CFA Institute

After working with private clients for 27 years, I’ve done many non-traditional things beyond offering them investment advice. I’ve gone for runs; attended funerals, bar mitzvahs, and concerts; and even referred one client to a top-flight pro-sports surgeon when he dislocated his shoulder. This year, I mailed holiday cards to every client. It featured a photo of my husband and me with our gigantic Bernese Mountain dog, Grace, all wearing our Santa hats — well, Grace refused to wear hers. A few days later I received this note from one of my long-time clients: Barbara, Thank you for the wonderful card. I feel I need to meet the one “member of the family” that I have never had the privilege of looking in the eye. May 2023 be a super year for you & Duncan. All best, (His name) This was the first time I’ve had a client request a meeting with my dog! And of course, I set it up immediately. Grace and I had a great visit with this lovely couple, and we talked about topics that had absolutely nothing to do with their investment portfolio. Grace was thrilled that they offered her some rippled potato chips and lots of belly rubs. What a fun way to start the New Year! Here are seven more surprising ways to bond with clients: Maria Pia Leon, Director Client Services, Forbes Family Trust, Miami “A couple of years ago, a long-time client asked me to help him with a very different task: putting up and restoring a 1960 Rolls Royce. It was the car he had used in his wedding, and over time, it had deteriorated. I have always loved classic cars, and I always had the crazy idea of working on a 1978 Porsche 911, so this request was not so much out of my realm. “The project took us three years; then while he was visiting last summer, we finally went for a ride in the car. Just the look on his face showed me that those three years of reviewing catalogs, auctions, and color palettes were so worthwhile. This entrepreneur embraced his passion and helped a family tradition continue. As a trusted adviser, I see my role as helping to sustain the wealth for generations, and for me, this includes a car with meaning if it is part of a family story. I am pleased this car will be used for weddings and special occasions of future generations.” Blair duQuesnay, CFA, Lead Advisor, Preserve, Ritholtz Wealth Management, New Orleans “Last fall I was planning on travelling to Southern California for an event, so I decided to reach out to several clients in the area to arrange meetings. I had never met one of my newer clients in person: We started working together at the beginning of the pandemic, so we had only met virtually. She is a single retired woman who lives alone in Northern San Diego County, which is quite a long drive — 30 minutes or so — from where I was staying. I told her I would look for a local hotel and we could have dinner together. She said, ‘Why don’t you just stay with me?’ “Now maybe this might seem a bit weird, but I said ‘Sure,’ and we ended up having a very relaxed time getting to know each other. She gave me a tour of her beautiful property and garden, we went to a not-fancy local place for dinner, and later we watched Netflix on her couch together . . . just like friends. The next morning, I drove back to LA with pomegranates and passion fruit from her garden. My daughter really loved the passion fruit!” Kathrine Madsen, Senior Investment Advisor HNWI/UHNWI, Private Banking Elite, Danske Bank, Copenhagen “When I started out in this business 15 years ago at age 28, fresh out of Copenhagen Business School, I was very self-conscious and always wondering if I was good enough to do this job. Over the years, I have realized that you can memorize P/E ratios but that won’t make you trustworthy. Either you have a trusting relationship with your clients or you don’t. Trust has to come naturally. I like to give my clients a sense of who I am in real life, not just the corporate Kathrine. “During the pandemic, one of my wealthiest clients and I deepened our bond: We both had a lot of time on our hands. On occasion she would send me LinkedIn profiles of men she deemed to be good potential for me to date. Then I shared with her that I had taken on a hugely challenging project of renovating my kitchen all by myself. She said ‘Oh how cool are you? Send me some pictures!’ “I have an integrated dishwasher, and it was a tough job getting it to fit properly. The plate had to perfectly match to the top drawer of my kitchen table. I was so excited that I aced it on the first attempt! I filmed a video of this successful situation and texted it to my client. At age 28, I would never ever have expected that I would do something this odd, texting a video of my dishwasher to a major client. It is interesting how these types of relationships start and how they evolve.” Guillaume Drouin Garneau, CIM, Portfolio Manager, RBC Dominion Securities, Montreal “In addition to being an investment adviser, I’m a passionate cyclist, in pursuit of adventure, pushing my physical and mental boundaries to new levels. I’m also the co-owner of Le Club Espresso Bar, an online retailer of premium cycling brands and a unique space offering an espresso bar and a boutique under the same roof. Our mission is simple: To gather and grow the cycling community, provide a selection of high-quality cycling brands, and to expand the third wave of coffee, a movement to produce high-quality coffee. “A few of my clients are very interested in coffee, and one asked me

Some of the most powerful tools in today’s investment playbook started as academic arguments. But they didn’t reshape practice until they moved off the page and into the hands of portfolio managers, risk teams, and product designers. Harry Markowitz’s efficient frontier, Bill Sharpe’s capital asset pricing model (CAPM), Eugene Fama and Kenneth French’s style factors, and Edward Qian’s risk parity framework all began as journal arguments. Their ideas now sit inside portfolio guidelines, ETF rulebooks, and risk dashboards worldwide. The leap from theory to real-world relevance is what gives high-quality research its staying power. As CFA Institute Research and Policy Center celebrates the 80th Anniversary of the Financial Analysts Journal and 60th Anniversary of the Research Foundation, it is an opportune time for investment professionals to reflect on the impact of practitioner-relevant research on the industry’s evolution. Uncovering practitioner-relevant insight is at the core of the Hillsdale Investment Management–CFA Society Toronto Research Award, which is accepting submissions for 2025. Any academic or practitioner can submit their research for consideration, regardless of their geographic location. Consideration is given to any original, unpublished work that sheds light on Canada’s capital markets and helps investors allocate capital more intelligently. Topic areas include public and private markets governance, sustainability, and market microstructure. The deadline is fast approaching (June 27). Past winners include a six-factor model tailored to Canadian equities that helps portfolio managers navigate the “factor zoo,” a study quantifying when currency hedging adds value to international equity funds, and an analysis of how complex instrument allowances affect mutual fund performance and risk. Scholarship only changes behavior when it solves a concrete problem and arrives in a form investors can apply. Market context makes that harder. A factor model that works in one region might falter in another due to differences in  industries, regulations, and investor behavior. That is why competitions like the Hillsdale Award — focused on market-specific research — help innovative ideas travel faster and land with greater impact. Research in Action: 3 Hillsdale Award-Winning Papers Navigating Canada’s Factor Zoo (2024) introduced a six-factor model built on three decades of data of Canadian equity returns, giving portfolio managers a clear, evidence-based shortlist for factor investing. Using CFMRC-TSX and COMPUSTAT files for July 1991 to December 2022, the authors measured 17 widely cited style factors across 11 academic frameworks and ran redundancy, spanning, and anomaly-pricing tests. Classic HML and UMD signals added little once profitability, investment, and mispricing variables were included. The data pointed to six variables (market, size, monthly-updated value, return-on-equity, expected growth, and post-earnings-announcement drift) that explained Canadian returns more consistently than any legacy model. This  result trimmed the “factor zoo” to a manageable practitioner toolkit for screening, attribution, and product design. It identifies where global multifactor products may be mis-aligned with local risk premia. Currency Hedging and Tracking Error (2023) provided evidence that actively hedging foreign exchange exposure with currency forwards can lift international equity fund performance. It gave managers evidence-based guidance on when FX hedging pays. The study matched 55,000 forward contracts to 1,279 US-registered international equity funds (2004-2019) and sorted users into “exposure managers,” “occasional users,” and “non-users.” Systematic hedgers cut benchmark-relative volatility by about one percentage point and outperformed unhedged peers by roughly 120 basis points (bps) per year, benefits that were largest during FX-volatile quarters. Forward books tilted toward currencies with favorable carry and momentum profiles, indicating that a disciplined overlay can function both as a risk-control and a modest return engine. Counter-factual tests suggested non-users left 40 to 60 bps of annual performance on the table. The paper supplies CIOs with quantitative thresholds for when the cost of forwards is likely to be rewarded and a template for linking hedge ratios to currency-factor signals. Complex Instrument Allowance at Mutual Funds (2020) revealed evidence that letting mutual funds use leverage, derivatives, and other complex instruments erodes returns and increases downside risk, signaling to fund boards and regulators that fewer restrictions can hurt investors. Analzsing SEC N-SAR filings for 4,793 US domestic equity funds (2000-2015), the authors built an “allowance score” for leverage, derivatives, and illiquid-asset permissions, then linked those permissions to daily performance and risk. Funds with the broadest latitude under-performed more constrained peers by 1.3 percentage points of four-factor alpha a year and carried higher market beta and downside semivariance, particularly in bear markets. Derivative authorizations showed the strongest negative relation to risk-adjusted returns, while better board oversight and larger fund size mitigated the drag. The findings give trustees and regulators a data-backed caution: expanding a fund’s toolbox without commensurate monitoring can lead to higher volatility and lower investor welfare. (See all past winning research papers) Why This Matters to the Wider Investment Community Sharper Tools: The winning paper often surfaces updated factor libraries, hedging templates, or governance checklists that teams can A/B test in live portfolios. Diversity of Thought: A global author pool examining a mid-size market helps reduce home bias and brings fresh ideas across borders. Faster Uptake: Because the award sits inside a professional body, useful findings reach practitioners, directly compressing the time from research to real-world application. Award Details The Judges: Every submission is judged by a panel of CFA charterholders. This means only research with clear, test-ready insights and practical relevance survive the review process. The Award:  The award, which comes with a $10,000 (CAD) prize, helps empower winning researchers to continue ground-breaking research through flexible funding they can redirect to additional research funding, conference travel, or their next projects, without strings attached. High Visibility with Investment Professionals: The winning paper and authors gain visibility among more than 11,500 CFA charterholders  in Canada and the broader global CFA Institute community. Publication can lead to stronger citation momentum and, more importantly, faster adoption in practice. The winning paper is unveiled at CFA Society Toronto’s Annual Investment Dinner, promoted through Society press channels, and published in The Analyst, CFA Society Toronto’s quarterly magazine. How to Submit Submission deadline: 27 June 2025, 23:59 ET Eligibility: Open to global researchers; submissions must focus on

The “Mercer CFA Institute Global Pension Index 2023” takes the top spot. The CFA Institute Research and Policy Center (RPC) focuses on four forward-looking research themes to drive content engagement, action, and outcomes. These themes are Capital Markets (Strengthening the Structural Resiliency of Capital Markets); Technology (Understanding the Latest Developments in Data Analytics, Technology, and Automation); Industry Future (Providing New Insights into the Future of the Profession); and Sustainability (Advancing the Industry’s Thinking on Sustainability Challenges). Below are the most popular top five articles of 2023 published under the Capital Markets theme in the RPC since its inception. The theme underscores a commitment to the dynamic relationship among asset managers, asset owners, and individual investors/savers through the capital markets, given the backdrop of trends in the regulatory and policy environment. 1. “Mercer CFA Institute Global Pension Index 2023” This report delivers the world’s most comprehensive comparison of 47 retirement income systems, representing 64% of the global population, and suggests ways to improve the efficacy of each pension system studied. 2. “Cryptoassets: Beyond the Hype” Based on interviews of investment professionals and crypto experts, this report, by Stephen Deane, CFA, and Olivier Fines, CFA, goes beyond the hype to understand the state of crypto investing and the implications for investors and policymakers. 3. “CFA Institute Global Survey on Central Bank Digital Currencies” Stephen Deane, CFA, and Olivier Fines, CFA, gauge demand for central bank digital currencies (CBDCs) by examining the attitudes of a significant segment of potential CBDC end-users. Their data is derived from a CFA Institute global membership survey. 4. Revisiting the Equity Risk Premium Held once a decade since 2001, the Equity Risk Premium Forum gathers leading investment minds to discuss new equity risk premium (ERP) research and key trends. The 2021 consensus was lower expected returns in the future. The publication, edited by Laurence B. Siegel and Paul McCaffrey, includes contributor updates by Clifford Asness and Jeremy Siegel, among others, from 2023. 5. Valuation of Cryptoassets: A Guide for Investment Professionals The valuation of bitcoin, Ethereum, and other cryptoassets is a challenge for the investment industry. Urav Soni and Rhodri Preece, CFA, review the tools available to value cryptoassets, and in doing so, aim to help practitioners better understand the dynamics of cryptoassets. If you liked this post, don’t forget to subscribe to Enterprising Investor and the CFA Institute Research and Policy Center. All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer. Image credit: ©Getty Images / Galeanu Mihai Professional Learning for CFA Institute Members CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Enterprising Investor. Members can record credits easily using their online PL tracker. source

The M&A Failure Trap: Why Most Mergers and Acquisitions Fail and How the Few Succeed. 2024. Baruch Lev and Feng Gu. Wiley. At an early-1980s presentation by a leading investment bank to a business school alumni group, the bank’s CEO was confronted during the Q&A session about the high failure rate of corporate mergers and acquisitions (M&A), from which Wall Street derives a significant chunk of its revenues. The CEO responded by pointing out that companies’ internal projects — their investments aimed at building businesses from scratch rather than buying them — also fail at a high rate. He did not mention the perverse incentive whereby divestments made in the wake of failed acquisitions generate additional fees for bankers. Neither did he cite any data on comparative success ratios of internal and external corporate growth initiatives. Thanks to Baruch Lev, professor emeritus of Accounting and Finance at the New York University Stern School of Business, and Feng Gu, chair and professor of Accounting and Law at the School of Management, University at Buffalo, we now have an authoritative measure of the M&A failure rate. Lev and Gu define failure in terms of post-acquisition sales and gross margin trends, stock performance, and goodwill write-offs. Based on a sample of 40,000 transactions over 40 years, they find that 70% to 75% of M&A deals fail. That is twice the 36% failure rate for internal projects reported by project management application service provider Wrike, Inc. As if these figures were not sufficiently dismaying, Lev and Gu report in The M&A Failure Trap that the failure rate is on the upswing. Acquisition premiums have risen, and average goodwill write-offs have gotten larger. Moreover, conglomerate acquisitions — purchases of companies unrelated to the acquirer’s core business—have made a strong comeback. This comeback has occurred despite the de-conglomeration of most of the widely diversified corporate giants of the 1960s — after their shares traded at discounts to focused companies’ stocks and management failed to produce the synergies they claimed would emerge from their frenetic dealmaking. Lev and Gu further note that the usage frequency of “synergy” in corporate merger announcements tripled between the 2000s and 2010s. Investors will find this book an invaluable resource. In addition to being called upon to vote on major M&A proposed transactions, shareholders sometimes suffer horrendous losses due to ill-conceived and poorly executed acquisitions. Based on rigorous statistical analysis of their huge sample of deals, the authors identify 43 different factors that enhance or detract from the probability of success. For example, the larger the deal size, the higher the percentage of the payment for the acquisition that is made in the acquirer’s stock, and the higher the S&P 500’s return in the year preceding the transaction, the greater the probability of failure. Lev and Gu condense their analysis into a 10-factor model that is practical for investors to employ in assessing the merits of a prospective merger. The authors leaven their abundant quantitative detail with colorful prose. They supplement their quantitative findings with case studies of both successful and unsuccessful M&A. Such prominent deals as Hewlett Packard/Autonomy, AOL/Time Warner, and Google/YouTube are examined for clues that can predict the fates of future transactions. Lev and Gu do not shrink from identifying culprits as they explore the underlying causes of the high M&A failure rate. These include (in their phrase) “commission-hungry investment bankers.” They also point to overconfident CEOs and boards of directors who, despite substantial evidence to the contrary, imagine that a transformational acquisition can pull a company’s profitability and stock performance out of the doldrums. CEOs receive extra compensation for completing such transactions but are not penalized if the transactions fail. Flawed incentives for CEOs also help explain the above-mentioned resurgence of conglomerate acquisitions. Spreading a corporation’s operations across a wide range of unrelated businesses provides no genuine benefit to shareholders, who can diversify on their own by holding stocks of companies in many different industries. In contrast, the manager of a single-line-of-business company has no hedge against an industry downturn that will adversely affect CEO compensation. Spreading risk by transforming the company into a conglomerate makes strategic sense for the CEO, who has a more direct say than shareholders in the matter. In addition to describing this sort of agency cost and presenting extensive evidence that corporations should strongly consider internal investment as an alternative to acquisitions, especially considering the buy-rather-than-build route’s frequently formidable integration challenges, the authors address accounting issues that are pertinent to M&A, such as the subjectivity of the fair value estimates required for calculating goodwill. This discussion draws on Lev and Gu’s expertise in financial reporting, as displayed in their pathbreaking The End of Accounting and the Path Forward for Investors and Managers (2016), reviewed here in June 2017. They also write about the disturbing phenomenon of acquisitions made with the intention of terminating a successful competitor’s operations. It in no way diminishes The M&A Failure Trap’s overall excellence that it includes a couple of mistaken quotation attributions. Publishers ought to instruct their editors to make use of Quote Investigator®. Had this book’s editors checked that indispensable website, they would have learned that there is no reliable evidence that P. T. Barnum ever said, “There’s a sucker born every minute.” That is an example of an anonymous saying being put in the mouth of a famous person, as happens with many aphorisms. Similarly, in the case of “It’s difficult to make predictions, especially about the future,” which Lev and Gu (along with many other writers) attribute to the physicist Niels Bohr, Quote Investigator concludes that the author of the “comical proverb” is unknown. Bohr died in 1962, and no published linkage of his name to the witticism prior to 1971 has been found. Notwithstanding these very minor editorial shortcomings, The M&A Failure Trap must be judged a rousing success. Massive M&A deals make headlines but too rarely make money for stockholders. “Fondly do we hope, fervently do we pray” (yes, Abraham Lincoln did

The UN Framework on Climate Change (UNFCC) is set to convene the 27th annual Conference of the Parties, commonly known as COP27, in Sharm el-Sheikh, Egypt, next week. The goal is to assess global progress in addressing and mitigating the impacts of climate change, and myriad voices will seek to influence the dialogue. The global asset owner community will lend a strong and influential set of voices to the proceedings. This group, comprised of pension funds, sovereign wealth funds, foundations, and endowments, is increasingly engaged and outspoken around environmental, social, and governance (ESG) issues. And the top 100 asset owners control $23.5 trillion in assets as of 2020, according to Willis Towers Watson, so they stand a good chance of being heard. The Voice of the Asset Owner Roger Urwin of Willis Towers Watson’s Thinking Ahead Institute believes asset owners have critical roles to play in the global climate change debate. “Their allocations, ownership muscle and trickle-down influence will be important in opening the door to net zero pathways,” he said. “The [2021] Glasgow COP summit has highlighted how asset owners can work together as part of a wider collaboration framework to produce better long-term outcomes for the whole system.” As a group, asset owners take ESG and climate change very seriously. In fact, according to our first Morningstar Voice of the Asset Owner Survey, fielded in August, 85% of asset owners believe ESG is “very” or “fairly” material to investment policy, with 70% saying it has become more material in the past five years. Our survey sought to understand asset owners’ opinions and attitudes on investment policies, current investment trends, the impact of regulatory change, key stakeholders and influencers, and, importantly, the role that ESG plays in investment decisions. The findings are instructive as COP27 approaches and we consider how asset owners can bring their influence to bear on this important topic. Surveyed asset owners are pushing for constructive change around ESG and climate on multiple fronts. For example, most respondents felt that ESG ratings, indexes, data, and tools have become either “a lot” or “somewhat” better in the past five years. But they expect continued improvement to be initiated by governments, rating agencies, standard-setting bodies, service providers, and markets. In other words, asset owners are looking for an array of key participants across the ESG ecosystem to drive change. When it comes to implementing ESG policies, about 40% of the asset owners surveyed use external asset managers, presumably outsourcing important elements of their investment policies, such as proxy voting. More than two-thirds say stewardship is a “somewhat” or “very” significant part of their ESG program, including both direct and collaborative engagement. Asset owners generally view regulation of ESG as beneficial for addressing greenwashing through greater transparency, more enforcement, and better regulation. In addition, nearly three-quarters expressed support for regulations intended to achieve specific sustainability objectives. Words into Action While advancing public debate on ESG is important, asset owners have proven time and again that actions speak louder than words. They have been instrumental in developing ESG practices over the past several decades, often filling the void created by the absence of effective public policy, engaging on their own and collaboratively through initiatives like Climate Action 100+. Asset owners were among the first investors to request disclosure on company sustainability issues, signaling that ESG matters for their investment decisions. They have used their influence to engage with companies on such environmental issues as carbon emissions, waste management, and pollution as well as social issues encompassing management and board diversity, fair labor practices and treatment of indigenous peoples, and corporate governance best practices. COP26 led to the creation of the Glasgow Financial Alliance for Net Zero (GFANZ), an umbrella organization made up of separate alliances for asset owners, asset managers, banking, insurance, consultants, and financial service providers.* Realizing GFANZ’s promise will depend on financing from the large asset owners that expressed a favorable stance on regulation targeting specific objectives like “net zero by 2050” in our survey. The agenda at COP27 will emphasize financing the transition to a low-carbon economy. Commitments by banks to reduce financed emissions have become a contentious topic in the United States where companies and asset managers are already under scrutiny from politicians for their support of ESG investing. With reports that banks are balking at their commitments in this area, asset owners are pushing back. This illustrates the challenges of managing for net zero amid energy market volatility, geopolitical turmoil, and political polarization, but it is consistent with our survey findings that energy management and greenhouse gas emissions are the most material ESG issues for asset owners. Tackling a “Wicked Problem” The Conference of the Parties, or COP, has been coming together for over a quarter century to assess global progress in countering climate change. These ambitious proceedings aim to secure voluntary national commitments on carbon reductions and financing as well as follow-through and progress reports. They reflect the challenge of collective action in the face of an inherently complex and difficult-to-solve “wicked problem” like climate change, which features tensions between the developing and developed worlds about burdens, costs, and equity. It is a problem that requires influential, steady, and honest voices to drive the debate forward through words as well as actions. The global asset owner community is one of these important voices. If you liked this post, don’t forget to subscribe to the Enterprising Investor. * For full disclosure, Morningstar Inc. is committed to be net zero by 2050 and actively participates in the Indexes and Research & Data workstreams of the Net Zero Financial Service Providers Alliance (NZFSPA). All posts are the opinion of the author and of the speakers quoted or discussed. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer. Image credit: ©Getty Images/ioanna_alexa Professional Learning for CFA Institute Members CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits

Readers clicked most on “Applying Economics — Not Gut Feel — to ESG” by Alex Edmans in 2023. The CFA Institute Research and Policy Center (RPC) focuses on four forward-looking research themes to drive content engagement, action, and outcomes. These themes are Capital Markets (Strengthening the Structural Resiliency of Capital Markets); Technology (Understanding the Latest Developments in Data Analytics, Technology, and Automation); Industry Future (Providing New Insights into the Future of the Profession); and Sustainability (Advancing the Industry’s Thinking on Sustainable Investing). The theme Advancing the Industry’s Thinking on Sustainable Investing covers an array of sustainable investing topics, including biodiversity, human capital, climate risk, net zero commitment issues, and environmental, social, and governance (ESG) investment approaches and performance data. CFA Institute research provides investment professionals with tools and resources for understanding, measuring, and managing sustainability-related risks and opportunities; meeting client demands; and complying with regulatory requirements. 1. “Applying Economics — Not Gut Feel — to ESG” Interest in ESG issues is at an all-time high. However, academic research is still relatively nascent, often leading us to apply gut feel on the grounds that ESG is too urgent to wait for peer-reviewed research. For the Financial Analysts Journal, Alex Edmans highlights how the insights of mainstream economics can be applied to ESG, once we realize that ESG is no different from other investments with long-term financial and social returns.  2. “An Exploration of Greenwashing Risks in Investment Fund Disclosures: An Investor Perspective” Nicole Gehrig and Alex Moreno examine investment funds’ disclosures related to ESG information through the lens of investors to understand the nature of disclosure issues that could give rise to a perception of greenwashing. 3. “Definitions for Responsible Investment” This guidance developed by CFA Institute Global, Sustainable Investment Alliance, and Principles for Responsible Investment (PRI), provides five key definitions for responsible investment terms: screening; ESG; thematic investing; stewardship; and impact investing. 4. “Green Parity and the Decarbonization of Corporate Bond Portfolios” Based on an investment universe for the 2017 to 2021 period, this study by Mario Bajo and Emilio Rodriguez for the Financial Analysts Journal examines different strategies that corporate bond investors can apply to achieve decarbonization goals. The authors find that a “Green Parity” strategy yields the best performance. 5. “Guidance for Integrating ESG Information into Equity Analysis and Research Reports” This guide to integrating ESG information draws from a number of CFA Institute publications to present a framework for identifying ESG information, assessing the materiality of ESG information, integrating ESG information into analysis and valuation, and presenting ESG information in research reports. If you liked this post, don’t forget to subscribe to Enterprising Investor and the CFA Institute Research and Policy Center. All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer. Image credit: ©Getty Images / franckreporter Professional Learning for CFA Institute Members CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Enterprising Investor. Members can record credits easily using their online PL tracker. source

Does gold hedge inflation? On average the answer is no, empirically speaking. But gold’s relationship with inflation is complicated, making any blanket statement about its role in portfolio construction unwise. In this blog post I offer evidence against the claim that gold is a reliable inflation hedge. But I don’t test and thus don’t dismiss gold’s potential value as a diversifier for other reasons. Gold Rush Gold’s recent surge has sent its real (Consumer Price Index-deflated) price to its highest levels since July of 2020 — almost $740 per ounce as of April 2024 — though still below its early 1980 peak of approximately $840 (Exhibit 1). Exhibit 1. This recent high has heightened interest in gold as a portfolio diversifier generally and presumably as an inflation hedge specifically. This blog examines gold’s inflation-hedging properties visually and empirically. Full results and R code can be found in the online R supplement. What an Inflation Hedge Should Do, and What Gold Doesn’t Do An inflation hedge should move with inflation. When inflation goes up, so should the hedge. The claim that gold hedges inflation is therefore testable. To start with, the scatterplot in Exhibit 2 shows the month-over-month change in the headline (that is, “all items”) personal consumption expenditures (PCE) deflator inflation measure versus the spot price of gold from 1979 to 2024, the longest publicly available series for gold prices. Exhibit 2. As evidenced by the random scatter of points in Exhibit 2, changes in headline PCE inflation are not meaningfully correlated with changes in the spot price of gold, on average (correlation coefficient confidence interval = -0.004 to 0.162). And the best-fit line (blue) is flat, statistically. Results are robust to using the Consumer Price Index is used for inflation, though in this case the lower end of the confidence interval is just barely positive—as shown in the online R supplement. The relationship between gold and inflation, however, isn’t stable. There are times when gold’s relationship with inflation is positive, and times when it’s negative. Exhibit 3 shows the rolling 36-month “inflation beta” estimated by regressing the gold spot-price monthly change on the monthly change in headline inflation over a moving 36-month window. Exhibit 3. Sign changes — where the series crosses the dotted horizontal line in the chart above — and large errors indicated by the expansive confidence-interval (two-standard-error) ribbon, which includes zero at just about every point make general statements about the relationship impossible. At the very least, the idea that gold spot price changes move dependably with inflation isn’t supported by this evidence. But there are periods, some protracted, when it does. Casual inspection suggests that the gold-inflation “relationship,” such as it is, is stronger during expansions — the periods between the gray recession bars — except for the Great Recession of 2007 to 2009. Perhaps this is because impulse for inflation matters to its relationship with gold. I look at this possibility next. Decomposing Inflation Using Economic Theory Inflation can be decomposed into temporary and persistent parts, as embodied in Phillips curve models of the inflation process used by economists (Romer 2019). The persistent component is underlying or trend inflation. The temporary part is due to transitory shocks (think oil-price spikes), the impact of which usually fades. What might truly be of interest to practitioners is how gold responds to a rise in underlying inflation resulting, for example, from too much demand or from rising inflation expectations. This kind of inflation can be stubborn and costly (economically) to contain. We can test this response. To do so, we need a measure of underlying inflation. There is a strong theoretical and empirical basis for using an outlier-excluding statistic like the median as a proxy for underlying inflation (see for example Ball et al 2022). The Federal Reserve Bank of Cleveland calculates median PCE and CPI inflation every month, and I use the former measure here, though results are robust to using the latter measure as shown in the online R supplement. A regression of the monthly change in gold on the change in median PCE results in the rejection of any relationship at the usual levels of significance (t -value = 1.61). This is suggested by the shapeless cloud of points in the scatterplot with best fit line (in blue) shown in Exhibit 4. Exhibit 4. Rolling 36-month regressions of gold on median inflation yield results like those for headline inflation. The relationship is unstable and variable (Exhibit 5). Exhibit 5. Interestingly, gold’s median-inflation beta is far more volatile — the standard deviation is about three times larger — and less persistent (as measured by autocorrelation) than headline inflation. That is, gold’s relationship to underlying inflation appears weaker than to headline inflation (regressions confirm this, too — see online R supplement.) One possible explanation is that gold may hedge the difference between headline and median inflation — sometimes called “headline shocks” — more reliably than underlying inflation. That is a point I don’t explore further in this blog post, though I did test the idea briefly in the online R supplement and found no evidence for it.   If underlying inflation captures economic forces of excess demand and rising inflation expectations as embodied in Phillips curve-type models, gold doesn’t appear to hedge the price pressure they can cause. To check the relationship between gold and an overheating economy, I test one more, simple model. Using quarterly real gross domestic product (GDP) and potential GDP estimated by the Congressional Budget Office, I regress gold’s spot-price change on the difference between actual over potential GDP as a measure of economic slack or lack thereof. That is, I regress gold on the GDP “gap.”    A priori, if gold were a hedge against the “demand pull” inflation that can result from an economy speeding up or growing too fast, it should be positively related to the change in the gap. But I find no evidence for this, as shown in the online R supplement. Gold and Inflation: An Unstable Relationship An inflation

What’s more important to success — talent or effort? Most of us would say talent. But according to psychologist and bestselling author Angela Duckworth, most of us would be completely wrong. That’s one of the key takeaways from her bestselling book Grit: The Power of Passion and Perseverance. In an interview with Rosanna Lockwood at the Alpha Summit GLOBAL from CFA Institute, Duckworth, who is also founder and CEO of Character Lab and co-director at the Penn-Wharton Behavior Change for Good Initiative, explained what her research has revealed about the nature of success and how talent and grit contribute to it. From an early age, Duckworth came to understand our tendency to overvalue talent. Her parents’ obsessive focus on success and achievement was a key factor. “It was talked about all the time in our house,” she said. “Who was the most successful person in our family? Who is the most successful of our cousins? Who is the brightest physicist who ever lived? Who is the greatest painter who ever lived?” Her father especially viewed talent as almost synonymous with eventual achievement. But Duckworth took a different tack. “I grew up to become a psychologist who studies pretty much everything that is not your innate talent, your gifts,” she said. “This common denominator that I have identified in high achievers, whether they’re athletes or musicians or investors, is grit.” The basic concept of grit sounds very simple: “passion and perseverance for long-term goals” in Duckworth’s words. But it gets tricky. “This quality of grit is malleable, and it is not correlated at all with measures of talent,” she said. So, not only do we have to overcome the belief that talent defines our potential and limits what we can achieve, but we also have to reframe how we think about making the most of our talents. Consider the so-called 10,000-hour rule. That concept, based on a single study of German musicians, created the misconception that mastery could be achieved simply by putting in the time. But that’s an oversimplification. The actual study found that a very specific and extremely demanding type of practice differentiated the superior from the very good, that the quality of effort over time matters at least as much as the sheer amount of time.  Interpreting these findings through the lens of “grit,” Duckworth broke down the principle into three elements: Concentrate on one specific aspect of overall performance and make deliberate efforts to improve it. Focus on this effort with 100% intensity, with no multitasking, because half-hearted or mindlessly rote “practice” will not suffice. Solicit continuous feedback on how to do better and repeat steps 1 through 3 relentlessly until excellence is achieved. This all might sound like pure persistence. But grit has another critical component: passion. “Happiness and grit and success are all related,” Duckworth said. “Can you become truly world class by doing thousands and thousands of hours of this kind of difficult deliberate practice without loving what you do?” So, there’s nothing magical about the 10,000-hour rule. But there is something magical about hours upon hours spent in high-quality practice. Persistence + Passion = Success? Still, there’s more to the grit equation. Yes, persistence pays off, but most of us still conceive of talent as a rigid, inflexible substance. Duckworth’s research has explored how this mindset influences us, and the hardest part of achieving true grit may be understanding that our abilities are more malleable than we imagine. “Your grit, your curiosity, your humility — there’s nothing about you that is completely fixed when it comes to your mindsets, to your habits, your character,” she said. In Duckworth’s studies, “success” is always defined as objectively possible through countable or measurable criteria. But the malleable nature of our potential is more subjective and depends on conviction. The only way to measure it is to have the passion to persevere in pursuit of something difficult for a long time. Throughout the process, we simply cannot know whether such hyper-focused effort will lead to success. Our preconceptions about the limits of our abilities may constrain us more than our innate abilities. But there is another subjective factor: happiness. Aerodynamic Pursuit “Happiness and success must be related, but they’re not the same thing. Happiness is how you feel about your life. It’s subjective, not objective,” Duckworth said. “Grit not only predicts objective measures of success, but it also predicts subjectively feeling happy, feeling a lot of positive emotion on a daily basis, and also feeling overall satisfied with your life.” So, what will make us happy is grinding persistence in pursuit of achieving some kind of unknown potential that can only be realized after years of sacrifice? As counterintuitive as it may seem, that is exactly what Duckworth’s research suggests. “I think what it really is to be gritty is to have some alignment in your goals, and so you have the opposite of conflict — that you’re aerodynamically pursuing things with a lot of enthusiasm,” she explained. “There’s a wonderful harmony when you feel like what you’re pursuing aligns with your values and aligns with your interests, it aligns with how you’re spending your time. And that’s what I find about very gritty people.” As for achieving happiness, a sense of purpose may be more important than material wealth. “What really motivates people? More than money, honestly, it’s mattering,” Duckworth said. “It’s mattering and being useful and being appreciated by other people.” There’s more. Not only are gritty people happier, but they also tend to score high on other virtues. “There is a positive correlation between grit and kindness, gratitude, empathy, curiosity, and more,” she said. “These things are positively correlated, but they’re not exactly the same. So, we should be reminded of the importance of ethics and other people.” Beyond Individual Achievement Grit is not developed in isolation but in a context. And culture is a critical element of that process, according to Duckworth. Shared beliefs, values, and rituals at the national, local, and

“There are these people who think we don’t have to take all these tough decisions to deal with our debt. . . . It’s as if they think there’s some magic money tree. Well, let me tell you a plain truth: there isn’t.” — David Cameron, UK Prime Minister, 2010 to 2016 How does public debt influence an economy’s long-term potential? A decade ago, some economists claimed public debt in excess of 90% of GDP led to negative growth. Others disputed these parameters but conceded that advanced economies with public debt above 90% of GDP averaged 2.2% annual growth between 1945 and 2009 compared to 4.2% for those with a ratio below 30%. Whatever the relationship between sovereign debt and economic growth, many developed economies have debt burdens well in excess of that 90% threshold. When its then-prime minister David Cameron emphasized that more deficit spending was out of the question, the United Kingdom had a debt-to-GDP ratio below 80%. After a decade nurturing the alchemistic money tree, that figure is now 100%. In the United States, after 40 years of almost uninterrupted supply-side “trickle-down economics,” this ratio is over 120%. Should governments ever decide to end this permissive environment and start deleveraging, how could they do it? 1. Redeem Governments can discharge public debt by selling off infrastructure and other state property. Following the eurozone crisis of the 2010s, for example, Greece sold several of its air- and seaports and a large stake in its telecoms operator OTE, among other assets, to erase part of its liabilities. States can also requisition the assets of their citizens and corporations. In the 16th century, Henry VIII dissolved monasteries in England and disposed of their property to fund his military campaigns. During the French Revolution, the Constituent Assembly confiscated the clergy’s estates and auctioned them off to wipe out the public debt. Taxation rather than outright expropriation is a much more common appropriation technique, however, whether through higher marginal income and capital tax rates, as the Joseph Biden administration proposed, or through an exceptional tax. In the United States, some economists and politicians support a wealth tax to address economic inequality and generate extra revenue to pay down the debt. In the United Kingdom and other nations that have yet to overhaul their property laws, taxing land value is a viable alternative. Of course, with globalization and sweeping financialization, tax evasion and avoidance schemes have grown ever more sophisticated. Without international cooperation, wealth tax collection can be neither easy nor fair. 2. Prune A more effective debt amortization strategy is to let prices rise. Amid increased output and government revenues, inflation mechanically lowers the debt-to-GDP ratio as the denominator expands. In the aftermath of the 1970s oil shocks, for example, US public debt fell from 35% to 30% as a percentage of GDP. Not only does the principal fall in value, if interest charges remain below the price index, as they have in many developed countries over the last 18 months, negative real interest rates reduce the debt service burden. With inflation at or close to double digits, interest rates in the low single digits make interest repayments much more manageable. Naturally, bonds linked to the retail price index, which represent about 25% of UK public debt, provide no such comfort. The US Treasury first issued government-guaranteed inflation-indexed bonds in 1997 — when many thought inflation was permanently tamed — but paid close to double digit interest rates on them last year. If maintaining zero or negative interest rates on a real-term basis is a standard technique of financial repression, the current situation demonstrates that controlling price increases is challenging, while the 1970s scenario shows that reducing sovereign debt via inflation takes time. Either way, such arrangements are harmful to savers and consumers alike. Currency devaluation can also lower debt-servicing costs. It has been unofficially endorsed by the United Kingdom since exiting the European Union. Through such depreciation, countries that issue public debt in their own currency facilitate the redemption of that debt since government bonds’ interest payments are primarily fixed. Budget deficit reduction is even more effective. Government spending cuts combined with increased revenues eventually produce budget surpluses. This is what Cameron’s government sought to accomplish during the Great Recession. But success is far from assured. Such efforts require phasing out popular programs and sustained fiscal discipline and can take decades to bear fruit. The United States has only recorded four years of surplus in the last 50. France last reported a balanced budget half a century ago. A less painful way to shrink the public debt is for borrowers — whether individuals, corporations, or nations — to grow into their debt structure. But stimulating growth is not a straightforward exercise. Over the last 30 years, Japan has increased its debt-to-GDP from 40% in the early 1990s to 220% or more today without generating the hoped-for economic expansion. Growing out of debt is hard and when central banks maintain tight monetary policies amid inflation fears, it is pretty much impossible. 3. Amend Restructuring may be a more credible way to manage sovereign debt. “Independent” central banks purchased government bonds to keep the economy afloat throughout the 2010s and resorted to even more unconventional monetary policies during the pandemic. Since the global financial crisis (GFC), the US Federal Reserve’s balance sheet has expanded by a factor of 8 while the Bank of Japan’s multiplied sevenfold. This debt-vacuuming strategy lowered interest rates to zero and the cost of debt evaporated. Rather than flood public markets with sovereign bonds, governments chose to temporarily park them off market. But the post-pandemic contraction is making it difficult for central banks to offload these bonds. Creditors could also voluntarily waive their redemption rights. The so-called debt jubilee was common in ancient times, but such debt forgiveness has not occurred in Europe since the aftermath of World War II. Since central banks have become their countries’ major creditors, this option may be more feasible today. While the

The following is based on “Redefining the Optimal Retirement Income Strategy,” from the Financial Analysts Journal. Last month, I explored how retirees typically have some ability to adapt their spending to prolong the life of their portfolio. Here, I introduce an approach that incorporates dynamic spending into retirement income projections and provide an example of how it can result in more realistic expectations of potential retirement spending paths. Evolving Models Retirement income planning tools largely assume “static” spending: That is, portfolio withdrawals are expected to change over time based on inflation or some other constant factor. This assumption is overly simplistic and inconsistent with the decisions retirees might make when faced with potential portfolio ruin. In reality, retirees cut or increase their spending based on how their situation develops. If their portfolio performance falls below expectations, for example, they may need to tighten their belts, and vice versa. While research going back decades proposes various methods to adjust portfolio withdrawals over time, these so-called dynamic spending (or withdrawal) rules can be difficult to implement. They may be too computationally complex or otherwise unable to handle nonconstant cash flows, and they may significantly complicate financial planning tools and even “break” more common binary outcome metrics, such as the probability of success. Static spending rules lead to retirement income projections that can differ significantly from the likely choices a household would make in retirement and from the optimal decisions around how that retirement should be funded. Introducing the Funded Ratio The funded ratio metric measures the health of pension plans, but it can also estimate the overall financial situation of retiree consumption or any other goal. The funded ratio is the total value of the assets, which includes both current balances and future expected income, divided by the liability, or all current and future expected spending. A funded ratio of 1.0 implies that an individual has just enough assets to fully fund the goal. A funded ratio greater than 1.0 suggests they have a surplus, while one below 1.0 implies a shortfall. Estimating the funded ratio for each assumed year using a Monte Carlo simulation is one way to adjust expected spending throughout retirement as the retiree’s situation evolves (e.g., based on market returns). The table below provides context around how a certain spending amount could be tweaked based on the funded ratio for the respective goal at the end of the previous year. Real Spending Adjustment Thresholds by Funding Ratio Level Funded Ratio Needs Goal Wants Goal 0.00 -10% -20% 0.25 -5% -15% 0.50 -3% -10% 0.75 0% -5% 1.00 0% 0% 1.25 0% 2% 1.50 0% 4% 1.75 2% 8% 2.00 4% 10% For illustrative purposes only. Based on the above, if the wants spending goal is $50,000 and the funded ratio was 1.40, the amount would increase by 2%, to $51,000, in the subsequent year. Anticipated spending falls as the funded ratio declines, and vice versa. The changes to the needs and wants spending adjustments vary, with greater adjustments to the latter. These differences reflect how much assumed flexibility is embedded in the two spending goals and the diminishing marginal utility of consumption. We could significantly increase the complexity of the adjustment rules, for example, by considering the remaining duration of retirement, portfolio risk levels, or additional client preferences. While this dynamic spending model resembles some existing approaches, it is more holistic in how it considers the retiree’s situation. Other common dynamic spending rules, such as variants of how required minimum distributions (RMDs) are determined from qualified accounts, focus entirely on the portfolio balance and cannot incorporate how the role of the portfolio funding retirement could vary over time. Most dynamic spending rules cannot model a scenario in which spouses retire and claim Social Security at different ages and receive future sources of guaranteed income, such as a longevity annuity starting at age 85. The Impact on Income Incorporating dynamic spending rules can reveal a very different perspective on the range of potential retirement outcomes than viewing retirement as a static goal. For example, the exhibit below shows how spending could evolve for a retiree with an $80,000 retirement income goal, $1 million in savings, and $40,000 in Social Security benefits for whom 70%, or $56,000, of the total $80,000 goal is classified as needs. Distribution of Simulation Outcomes While the probability of success for this simulation is approximately 70% assuming a static retirement income goal based on the key modeling assumptions in the research, overall the retiree does relatively well. The likelihood of missing their retirement income goal, especially the amount they need, is incredibly low. Conclusion While financial advisers often say they are dynamically adjusting client spending throughout retirement based on how the retiree’s situation develops, the related decisions are not generally incorporated into the actual plan when it is based on static assumptions. This creates a significant mismatch. Integrating dynamic rules into a retirement income plan can have significant implications on optimal retirement income decisions and must be included in financial planning tools to ensure the modeled outcomes and potential guidance better reflect the realities of retirement. For more from David Blanchett, PhD, CFA, CPA, don’t miss “Redefining the Optimal Retirement Income Strategy,” from the Financial Analysts Journal. If you liked this post, don’t forget to subscribe to the Enterprising Investor. All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer. Image credit: ©Getty Images / jacoblund Professional Learning for CFA Institute Members CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Enterprising Investor. Members can record credits easily using their online PL tracker. source