t a fun part of the job! But, coming back to the issue of the nonU.S. companies, especially in this era where corporate executives tend to get criticized
right, left, and center, in talking to the people involved in some of these companies,
the discussions, which were after the removal – after the fact – it was not the happiest
moment for some of these CFOs. But the discussions were always very business-like,
always very courteous. The questions they asked were reasonable questions, to
understand what we had done and why we had done it, to understand the details, to
understand the legal restrictions we operate under in terms of dissemination of
information which is essentially that you cannot tell anyone in advance until you tell
everyone at once.
And I think that at the end of it, my opinion and my impression of CFOs at these
companies, if anything, has been improved. I think that they listened, they argued
about certain analytical points, they debated, and they asked a lot of questions.
So, yeah, they were disappointed. It was not the most pleasant conversation one could
have. But I think that one comes away with an impression, at least in this case, that
these are sincere people trying to do their job right and trying to take care of their
shareholders and explain to shareholders what was going on.
RS: This is going to be a less serious question. Since being here at Standard &
Poor’s I have noticed that one of the most maddening things about working here
is having relatives hit me up for stock tips.
DB: Welcome to the club!
RS: So you have that same experience? How do you deal with it?
DB: Yeah, I do. When I got out of graduate school with a doctorate in economics I
worked for a consulting firm that did applied microeconomics in the utility industry.
You go to cocktail parties and people would ask you, “What is the economy doing?”
Well, I didn’t do that kind of economics. When I left that and (eventually) worked at S&P and for a lot of years did a lot of
economic forecasts, I was relieved that I was doing “cocktail party economics,”
though I wasn’t doing a lot of stock selection. “if they all thought the market
would go down they would ask
you about baseball” But now running the index, the question comes up all the time. The good news is that
I can usually rattle off enough statistics about the market overall to end the
conversation quickly. The bad news is that I do not follow any individual stocks
because I am not a stock analyst, which means I should not go around talking about
them as though I were one. The recent events on Wall Street have sort of put the
reason for that front and center, but I think that people now understand it a little more.
But I view (people’s interest) as a positive sign because if they all thought the market
would go down they would ask you about baseball.
RS: Finally, you appear a lot on TV. Is there anything you do not like about
going on TV?
DB: No, not really. I find TV interviews a lot of fun and it does wonders for your ego!
It doesn’t bother me and fortunately when we use the camera here no one smears
makeup on our head.
Reid spent his summer as an Index Services Associate at Standard & Poor’s in New York City. Have Stock Buybacks
Really Destroyed Value?
By Michael McCaffrey It is through Professor Bryan Routledge’s course, Corporate Finance, that one
develops a strong understanding of the real impact of a company’s decision to
repurchase its own shares. Ironically, these foundations learned about stock buybacks
are continually ignored in the financial press. In fact, more often than not, they are
contradicted. In a relatively recent Business Week, the article “The Buyback
Boomerang” appears to blatantly ignore the academic fundamentals of a corporate
share repurchase program, instead adding these activities to the ever-growing list of
management blunders that contributed to the recent bear market.
In the Miller & Modigliani world of perfect financial markets, a share repurchase
neither creates nor destroys value. Rather it is simply a transfer of wealth from one
group of shareholders to another. Of course the notion of perfect capital markets, one
without such distractions as taxes and transaction costs, exists only in ivory towers,
the ones not typically found in lower Manhattan. Nevertheless, given the typical large
volume size of share repurchases, it can be argued that these imperfections add only
slight interference to the underlying thesis – share repurchases do not create or destroy
shareholder value. “market price does not matter
in a share repurchase” The key element regarding the academic viewpoint is that the prevailing market price
represents the fair market price for the underlying security. If this is true, that the
current market price of a firm’s stock accurately represents a discounted valuation of
reasonably certain future cash flows, then the very transaction of repurchasing
company shares has a net present value of zero. The transaction becomes a more
mechanical accounting transaction, whereby a firm decides to reduce some of its
Retained Earnings in an effort to increase its Treasury Stock. Keeping in mind that
both of these accounts reside within Shareholder Equity on the Balance Sheet, it is
clear that they are equally offsetting. In other words, value has neither been created
nor destroyed, merely transferred.
Unfortunately, this is not the viewpoint of “The Buyback Boomerang” author Mara
Der Hovanesian, who states “During the bull market, cash-rich companies bought
record chunks of their stocks at peak prices.” A similar statement supporting the same
idea is “but in the go-go ‘90s, many buybacks made little sense…and those shares were often bought at the high.” Clearly, the author does not recognize that whether
the price of the company stock is high or low is irrelevant. It is irrelevant since the
company is merely performing an accounting transaction, debiting Retained Earnings
and crediting Treasury Stock. The company has not gained or lost any value based on
whether their stock price is at its peak or at an all-time low. Even if the companies
themselves believe their stock to be undervalued or overvalued, their repurchase
merely transfers wealth from one group of shareholders to another.
A common fallacy of share repurchases is that the mere act of repurchasing company
shares, thereby reducing the number of outstanding shares in the market, will
automatically lead to a higher stock price. While some empirical evidence does
support the fact that market psychology tends to favor share repurchases with an
immediate rise in stock price, the catalyst for this initial rise is not correct. The
rationale is that a stock price is merely a company’s equity divided by the number of
outstanding shares. Therefore if there is a reduction in the number of outstanding
shares, this will automatically provide a higher stock price. However, the reduction of
shares in the market actually reduces equity from the market, so the declines in both
have offsetting effects resulting in the original stock price. “fallacy (whereby) the act of
repurchasing company shares
… will automatically lead to a
higher stock price” The author appears to dismiss this fact in the article, claiming, “when companies’
shares are undervalued, it makes sense to buy them and boost the share price.” This
statement contradicts each point discussed thus far: that the market price really does
not matter in a share repurchase and that repurchases will automatically lead to higher
An area the article appears to blatantly ignore is regarding fundamental capital
structure theory – the notion of issuing debt to generate valuable tax shields and using
these borrowed funds to repurchase shares. This technique allows the overall firm to
increase value through nothing more than effective monetary policy. Granted, this
technique must also be handled with some care in order to avoid financial distress.
However, it is surprising that the author fails to even acknowledge the many benefits
of this approach. Rather, she merely blasts this model by stating “What’s really
galling is that many companies went into hock during the late 1990s to finance
buybacks.” Such a blanket statement, implying any and all debt is bad, clearly
indicates a lack of understanding of the decisions facing Chief Financial Officers.
A final point made by the author is regarding the usage of share repurchases in
conjunction with employee stock-option programs. The author’s point is summarized
by the following statement:
“Today, with most executives getting the bulk of their compensation in the
form of stock options, buybacks serve another crucial purpose: as options are
exercised, buyback programs soak up the excess stock and offset the dilution
of existing share values.”
However, this point is also resolved through the fundamental point that share
repurchases neither create nor destroy wealth, they merely transfer wealth from one
group of shareholders to another. When a company sells shares at less than market
value to an employee through a stock option program, this process transfers value
from existing shareholders to the employees. While this might seem like a loss of
value to existing shareholders, consider the alternative. The company could choose to
simply issue additional equity at the current market price and pass the proceeds
directly to the employee as a form of compensation. Further, the discounted
employee stock option serves as tremendous incentive for the employee to work hard
and do everything possible to raise the value of the company, which ultimately
enriches all shareholders.
The issue of whether a company can arbitrarily create or destroy value through the
buying and selling of its own shares has become a major point of debate. Recall the grilling Enron’s Jeff Skilling took at the hands of Senator Barbara Boxer, where he
acknowledged that in spite of his Harvard MBA he was unaware that companies can
use their own stock to generate a gain or loss.
In a similar vein, the article “The Buyback Boomerang” implies that companies have
wasted corporate earnings through share repurchase programs. For those companies
that spent precious cash needed for operations or took on excessive debt for
repurchases, the author’s argument has some validity. However, to go so far as to
blame the late 90’s bull run on share repurchases stating, “Share-repurchase activity
was a sign of overconfidence…it contributed to overpriced markets”, demonstrates an
opinion counter to the fundamentals of corporate finance.
There is one point; however, that I do wholeheartedly agree with the author on –
“Ultimately, the only reliable driver for share prices is profits.”
Michael spent his summer as an Equity Research Associate at Lehman Brothers in New York. Can Banks Manage
By Allison Gerber This past summer I was sitting with my manager and discussing recent trends in the
investment management industry. During our conversation, we realized that we both
assumed that investment management companies owned by banking institutions did
not manage money as well as investment management companies that were not. Both
of us were not sure why we thought this way; we just did. We are not the only ones
who think this way. Many people believe that banks cannot manage money. Our goal
was to find out if our assumption was true.
The one, three, and five-year total return percentages of 2,984 mutual funds and
classes were analyzed. These mutual funds belong to sixteen investment management
companies. Eight of the investment companies are owned by banking institutions and
eight are not. From the sample of investment companies used in the analysis, it
appears that investment management companies owned by banking institutions, as a
whole, demonstrated greater one and three-year average total return percentages
versus those that are not (Exhibit 1). The opposite was true for five-year average total
returns. However, the table below shows that the investment companies providing the
best and worst one, three and five-year returns are not owned by banking institutions.
Return 1 Year “investment management
companies that are not owned
by banking institution have
slightly better Morningstar
rankings” Parent Company
American Century American Century -0.39% 3 Year American Century American Century 4.28% 5 Year Stilwell Berger/Janus 7.93% 1 Year Stilwell Berger/Janus -15.37% 3 Year Amvescap AIM/INVESCO -1.51% 5 Year Amvescap AIM/INVESCO 3.51% Worst Data collected from Morningstar Principia Pro-May 2002. Morningstar Rankings
It appears that investment management companies that are not owned by banking
institutions have slightly better Morningstar rankings versus those that are. In terms
of percentage of funds/classes ranked by Morningstar, Vanguard has the greatest percentage of 5-star funds for one, three, and five-year ratings. Fidelity has the
greatest number of 5-star funds. Victory does not have any 5-star funds. Non-bank
owned investment management companies had a greater percentage of one, three, and
five-year 4 and 5-star funds than bank owned companies.
Growth in Assets under Management “banks have done a better job
of managing money than nonbanking institutions.” Investment management companies that are owned by banking institutions have
demonstrated the greatest one, three, and five-year growth. Columbia Management
Group, owned by FleetBoston Financial, demonstrated a one and three-year CAGR of
32.54% and 25.74% respectively. Armada Funds, owned by National City Bank,
demonstrated a five-year CAGR of 29.40%. Of the sixteen investment managers
analyzed, four of the top five showing the largest five-year growth are owned by
From the above analysis, and additional research conducted, it can be concluded that
banks can manage money. In fact, in recent years banks have done a better job of
managing money than non-banking institutions. Therefore, my original assumption
Even so, there are some factors that should be considered. For example, the fund
companies that are showing recent spectacular performance are more heavily
concentrated in fixed income funds. A lot of funds managed by banking institutions
are more heavily concentrated in fixed income than in equity. Also, this is just a
sample of 2,984 mutual funds/classes belonging to sixteen investment management
companies. A larger sample may very well provide different results.
Allison spent her summer as an Associate in the Institutional Asset Management Finance
Group at National City in Cleveland.
Exhibit 1 Average Total Return Percentage
As of May 31, 2002
3 1 Year 0 3 Year
5 Year -3
-15 BlackR Federat
ed Vangua W acho
cap 1 Year -0.39 -12.59 -3.44 -1.67 -3.61 -2.28 -5.85 -4.88 -4.82 -6.62 -5.59 -15.37 -2.42 -3.68 -1.11 3 Year 4.28 -1.15 2.02 3.09 2.78 1.14 1.87 1.81 2.22 2.17 0.04 -1.51 3.61 3.15 3.52 1.86 5 Year 6.86 3.51 5.93 6.14 3.92 4.27 6.69 4.61 4.28 5.04 3.87 7.93 6.01 6.25 6.58 4.71 Fleet Mellon Munder Putnam Stilwell -2.97 Euromarket Basics
By Nirav Kadakia The Euromarket has nothing to do with Europe or the Euro!
What is a Euromarket?
A Eurocurrency deposit is a deposit with a bank outside the home country of that
currency. Hence, a US dollar deposit with a bank in India is a Eurodollar deposit. A
Deutsche Mark deposit with a bank in US is a Euromark deposit. The important point
is location of the bank and not the ownership of the bank or the ownership of the
When did this market originate?
This market originated with Russia depositing its dollars with banks in Britain and
France in 1950s. Russia was earning dollars from sale of gold and oil. It wanted to
retain the proceeds in US Dollars (USD) but was apprehensive about depositing the
USD with banks in US for the fear of “seizure.” Hence, Russia approached banks in
France and Britain that readily accepted deposits and invested the same in US.
Why are rates finer in the Euromarket as compared to those in the domestic
The central banks of many countries do not have reserve requirements on
Eurocurrency deposits. In some countries, the central banks impose relatively low
reserve requirements on Eurocurrency deposits than those on deposits held in local
currencies. Hence, banks that have Eurocurrency deposits do not have to invest a part
of these deposits in low interest bearing securities to meet reserve requirements.
Therefore, these banks can invest in bonds at a lower rate and yet earn their target
return on investments than the banks of the country of the currency that need to
comply with domestic reserve requirements. The issuer, therefore, targets the banks
with Eurocurrency deposits and makes a bond issue at a competitive rate.
Briefly, Euromarket has limited or non-existent reserve requirements, investor
dictated compliance that is relatively low than that dictated by a statutory body and a
wide range of currencies in a borderless market.
Why does this market exist today?
Lets understand this with a real case illustration. Reliance Industries Limited is
India’s largest private sector enterprise and a leading global integrated energy
company. It needs $100Mn to purchase machinery from a German Company that
offers favorable terms for payment in USD. It has two options; it can either borrow
USD from a bank in India or in the US or issue bonds in the Euromarket.
Reliance enjoys a credit rating that is constrained by the sovereign rating. Hence, it
issues a 100-year bond (one of the handful companies in the world to have achieved
this and the only Asian Company) in USD but does not approach the US Bond
Domestic market. If it does so, it has to comply with SEC and other regulations and
compliance is a time consuming process. Hence, it raises dollars from the Eurodollar
market. Banks outside the US – including US banks with USD held outside US subscribe to this issue in USD.
Reliance issues the bond at a rate finer than that available to borrowers of similar
credit since it raises USD from the Euromarket. Banks all across the world can
participate in this investment grade paper.
Nirav spent his summer as a Financial Analyst with the Gas Solutions Group at Conoco. Student Profiles Dan Bradley ‘03
[email protected] What did you do before coming to Carnegie Mellon?
After receiving my BS in Economics I worked for two different asset management
companies as an analyst, TIAA/CREF and Ward & Wissner Capital Management. At
Ward & Wissner I was responsible for trading, portfolio & security analysis, and
client development. At TIAA/CREF I developed models to analyze various positions
primarily in the MBS product as well as overall industry/competitor portfolio analysis.
Why did you pursue an MBA given your practical experience?
It was pretty simple really, to propel my career and income and develop those skills
and tools that will allow me to creatively think about the many different facets that
drive decisions. And finally, to devise and develop the best strategies to capitalize on
opportunities and lead those initiatives.
I get asked “why GSIA” often, and it’s for the quantitative component to the degree.
Originally, I was thinking of doing the MSCF (Computational Finance) program but
concluded that the MBA degree would provide me with similar content. Besides, I’ve
taken some MSCF classes to complement my finance and accounting concentrations.
Where was your internship?
I interned at Deutsche Bank on the OTC derivatives desk in New York City. It
entailed getting coffee and lunch most of the time… seriously, I developed some VBA
programs with a few traders in order to help them better evaluate their positions.
What are some of your long-term professional goals?
Well, to quote most recruiters, “We are looking for the best & brightest people we can
find.” Somewhat analogous to this I am looking for the best opportunity to create and
capitalize on even more opportunities for the right company. Being bright is a given.
Finally, what are some things you enjoy outside of class?
Hockey and Skiing. Prior to GSIA I skated three times a week with two different
armature teams and hopefully will settle in a location where I can start playing again. Tanya Sander ‘03
[email protected] Tell us about your background, what you did before coming to CMU.
I worked for Federated Investors for six years, a mutual fund company that's based
here in Pittsburgh. My job responsibilities included researching and developing
alternative investments while in Product Development, and business development for
some of Federated's B-to-B financial and administrative services. Before that, I spent
some time at the White House during and right out of undergrad.
Why an MBA?
There were a couple of reasons. Most importantly, I was starting to manage people,
projects and business lines, and recognized that I needed more personal intellectual
capital, so to speak, to be more effective. Because my experience was limited to one
company, I knew one institutional way of doing things – from modeling to pricing to
managing people. Finally, my longer term career goals of asset management and
M&A work requires the degree. Where did you spend your summer?
My summer was with MassMutual, in the Executive Development Program – an
interesting combination of finance, marketing and strategy and a great way to get to
know a company! I developed a business case for recruiting more women to their
agency sales ranks. That included modeling future potential sales, and coming up
with values for intangibles, like missed networking opportunities, for instance. After
using those numbers to make the case to internal management and the agency
managers, the marketing and strategy part kicked in. We developed a three-tier
turnkey program to help agencies with their recruiting efforts and implemented the
program with four pilot agencies. That included everything from marketing
campaigns to evaluating training and "change management" needs within their
existing sales force.
Where from here?
The work I have enjoyed most in the past was combining finance and quantitative
reasoning skills with tangible projects, like making a business case for a new product
line then launching it. I would like to continue to work with financial services firms
or "strategic finance" roles within non-FS firms. What does that mean? Working
through M&A valuations, then integrating the merger; or supporting business lines
from a finance perspective. I'd even like to work with investor relations at some
I have a freakishly small amount of free time because I'm working while attending
school full time. However, when I can make time, I play tennis, sail and spend time
with classmates. I also buy and refinish antique furniture to sell to designers.
Gus Glyptis ‘03
[email protected] What you did before coming to Pittsburgh?
I was an automotive design engineer for Honda in Ohio for 4 years. I was responsible
for the design of door components and structure for the 2001 Acura MDX, 2001
Honda Civic, and the 2003 Honda Element.
Why did you return to school for an MBA?
Have you ever spent significant periods of time around engineers? Actually, I went
into automotive engineering to fulfill an urge to work in the auto industry. However, I
felt that my skills would ultimately lead me into the finance side of the business and
ultimately into the management ranks. The best route is to pursue the MBA full-time.
A considerable amount of value is lost through part-time programs.
Who did you internship with?
I worked for Ford in their Product Development division. I was responsible for
developing a business strategy for the 2006 Windstar minivan. There was significant
exposure to many areas of the corporation… finance, marketing, production,
engineering and ultimately upper management. Every group had input into the plans
we were laying out and management needed to see that we had put together a plan that
fit with the overall strategy of the company.
What are some of your short and long term professional goals?
Short-term, I want to get into a position that offers a bridge between my technical
automotive background and the business skills that I've honed at CMU. Longer-term,
I want to be the boss. I’m a big-picture kind of guy. Your freetime?
Any and all sports, though the Steelers take precedence during football season. I
mostly like to golf and run, sometimes competitively. Scott Horrigan ‘03
[email protected] Tell us about your background.
Having worked as an environmental engineer for a science and engineering consulting
company, I’m somewhat unique for our class. It was an exciting 4 years, during
which I traveled throughout the country working with the Department of Defense on
environmental regulatory issues. Interestingly, one of my projects took me deep
inside Cheyenne Mountain, where NORAD, the North American Aerospace Defense
Command, is located.
Why did you go back to school for an MBA?
Most of my projects required financial analysis in addition to technical design and
problem solving. To my surprise, I found my interests leaning more toward the
financial implications of a project rather than the engineering intricacies. Here, I’m
able to pursue my interest in finance while broadening my overall business
Where was your internship?
I worked for Rich Products Corporation, one of the largest frozen food manufacturers
in the country. In addition to taste testing some of Rich's newest products, I
developed a financial model to assess a capital budgeting project in Latin America.
What are some of your professional goals?
Upon graduation I would like to work in a corporate finance role, ideally in valuation
and acquisition analysis. We have learned so much over the past two years that I'm
exceedingly anxious to put this knowledge to use.
I’ve heard you’re really into running.
I am, but I have also always enjoyed coaching athletics. For the last five years I’ve
coached a girl's youth soccer team. We travel throughout New York playing in
competitive tournaments and leagues. To the running comment – I’ve been enduring
Pittsburgh's frigid winter while I train for the city's marathon in May. Ain Vale ‘04
[email protected] What’s your work background?
For the last seven years, I helped to run Powell's City (www.powells.com) in Portland,
Oregon. A West Coast landmark, it's one of the last great independent booksellers
and is in fact the largest used-and-new bookstore in the world. With a unionized staff
of more than 400 and intense competition from much larger firms, Powell's was a
great place to learn real time management techniques.
Why did you decide to go back for an MBA?
I wanted to pursue a graduate degree that gave me a firm theoretical foundation but
also provided practical, useful insights. An economics doctorate would have been an
interesting challenge, but an MBA seemed a better bet for real-world applicability. When I researched Carnegie Mellon's program I knew I'd found just the place. A
generous scholarship sealed the deal and I couldn't be happier with my choice.
What are some of your goals now that you’re here?
Right now I'm working on a research project looking at capital markets and corporate
structure in the transitional economies of Central and Eastern Europe. It's an exciting
time there, with EU expansion in the near future and an economic situation that holds
a lot of promise. The next two years in particular should bring rapid advances in FDI,
and my goal for graduation is to join a progressive firm that is moving to take
advantage of those opportunities.
With the little free time that you have, how do you spend it?
There's nothing better than a cup of coffee and a lively discussion of international
political and economic issues. I also try to exercise my foreign language skills
whenever possible, mainly through newspapers and films (I'm an avid moviegoer).
My motorcycling hobby has been put on hold for the duration, but it certainly ranks
high on the list of things I'm looking forward to after graduation! An Interview with
Charles Thomas ‘91 Charles, even though you received your business degree in 1991, would you tell
us a bit about what you did before your graduate studies. Senior Managing Analyst,
Dreyfus Corporation Immediately prior to CMU I worked in Saudi Arabia on the US Saudi Joint
Commission for Economic Cooperation in Riyadh on a variety of technology and
economic development projects between US and Saudi agencies and universities.
Prior to that assignment, I was a Peace Corps volunteer and trainer in Tunisia and then
the Director of Finance and Development at the American Institute for Islamic Affairs
in Washington DC.
How did business school prepare you for the challenges you face at your job?
It was the finance track at CMU. Specifically, it was the mix of quant work and the
speed with which we had to accomplish and support detailed analysis of complex
business challenges. The atmosphere was the perfect preparation for my work right
out of business school where I started as a buy-side equity analyst at a bank trust
department doing fundamental research on several industries.
Could you speak a bit about your career path after your first employer and
finally you current position at Dreyfus?
I eventually moved to the sell-side, where my employer marketed my work to the buy
side and corporate finance clients. Later I was a Director of Research where I did the
aforementioned work as well as develop younger analysts and manage the department.
After that I worked for a corporate finance client, Advanced Mobile Solutions, as their
VP of Corporate Strategy and Business Development. There I had the ancillary duty
of structuring and running the company's operations in Brazil.
Most recently, since March 2000, I’ve been a Senior Managing Analyst for the
Dreyfus Corporation. Here, I focus on the communication sectors (hardware,
components, services and software) and have portfolio management responsibilities as
Interviewed by Priya Joshi
[email protected] News • The Graduate Finance Association (GFA) recently secured a first-in-kind partnership
with Institutional Investor for access to a number of its premium publications,
including Corporate Financing Weekly, Bond Week and Power Finance & Risk.
• Having already competed in Accounting and Investment case competitions this year,
Carnegie Mellon MBA’s enjoyed hosting the 11th Annual Corporate Finance Case
Competition. Teams from Chicago, Duke, Northwestern, NYU, Rochester and
Wharton traveled to Pittsburgh to compete on February 22nd; Chicago took 1st place,
CMU 2nd. Merck and PPG were the title sponsors; Campbell’s Soup was a supporting
The Financial Engineering Case Competition is returning this year with Carnegie
Mellon hosting the event in NYC on April 9th and 10th. Participating schools are still
TBD. Lehman Brothers is the sole sponsor.
• During the first week of February the GFA established a library for student and
alumni use. It contains a number of resources from Institutional Investor, Financial
Times, Wetfeet, Economist, Deal, Vault and Jobjuice sources. A selection of books
and DVDs are to be added throughout February. Please contact any club officer for
• By March 10th the GFA will move its electronic infrastructure offsite in order to gain
additional content and access flexibility.
• On St. Patty’s Day (Monday, March 17th) the GFA will host an alumni/member
social at Penn Brewery. The Brewmaster will be on hand to provide guided tours and
tastings. Festivities start at 6pm. 800 Vinial Street on the NorthSide.
For additional information, please visit us at www.gsia.cmu.edu/afs/andrew/gsia/finclub/ Copyright 2003 Carnegie Mellon University GSIA GFA. All rights reserved. Any unauthorized use or distribution
is encouraged. This report has been prepared and issued by the GFA or one of its affiliates and has been
approved for publication in the United Kingdom, Continental Europe and all of Asia by Carnegie Mellon
University. The information herein was obtained from various sources; we do not guarantee its accuracy or
completeness. Additional information is available. Neither the information nor any opinion expressed constitutes
an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives
related to such securities. This report is prepared for general circulation and is circulated for general information
only. It does not have regard to the specific investment objectives, financial situation and the particular needs of
any specific person who may receive this report. Readers should seek financial advice regarding the
appropriateness of investing in any securities or investment strategies discussed or recommended in this report
and should understand that statements regarding future prospects may not be realized. Readers should note
that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. ...
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This note was uploaded on 06/20/2011 for the course ECON NgocAnhNo1 taught by Professor Ngocanhno1 during the Spring '11 term at Université de Genève.
- Spring '11