Heritage at CFA Institute Annual Conference

Bob Weisse, Chief Investment Officer, and Michael Waldron, Portfolio Manager recently attended the CFA Institute Annual Conference in Philadelphia. Bob and Michael are CFA charterholders. The CFA designation is the highest set of credentials in the global investment management industry. The CFA examinations rigorously test candidates on a wide array of technical investment topics and stress a commitment to the highest ethical standards.

The conference hosted over 1,800 delegates from 70 countries. Notable speakers included Professors Robert Shiller, Jeremy Siegel, and Richard Thaler; Vanguard’s founder, Jack Bogle; and Former Deputy Governor of the Bank of England, Sir Paul Tucker.

Professor Robert Shiller of Yale was awarded a Nobel Prize in 2013 for his stock market valuation measure, the Shiller Cyclically Adjusted P/E. Today this measure paints a dismal picture, only rivaled in its negative outlook by the days leading up to the market peak before the Great Depression and the latter stages of the Tech Bubble.

While alarming, Professor Shiller acknowledged the extremity of the measure may be overstated due to the low yield on bonds today compared to the data in his sample and the recent advent of low-cost index funds, which allow investors to reduce risk through diversification, thus allowing stocks to be priced with below average forward-looking returns.

Professor Jeremy Siegel of University of Pennsylvania shared the stage with Shiller, and quickly pointed out that over the long-term, stocks are clearly a superior asset class to bonds, gold, and cash. While future returns may be below historical averages, stocks are still an attractive investment relative to low-yielding bonds.

Several speakers, including Professor Richard Thaler of the University of Chicago, raised concerns with the low level of volatility priced into financial instruments. He interprets the low level of implied volatility in options as complacency—complacency often is associated with elevated prices and presages poor forward returns. Thaler is known for his work in Behavioral Finance. From his perspective, investors’ short-term expectations—that stocks will increase healthily—do not reconcile with their surveyed beliefs that stocks are expensive.

Jack Bogle spoke about the revolution towards passive investing, particularly in public stock markets. More and more investors are realizing that trying to find the next star stock picker is a fool’s errand, and paying high fees for his or her stock-picking prowess is rarely worthwhile. Focusing on asset allocation and controlling for fees and taxes tends to produce superior outcomes.

Bob and Michael agree that Heritage’s clients are positioned well in light of the arguments presented at the CFA Institute Annual Conference — moderately underweight stocks; globally diversified in international stock markets that are not as highly priced as U.S. stocks; significantly underweight bonds; and overweight alternative assets. They are excited to continue their work navigating the rapidly changing landscape of the investment management industry.

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