Final Exam
Seth Klarman
"Consistency and patience arecrucial. Most investors are theirown worst enemies. Enduranceenables compounding." - ____ _______ - CEO & Portfolio Manager of The Baupost Group, managing approximately $29 billion for clients - responsible for managing Baupost's investments since its formation in May 1982 - employs a value discipline with an event-driven bias, exploring opportunities in various areas like equities, distressed debt, and real estate - author of "Margin of Safety," a book outlining his value investment philosophy - served as lead editor for the sixth edition of "Security Analysis," published in 2008. - graduated from Harvard Business School in 1982 as a Baker Scholar and received his Bachelor of Arts in economics from Cornell University in 1979 - serves on the board of directors of the Broad Institute and vice chair of Beth Israel Hospital's board of managers - serves as member of the board of dean's advisors at HBS, where he is a senior lecturer on value investing and received the Alumni Achievement Award in 2011 - elected in 2020 to the American Academy of Arts and Sciences - serves as co-chairman of The Klarman Family Foundation
John Phelan
"Give more than you can take" - ____ _______ - Co-Managing Partner and Co-Founder of MSD Capital, L.P. MSD Capital, founded in 1998, is Michael Dell's private investment firm - MSD engages in Public Market Securities, Private Equity, and Real Estate investments - Co-Managing Partner of MSDC Management, an SEC registered investment adviser - MSD and affiliates employ 100+ people, managing over $12 billion in New York, London, and Los Angeles - Previous experience: Principal at ESL Partners, responsible for Special Situation and Distressed Investments - Started career at Goldman, Sachs & Co. as an analyst in the Investment Banking Division - Education: MBA from Harvard Business School, BA in Economics and Political Science from Southern Methodist University (Phi Beta Kappa cum laude) - Board Positions: Chairman of the Investment Committee at Cold Spring Harbor Laboratory, Co-President at Aspen Art Museum, Executive Committee at Whitney Art Museum - Alma Mater Involvement: Deans Advisory Board for Harvard Business School, SMU Endowment Investment Committee, North American Advisory Board for the London School of Economics - Board Member of the Federal Enforcement Homeland Security Foundation
Stanley Drunkenmiller
"If you're early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time. It's not even close. And don't even think about leaving that mentor until your learning curve peaks" - ________ ___________ - American hedge fund manager, former chairman/president of Duquesne Capital - Born in Pittsburgh, Pennsylvania; graduated from Bowdoin College with an economics degree - Started a graduate program at the University of Michigan but dropped out for an oil analyst position at Pittsburgh National Bank - Head of PNB's equity research group; left in 1981 to establish Duquesne Capital Management - Consulted for various hedge funds, including George Soros' Quantum Fund, during the 1980s and 1990s - After the tech bubble, focused on Duquesne Capital Management; closed the fund in 2010 with an estimated value of $12 billion. - Forbes estimates his net worth at approximately $2.5 billion, ranking him as the 149th richest person in America - donates to medical research, education, and poverty-related causes (philanthropy)
Stephanie Pomboy
"The Fed is Stuck Betweena Rock and a Hard Place" - __________ _________ - born in 1968 & graduated from Darien High School in 1986 - earned a Bachelor of Arts degree in Economics and Art History from Dartmouth College in 1990 - started career at Cyrus J. Lawrence LLC's investment management company after graduation - became a managing director at ISI Group from 1991 to 2002, providing financial insight to major institutions - launched MacroMavens, a firm analyzing data for emerging macroeconomic trends since its establishment - Hosts "The Super Terrific Happy Hour" podcast with Grant Williams, covering finance, markets, and the economy - launched podcast in 2020, featuring guests from the financial industry - MacroMavens scrupulously analyzes data to find investment opportunities from economic reality - provides proactive insights on emerging macroeconomic trends for global financial markets - clients include macro hedge funds and large mutual fund institutions - captain of the Tae Kwon Do team during college
John Templeton
"The four most dangerous words in investing are: "this time it's different" - ____ __________ Early Life and Education - Born to a Poor Family in Tennessee - Graduated Yale University with an economics degree in 1934 - Rhodes Scholar at Oxford, obtaining a master's in law in 1936 Career Beginnings & Co-founding Investment Firm - NYC Trainee for Fenner & Beane (Merrill Lynch predecessor) - Co-founded Templeton, Dobbrow & Vance during the Great Depression in 1937 Business Success - Firm grew to $300 million in assets with eight mutual funds - Started Templeton Growth Fund in Nassau, Bahamas, in 1954 Name Changes & Stake Sale - Templeton, Dobbrow & Vance became Templeton Damroth - Templeton sold his stake in 1962 Global Investment Achievements - Created world's largest and successful international investment funds over 25 years Sale of Templeton Funds - Sold funds to Franklin Group in 1992 Recognition & Philanthropy - Money Magazine hailed him "arguably the greatest global stock picker of the century" in 1999 - Knighted by Queen Elizabeth II as a British citizen living in the Bahamas - Active philanthropist through the John Templeton Foundation, focusing on spiritual and scientific research worldwide
Alternative View of Social Responsibility
"There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." - Economist Milton Friedman, 1970
Nelson Peltz
"What we try to find is a business, a good business...that is just not living up to it's potential" - _______ _____ - CEO and founding partner of Trian since November 2005 - Non-executive Chairman of The Wendy's Company; served as Chairman and CEO of Triarc until June 2007 - Chairman and CEO of Trian Group, Limited Partnership (TGLP) from 1989 to 1993 - Former Chairman and CEO of Triangle Industries, Inc. (1983-1988) and Avery, Inc. (1984-1992) - Director of Mondelēz International, Sysco Corporation, and The Madison Square Garden Company - Previous director roles include H. J. Heinz Company, Legg Mason, and Ingersoll-Rand plc - Recognized by The National Association of Corporate Directors in 2010-2012 for global corporate governance influence - Honorary Co-Chairman of the Board of Directors of the Simon Wiesenthal Center - Chairman of the New York Tolerance Center; member of the Weill Cornell Medical College and Milken Institute boards - Member of the Honorary Board of Directors of the Prostate Cancer Foundation and Board of Trustees of the Intrepid Museum Foundation - Attended The Wharton School of the University of Pennsylvania - Father-in-law of Edward Garden and father of Matthew Peltz
Friendly Offers
- Acquirer Typically Approaches Target Company Management - Negotiate Terms and Method of Payment - Mutual Due Diligence - Keep Process Secret from General Public
Sources of Wealth
- Active Wealth Creation Through Entrepreneurial Ventures or Activities - Passive Wealth Sources: Inheritance, Other Windfall or Accumulation from Long-Term Employment or Conservative Investment
State Takeover Laws
- All U.S. corporations incorporate in a individual state - Some states have rules to protect against "hostile" takeovers
Private Investments In Public Equity
- Also Known as PIPES• Mechanism for Companies to Raise Capital from Select Group of Investors Outside the Market - PIPES are Key Source of Additional Capital for SPAC Transactions - PIPE Investors Receive via a Private Placement, the SPAC's Public Securities, typically at the SPAC IPO Price
Special Purpose Acquisition Companies (SPACs)
- Also Known as SPACs - A Non-Operating Publicly-Listed Company Created to Purchase a Private Company - Transaction Allows Acquisition Target to Become Publicly Listed - Transaction is Sometimes Referred to as a "Reverse Merger"
Typical Non-GAAP Adjustments
- Amortization of Intangibles - Research & Development Costs - Restructuring Charges - Transaction & Integration Costs - Debt Repurchase Charges - Impairment Charges - Lease Accounting - Foreign Exchange Effects
Principals of Responsible Investing (PRI)
- Backed by the United Nations - Include more than 1,600 Signatory Institutional Investors - Premise is that Fiduciary Duty Goes Beyond Maximization of Shareholder Values Irrespective of Environmental or Social Impacts, or Broader Governance Issues such as Corruption
Poison Put
- Bondholder right - Gives bondholders the right to demand immediate repayment
SPAC History
- Came into Existence in the Late 1980s - Originally Known as Blank Check Companies - Terrible Track Record Caused Investors to Largely Abandon the Investment Class in the 1990s - SPAC is Exempt from Regulation as Blank Check Company Under Rule419 on the Basis that its Net Tangible Assets Exceed $5 Million - After the 2007-08 Financial Crisis, SPAC IPOs were Sparse Over the Next Decade
Environmental, Social, & Governance (ESG)
- Catalyst was the United Nations "Principals of Responsible Investing" in 2004 - In 2005 "Who Cares Wins" Report Argued that Incorporating ESG Factors is Good for Business and Leads to Better Outcomes for Society - Principals of Responsible Investing (PRI) Objective is "support its international network of investor signatories in incorporating these factors into their investment and ownership decisions"
Direct Listing Process (DLP)
- Company Lists on Exchange, Allowing Shares Held by Investors, Management & Employees to Publicly Trade on the Stock Market - Authorized by the SEC in 2018 - No New Capital is Raised by the Listing - Select Investment Banks Advise the Company Through the Process
Share Repurchase
- Company Makes Tender Offer for its own shares - Raised Bid Price & Increases Target's Leverage Ratio
Greenmail
- Company Purchases Acquiring Company Shares at Substantial Premium - Law Passed in 1986 Assesses Additional 50% Tax on Greenmail Profits
Advantages of SPACs for Companies
- Competitive Alternative to Traditional IPO - Generally, a Fixed Valuation Since SPACs have Already Raised the Necessary Capital - More Flexibility to Structure Transactions - Unlike Traditional IPO, SPACs can Provide Forward-Looking Guidance - Eligible for Inclusion in Indexes After 5 Days, Not the Typical 6 to 12 Month Waiting Period
Standard & Poor's Composite 1500
- Composed of the S&P 500 Large Cap, S&P 400 Mid Cap, and S&P 600 Small Cap Indices - Total Market Cap $39.5T - Covers Approximately 90% of Total U.S. Market Capitalization
U.S. Consumers Reduce Credit Card Usage due to Record-high Repayment Charges
- Concerns rise as U.S. consumers reduce credit card spending amid record-high interest charges - Financial strain due to higher interest rates and growing credit card debt, surpassing $1 trillion - Citigroup economist Robert Sockin notes softness in credit card spending across all sectors in September - Average annual interest rate on credit card balances hits a record high of 22.8%, up from 16.3% a year ago - Consumers may pay $40 billion more on credit card interest in the next year, according to WalletHub - Credit card spending at retailers drops nearly 11% in the last month, marking the fifth consecutive month of "spending deceleration" - Concerns about cracks in the health of U.S. consumers expressed by Citigroup CEO Jane Fraser and Walmart CEO Doug McMillon - Despite credit card spending slowdown, default rates are not significantly higher than pre-pandemic levels - Strong jobs market provides support to U.S. consumers, with employers adding 336,000 positions in September - Consumers have been spending down savings accumulated during COVID lockdowns, but rising interest rates pose challenges - Overall consumer spending, including non-credit card purchases, continues to increase at a slower pace - Drop in credit card spending may indicate growing financial strain among lower-income consumers and tightening lending standards by banks - EY-Parthenon predicts a moderate 3% rise in retail sales for the holiday season, citing elevated inflation, higher interest rates, and moderating income gains
Friedman on Social Responsibility
- Corporations Wish to Exist in Perpetuity - Repeated Interactions with Customers, Suppliers and Employees Necessitates Acting Responsibly - Competition a Large Factor in Encouraging Good Governance - Government Regulators Also Serve as Arbiter of Fair Treatment of Customers, Suppliers and Employees
Alternative View of Friedman's Theory
- Customers, Suppliers and Employees have Different Interests and Often Compete for a Corporation's Resources - Industries with Monopolies or Oligopolies and Can Abuse Their Power to the Detriment of Other Stakeholders - Large Corporations have the Ability to Influence Politicians and Regulators
Post-Offer Defenses
- Decline Offer - Litigation - Greenmail - Share Repurchase - Leveraged Recapitalization - White Knight Defense - White Squire Defense
UAW Wages Limit Detroit's Flexibility
- Detroit auto workers among the world's best-paid, factoring in benefits - GM, Ford, and Stellantis facing strategic challenges due to high labor costs - GM's latest offer includes a 20% wage increase over four years - UAW wages high globally, estimated at $66/hour including nonwage costs - German auto labor costs lower, Japan even lower due to weak yen - Detroit and Germany both focus on high-margin vehicles, risking flexibility - Shift in market demand could expose Detroit, especially if consumers prefer smaller cars - GM's strategy includes offering EVs of all sizes, addressing potential market shifts - Discussions with UAW on unionizing battery plants are sensitive and crucial - Trust breakdown between Detroit Three and UAW adds to challenges - Acrimonious relationship with workers exacerbates high labor costs issue
Taxes and Social Responsibility (1)
- Difference Between Avoidance and Deferral (Legal) and Evasion (Illegal) - Corporations Act According to Established Rules, Rates and Incentives - Is Making Every Effort to Minimize Taxes Simply Acting for the Benefit of All Stakeholders?
Staggered Boards
- Directors split into groups (typically 3) - Three year staggered terms
Nikola Corporation SPAC
- Electric and Fuel Cell Truck Manufacturer Founded in 2015 - Reverse Merger with VectorIQ Holdings on June 4, 2020 - Shares Traded at Almost $100 on June 8th - PIPE Investors were Allowed to Sell Most of Their 53.3 Million Shares on July 3rd, Realizing Gains in Excess of $50 per Share
Use of Non-GAAP Financial Measures
- Even Under GAAP, Companies Retain Considerable Discretion Over Financial Reporting - Also Referred to as Core, Pro Forma, Operating or Adjusted Results - Non-GAAP Metrics Exclude Certain Income Statement or Balance Sheet Items that are Required Under GAAP
Objective of Performance Attribution
- Explain Relative Performance of Portfolio vs.Benchmark - Measure in Terms of Investment Strategy and Changing Market Condition
Initial Public Offering (IPO)
- First Sale of Shares is Initial Public Offering (IPO) - Public Offering May be Equity or Debt - any Subsequent Sale is a "Seasoned Equity Offering" Offerings Marketed by Underwriters ‒ advise firms regarding price and terms - typically one investment bank acts as "Lead Underwriter" and other investment banks participate (syndicate) Other Services Provided by Underwriters ‒ road shows to publicize new offering - bookbuilding determines demand which provides pricing information - shares of IPOs allocated in part based on each investor's expressed interest Underwriter Bears Price Risk of IPO
White Squire Defense
- Friendly 3rd Party Acquires Large Minority Stake in Target Company - High Litigation Risk Strategy
White Knight Defense
- Friendly 3rd Party Makes Offer for Target Company - Higher Offer May Create Bidding War or Drive Hostile Acquirer Away
Socially Responsible Investing (SRI)
- Gained New Momentum in the 1960s New Push for Investors to Avoid Companies Involved in "Unethical or Immoral Activities" - In Addition to Alcohol, Tobacco, Gambling, New Targets Included Adult Entertainment and Weapons Businesses (Firearms Manufacturers and Defense Contractors) - Sin Stocks
Poison Pill
- Gives current shareholders the right to purchase additional shares at large discounts to market value - Typically triggered when acquirer's ownership exceeds specified level (e.g. 10%)
SPACs in 2020
- In 2020 there was a Surge in the Number of SPAC IPOs and the Gross Proceeds Raised - High Profile Companies Merging with SPACs Include: Draftkings, Virgin Galactic, OpenDoor and Nikola - Larger, Established Investors Raising SPAC Capital Include: Pershing Square (Bill Ackman), Social Capital Hedosophia (Charmath Palihapitya), Apollo Strategic Growth, Gores Holdings and Churchill Capital
Disadvantages of SPACs for Investors
- Investors Must Rely on Sponsors to Make Suitable Acquisition - Sponsor Promote, Warrants and PIPE Investors can Result in Substantial Dilution - Early Investor Profit-Taking can have a Major Impact on Publicly-Traded Value - Lack of Sell-Side Analyst Interest can Result in Shares Languishing After Merger
MSCI Indexes
- MSCI: Morgan Stanley Capital International - Recognized for International Indexes - International Indexes: Widely used Benchmarks for Non-U.S. Stock Investments - Value Weighted Indexes (all)
Corporate Taxes
- Many Large, Profitable Public Corporation Pay Low Tax Rates or in Some Cases Zero Taxes on Income - Issue has Persisted for Decades - Critics Argue this is a Violation of Both Social Responsibility and Good Governance
Alternative ESG Criteria
- Most ESG Measures Exclude Factors Such as Domestic Employment and Wages and Corporate Taxes - Many Investors, Economists, and Politicians Consider These Important Measures of Corporate Responsibility - Currently Not Used by ESG Rating Data Providers
Sustainable Investing
- Movement Began in the Early 1990s - Natural Resource Supply Limitation and Exhaustion - Land, Air and Water Pollution - Agriculture and Food Production
ESG Fund Investing Categories
- Negative Screen (Exclusionary) - Exclude Stocks Based on ESG-Related Criteria - Positive Screen (Inclusionary) - Include Only Companies that Meet Certain ESG Requirements - Tilting - "Tilt" Portfolio to Companies with Higher ESG Ratings - Thematic - Target to Specific ESG Factor or Strategy - Impact - Generate ESG Impact (e.g. "Green" Bonds)
Disadvantages of SPACs for Companies
- No Guarantee SPAC will be able to Consummate a Deal with a Suitable Private Company - Cost of Capital can be High Due to Sponsor Promote, Warrant Dilution and Fees - Target Company Generally Bears Full Liability Risk for Completeness and Accuracy of Disclosures - Deal and Capital Risk Due to Redemption Potential
Eli Lilly & Company
- Non-GAAP Adjustments Common in the Pharmaceutical Sector - Many Firms in the Sector have Long Histories of Significant Non-GAAP Adjustments - Adjustments Mostly One-Sided
Investment Management Process (CFA)
- Objectives - Individual Investors - Personal Trusts
How Companies Avoid Taxes
- Offshore Tax Shelter - Shift Profits to Foreign Subsidiaries Due to Low Tax Rates in Certain Jurisdictions (Bermuda, Ireland, Luxembourg, Netherlands, Singapore and Switzerland) - Accelerated Depreciation - Stock Based Compensation - Industry Specific Deductions, Subsidies and Tax Credits, Both Federal and State
Pre-Offer Defenses
- Poison Pill - Poison Put - State Takeover Laws - Staggered Boards - Blank Check Preferred - Restricted Voting Rights - Supermajority Voting Provision - Blank Check Preferred
Blank Check Preferred
- Preferred stock share creation contained in articles of incorporation - Terms of unissued preferred stock may be determined by the board of directors - Preferred stock generally sold to "friendly" investors - Shares may have enhanced voting rights or convertible into common shares
Advantages of SPACs for Investors
- Provides Minimum Liquidation Value per Share in the Event No Business Combination is Effected - May Provide Public Investors Access to Investments Typically Restricted to Private Equity Funds - More Seasoned SPAC Sponsors in the Space - May Provide Greater Access to New Technologies and Business Models
Supermajority Voting Provision
- Provision in corporate charter - Requires more than simple majority of shareholder to approve mergers (often 66.7%)
Leveraged Recapitalization
- Recapitalization using Large Amount of Debt - Debt used to Repurchase Shares
Non-GAAP Earnings & CEO Pay
- Recent Paper by Guest, Kothari & Pozen* - Argue there is Little Evidence of Mispricing Due to Investors Being Misled by Non-GAAP Reporting - Found that Large Positive Differences Between Non-GAAP and GAAP Earnings Significantly Associated with Abnormally High CEO Pay - Why do these Company Boards Award these CEOs with Excessive Pay?
Litigation
- Resistance using Company Funds - Anti-trust, Securities Law Violations are Most Common
SPACs as Bond Substitutes
- SPAC Investor Capital Investor Proceeds Invested in Treasury Bills - Some SPAC Sponsors Deposit Additional Money into the Trust to Provide Return Above Treasury Bill Rate - Investors have the Right to Receive Their Proportional Share of Cash when SPAC Seeks Merger Approval - SPAC Investor Owns Common Shares, Warrants, an Option and Liquidation Rights
Measuring ESG
- Sampling of ESG Criteria from Different Firms Illustrates the Lack of Consensus - Larger Difficulty is Quantifying and Measuring - Much Data is Self Reported (e.g. Carbon Emissions)
Restricted Voting Rights
- Shareholder loses voting rights once stake rises above specified level(e.g. 15%) - Board can approve to allow shareholder to keep voting rights
Taxes and Social Responsibility (2)
- Should Public Companies Make Pledge to Pay a Minimum Tax Rate to the U.S. Federal Government? - Should Public Companies Refuse Federal Industry Subsidies or Tax Breaks? - Should State and Local Economic Incentives be Declared Illegal or Required to be Offered to All Businesses?
Trading Stocks Loses its Thrill: 'I Would Get Burned'
- Stock market trading loses appeal for individual investors. Investors dial back risk, accumulating cash or investing in bonds/money markets for higher yields - Many withdraw money from U.S. stocks, marking the first year of outflows since 2020 - Despite a 13% S&P 500 rebound, lingering losses from 2022 impact investor sentiment - Excitement in online forums like WallStreetBets diminishes; discussions shift to interest rates, bond yields, and inflation - High-yield savings and money market discussions quadruple, while talk about buying/investing in stocks drops by almost 10% - Increased caution after 2020 experiences; some investors abandon trading, focusing on stable income sources like real estate - Margin debt balances drop 26% from 2021 highs, trading activity at retail brokerages declines - "Buy the dip" mentality redirects investors to U.S. Treasurys; record purchases of Treasury Bond ETF - Investors pull around $80 billion from U.S. stock funds in 2023, while U.S. bond funds attract $277 billion - Money-market funds receive over $700 billion in inflows. Cautious tone and frustration among investors; reliance on a handful of tech stocks for portfolio performance - Broad ETFs tracking S&P 500 and Nasdaq-100 indexes gain popularity over high-risk trades - Increased focus on economic indicators like the consumer-price index on WallStreetBets - Some investors learn that excessive trading can negatively impact portfolios
Stock Based Compensation
- Tech Sector is Notorious for Reported "Adjusted Earnings" or "Adjusted EBITDA" with Stock Based Compensation Added Back - Tech Sector Analysts Typically Report Earnings and Forecasts Using this Convention - Clearly Stock Based Compensation is an Expense and a Recurring One
Adjusted EBITDA
- Technology Companies and Other Growth Firms who are Unprofitable or Marginally Profitable Frequently Report Adjusted EBITDA or EBITDAR - Results Include Typical Non-GAAP Net Income Adjustments Plus Stock Based Compensation
Tesla's Profits Decline Due to Price Cuts & Plant Shutdowns
- Tesla's Q3 revenue falls below Wall Street's reduced expectations - Planned factory shutdowns and price cuts impact the electric car maker's performance - CEO Elon Musk issues a downbeat outlook, citing high interest rates affecting vehicle affordability - Launch of the long-awaited Cybertruck anticipated next month, but Musk warns of an "extremely difficult" increase in production for at least 18 months - Concerns about weaker demand and production issues with the Cybertruck affect profitability forecasts - Excluding regulatory credits, Tesla's automotive gross margin drops to 16.3%, the lowest since Q4 2017 - Q3 net income at $1.85bn, down 44% YoY, with earnings per share falling 37% to 66 cents on a pro forma basis. Revenue grows 9% to $23.35bn, missing Wall Street's expectations of 73 cents per share on revenue of $24.1bn - Tesla delivered fewer vehicles in Q3 than anticipated, reaching 435,059, up 27% YoY but below analysts' predictions - Despite Musk's comments, Tesla shares had risen 9% over the past year due to industry-leading profit margins
Rationale for Non-GAAP Reporting
- The Rise in Usage of Non-GAAP Started in the 1990s - The Most Prominent Alternative Measure was the "Street" Earnings Number Based on Proprietary Definitions used by Commercial Forecast Data Providers (FDPs) - Justification by FDPs for Non-GAAP Earnings is that Historical Earnings Must be Normalized to Accurately Forecast Future Results - FDPs and Companies Frequently Argue Non-GAAP Figures are More Informative
Earnings Estimates
- The Use of Non-GAAP Earnings Estimates is Common in Analyst Community - Bloomberg Earnings Estimate <EE> Function Includes Both Adjusted and GAAP EPS Forecasts as Well as EBIT and EBITDA Forecasts
ESG Ratings Business
- Today there are Over 100 Firms Who Sell ESG Ratings and Data - Opimas Research Estimates Total Spending of ESG Data for2022 was $1 Billion - Major Players Include Bloomberg, FTSE, MSCI, Refinitiv(Thomson Reuters), RobecoSAM, S&P and Sustainalytics - Each Company has their Own Proprietary Methodologies
Outsourced Jobs
- Unemployment Costs Borne by Taxpayers - Social Costs of Crime and Substance Abuse - Outsource to Countries with Lower Wages and Harsher Labor Conditions - Transfer of Production to Developing Countries with More Lax Environmental Standards Exports Environmental Costs
Bloomberg Income Statement Reporting
Adjusted - Bloomberg computed income adjusting for non-recurring Items - used by Bloomberg for standardizing income across companies GAAP As Reported - as reported by company management - includes reconciliation between As Reported and GAAP
Multiple Equity Classes & Directors
An Alternative to Shares with Different Voting Rights is Election of Members for the Board of Directors One Class of Common Stock (Frequently Held by a Founder or Founder's Family Members) has the Right to Select a Majority of Directors, Regardless of the Size of the Class of Equity Relative to the Other Class of Common - Structure Examples: Nike & Ford Motor
ESG Fund Performance Considerations
Are Investors Willing to Accept Lower Returns in Order to Own "Responsible" Companies' Equity and Debt? Will "Bad" Companies Face Higher Funding Costs? Breaking Out E, S, & G - Are these ratings complementary or conflicting? - Should funds be established that emphasize one of these at the expense of the others?
Russell U.S. Indexes
Began in 1984 ‒ Most Commonly Referenced Indexes ‒ Russell 1000 Large Cap ‒ Russell 2000 Small Cap Russell 3000: Merged Index of Russell 1000 & 2000 Additional Indexes: Growth & Value Sub-indexes for 1000, 2000, & 3000 Indexes Value Weighted Indexes (all)
Paul Tudor Jones II
Career Start - joined Wall Street in 1976 Wall Street Environment - describes the 1970s Wall Street as a "free market free-for-all." - depicts intense competition with individuals acting like gladiators, both figuratively and physically, to secure profits Entrepreneurial Success - emerged successfully in the competitive atmosphere Founder & Head - Founder of Tudor Investment Corporation and other entities within the Tudor Group Trading Activities - engages in trading across fixed income, equity, currency, and commodity markets Corporate Details - Tudor is headquartered in Greenwich, Connecticut - manages approximately $13.7 billion - employs almost 400 people Philanthropic Involvement - Founder of the Robin Hood Foundation and the Excellence Charter School - Sits on the Boards of Just Capital, National Fish and Wildlife Foundation, Everglades Foundation, and Sonima Foundation - Trustee of NYU's Langone Medical Center
ESG Fund Performance
Conflicting Claims about Returns of ESG Funds - No real agreement on definition of ESG funds - Mixed reports about over- or under-performance vs. standard benchmarks such as the S&P 500 Over the Past Five Years many ESG Funds have been Overweight Tech Sector and Underweight Energy - Tech has been best performing sector, Energy the worst - Better results for some ESG funds may have more to do with sector allocation decisions than ESG
Low Wages & Few Benefits
Costs of Low Wages - Citizens forced to work multiple jobs - Social welfare program payments to low wage workers Few Employer-Paid Benefits - Workers may need to rely on Medicaid for health insurance - Lack of a company-sponsored retirement plan limits long-term wealth accumulation and worker standard of living in retirement
GAAP Reporting
Domestic Companies whose Equity & Debt Securities are Traded on U.S. Public Markets are Required to: - File regular financial reports with the SEC or state regulators - Reports must follow Generally Accepted Accounting Principals (GAAP) In 1973 the SEC Officially Designated FASB as the Standard Setter for Public Company Financial Reporting
High-ESG Score Companies Pollute Similarly to Low-Rated Counterparts
ESG & Pollution - highly rated ESG companies pollute as much as low-rated ones, even when considering carbon intensity - ESG ratings show little to no correlation with carbon intensity. Green Portfolios & ESG - adding ESG objectives can cancel out carbon intensity reduction in green portfolios Market Demand& Study Findings - strong demand for ESG investment, with $49 billion in net inflows globally - research by Scientific Beta shows that adding ESG scores diminish carbon intensity gains Impact of Social & Governance Ratings - social and governance ratings often reverse the carbon reduction objective - limited correlation (4%) between ESG scores and carbon intensity Industry Perspectives - ESG assessments might not effectively help investors create low-carbon portfolios - Moody's and MSCI emphasize ESG ratings measure resilience to risks, not direct climate impact Trade-offs in Sustainable Investing - Focus on trade-offs in sustainable investing is helpful, requiring careful prioritization. - Investors must choose between carbon reduction and a high ESG rating. Mass Market Challenges for ESG - conceptual question on ESG working as a mass-market product due to diverse investor priorities - customization challenges for collective investment schemes like ETFs and mutual funds Concerns about Adding Metrics - adding unrelated criteria, like biodiversity, may worsen the problem of ESG dilution - prioritizing focus is crucial for achieving specific goals in ESG investing
SPAC Structure
Founders Invest Initial Capital - founders' investment typically nominal amount - structured so founders retain 20-25% after IPO IPO Composed of Shares and Warrants - warrants generally are out of the money - upon completion of business combination, warrants become exercisable Transaction Allows Acquisition Target to Become Publicly Listed Acquisition Sometimes Referred to as a "Reverse Merger" SPAC Restrictions on Operations - time limit on completing a business combination (18-24 months) - size requirement for business combination typically 80% of assets - no compensation for management prior to combination Most of IPO Proceeds (i.e. 90% or greater) are Placed in Trust Account Until Business Combination or Liquidation
Multiple Equity Classes
Founders Often Maintain Voting Control Through the Use of Shares with Different Voting Rights NYSE - Historically has not allowed non-voting shares, but will allow shares with different voting rights - This changed in March, 2017 when the exchange allowed Snap to list non-voting shares NASDAQ Will List Non-Voting Shares Bloomberg Delineates Company Multiple Class Share Information <MSH>
General Atlantic Shifts
General Atlantic's Strategic Shift - General Atlantic (GA), a $77 billion investor, known for high-growth bets like TikTok's parent, is shifting away from its traditional focus Minority Stake in Clipway - GA has agreed to acquire a minority stake in Clipway, a newly established secondaries firm Diversification and Industry Trends - Amid changing investor preferences, GA diversifies its portfolio into in-favor strategies like private credit, infrastructure, and secondaries Wider Industry Diversification - Traditional buyout firms, including CVC and TPG, diversify assets, preparing for potential public listings Recent Strategic Moves by GA: - Acquired Iron Park Capital, a private credit firm, in collaboration with Blackstone veteran Tripp Smith - Teamed up with Middle Eastern investors and formed a joint venture called Atlantic Park Leadership Changes and Broadening Operations - Latin American head Martín Escobari becomes head of global growth equity - Gabriel Caillaux, investment head for Europe, the Middle East, and Africa, oversees climate investments Focus on Secondaries - GA's move into secondaries mirrors industry trends, as larger peers seek exposure to this rapidly growing investment strategy Clipway Background - Clipway, founded in 2021 by former Ardian executive Vincent Gombault, secures about $1 billion in backing with GA's commitment Industry Growth in Secondaries - Secondaries deals exceeded $100 billion in 2022, nearly double the value from five years ago - Competitors like Ares make significant acquisitions, while GA partners with established leaders like Clipway
Stock Indexes
Hypothetical Portfolio of Securities Constructed to Represent a Specific Market or Market Segment Objectives ‒ measure of change ‒ value of index only represents share price appreciation, not total return
Elements of the (CFA) Investment Process
I. Planning II. Execution III. Feedback
Dow Jones Average (DJIA)
Includes 30 Large Blue-Chip Corporations Began in 1896—Original Index had 12 Stocks Price-Weighted Index - each company's stock is weighted by its price per share - Index is the average of the share prices of all the companies - gives greater weight to stocks with higher prices
Vehicles for Public Offering
Initial Public Offering (IPO) - new shares created, underwritten and sold on public exchange - major intermediary in the process are the investment banks Direct Listing Process (DLP) - company sells shares directly to the public without using intermediaries - no new shares issued and no lockup period Special Purpose Acquisition Companies
ESG Definition(s)
Investopedia: set of standards for a company's operations that socially conscious investors use to screen potential investments Forbes: investing in companies that score highly on environmental and societal responsibility scales as determined by third-party, independent companies and research groups Motley Fool: a form of socially responsible investing that prioritizes financial returns alongside a company's impact on the environment, its stakeholders, and the planet
Pushback Against ESG
Investors, Asset Managers and Politicians have Challenged the Use of ESG Investing Criteria, Especially for Retirement Plans - Violates Fiduciary Rule of maximizing risk-adjusted return - Purchasing ESG ratings data adds expense and thus lowers return‒ Conflicting rating schemes and criteria S&P Global Ratings Recently Discontinued Their ESG Credit Ratings
Regulatory Concerns
Major Concern of Regulators is that Non-GAAP Earnings Cause Investors to Overvalue Companies Research by Abarbanell & Lehaby* - Question the assertion by earlier research that market relies more on Street earnings than GAAP results - Investors evaluate earnings in a more sophisticated manner than simply relying upon FDP figures
A Bitter Pill to Swallow for the US Bankruptcy System
Mallinckrodt's Second Bankruptcy - Mallinckrodt, a pharmaceutical company, receives approval for a second bankruptcy, often humorously termed "Chapter 22" Financial Struggles Leading to Restructuring - High interest payments and low profits force Mallinckrodt to restructure again, only 15 months after its first Chapter 11 bankruptcy Chapter 22 Approval and Outcome - Federal judge approves Mallinckrodt's second bankruptcy. Junior creditor, an opioid trust, expected to receive $1.7 billion, now reduced to $700 million - Senior lenders and bondholders, including Silver Point, Hudson Bay, and Arini, set to take over the company at a $3 billion enterprise valuation Impact on Company Value - The new enterprise valuation is just over half of what the company was worth when it emerged from the original bankruptcy Comparison with Other Pharma Bankruptcies - Unlike other pharmaceutical giants facing legal challenges, Mallinckrodt navigates the bankruptcy process without significant legal roadblocks Demonstration of Business Execution Impact - Mallinckrodt's experience highlights that business execution plays a crucial role in bankruptcy outcomes, even within the context of legal processes
S&P 500 Index
Most Commonly Used Stock Benchmark Represents Approximately 80% of the Total Value of the U.S. Stock Market Value Weighted Index - larger cap stocks have a disproportionate impact on index value when compared with DJIA - value of four largest market cap stocks have driven a large proportion of the index appreciation since 2017
Blackstone's Bad Private Credit Deal
Private Credit Risks - Blackstone's Stephen Schwarzman endorsed private credit, suggesting double-digit returns with minimal loss prospects Fintyre Collapse Dispute - Blackstone and Bain Capital are in conflict over the collapse of Fintyre, an Italian tyremaker, aiming to recover over €200mn in potential losses Fintyre Acquisition Background - Bain purchased Fintyre in 2017, aiming to become Europe's largest tire distributor with Blackstone's €200mn debt funding Initial Success and Subsequent Collapse - Fintyre's revenues doubled to over €900mn by 2019, but the tire group collapsed less than a year later, surprising lenders Current Legal Actions - Blackstone is funding law firm Pallas Partners to investigate potential claims against Fintyre's directors, including Bain executives Perceived Lack of Transparency - Blackstone management perceived a lack of transparency from Bain in the lead-up to Fintyre's insolvency, creating tensions Broader Investigation and Funding: - Blackstone's funding of Pallas Partners is part of a larger investigation led by a Teneo unit, handling Fintyre's liquidation Private Credit Challenges - The Fintyre case highlights lesser-discussed risks in private credit, as major firms shift focus from leveraged buyouts to lending Wider Industry Pivot - Despite potential losses, Blackstone continues its significant lending efforts, merging credit and insurance arms in pursuit of reliable returns
The State of Non-GAAP Reporting
Public Company Intelligence Service Audit Analytics Examined 300 Companies that were Publicly Held in Both 1996 and 2016 - Proportion of S&P 500 companies that reported non-GAAP Metrics in8-K or 10-K filings were 59% in 1996, 76% in 2006 and 96% in 2016 - For companies that reported adjusted non-GAAP income metrics in2017, in 69% of the cases the non-GAAP figure exceed the reported GAAP income As a Result of SEC Guidelines Published in 2016 & 2017,More Companies are Presenting GAAP Results as the Most Prominent Data
Non-GAAP Financial Measures Disclosure
Regulation G - All public disclosures that contain non-GAAP financial measures by required registrants - Applicable to press releases, conference calls, presentations and other media Required Disclosure - Must present most directly comparable measure in accordance with GAAP - Reconcile differences between GAAP and non-GAAP measures
Standard & Poor's U.S. Indexes
S&P 500 Large Cap - Market Cap range between $4.2B and $3.0T - Total Market Cap $36.2T S&P 400 Mid Cap - Market Cap Range between $1.4B and $18.6B - Total Market Cap $2.3T S&P 600 Small Cap - Market Cap Range between $230M and $7.4B - Total Market Cap $1.0T
Two Basic Approaches to Performance Attribution
Sector-based Model - Often Referred to as Brinson Model - Uses Sector Allocation Effect & Security Section Effect Factor-based Model - Decomposes active return into contribution of series of factors - Also known as "Style Analysis" - Product of Active Exposure at the Beginning of the Period & Active Return Over the Period
Unfriendly Offers
Submit Merger/Acquisition Proposal Directly to Target Company's Board - "Bear Hug" If Board Rejects Offer - Tender Offer: offer to buy shares directly from shareholders - Proxy Battle: appeal to shareholders to vote for new board members friendly to acquirer's position
ESG: What Should Investors Do?
Understand Limitations of ESG Criteria and Ratings Rigorously Evaluate Criteria of Outside ESG Ratings Providers Investors Must Take Responsibility for Their Own Investments - delineate personal criteria for acceptable investments - use multiple sources to evaluate companies and how they conduct business
Feedback
adapting to changes in expectations and objectives and changes in portfolio composition
Execution
details of optimal asset allocation and security selection
Planning
establishing all the elements necessary for decision making (data about clients/capital markets)
