Visit our website www.cfaphil.org

Established 1943A FOUNDING SOCIETY OF CFA INSTITUTESummer 2012

Partner with CFAP through Sponsorship

The CFA Society of Philadelphia events cal-endar includes numerous opportunities for your firm to partner with CFAP through

sponsorship. Our events provide sponsors with valuable recognition and publicity through exposure to a broad population of investment professionals. Throughout the year, CFAP offers sponsorship opportunities that are designed to fit any budget. We would welcome the chance to review the options that are currently avail-able. If you are interested in learning more, please email: Peter Conners, CFAP Executive Director at pconners@cfaphil.org or Brian Lauzon, CFA at brlauzon@gmail.com

The 2012 CFA Scholarship Program appli-cation submission process ended on May 31st, 2012. The scholarship discounts

the registration fee to $250 for each exam. Curriculum is now included as part of the registration fee. The program is intended for candidates planning to sit for Level I of the December 2012 CFA exam.

A total of five scholarships will be awarded. Selection criteria include – but are not limited to – interest in the CFA® Program, professional experience, academic achievement and finan-cial need. Candidates who have already reg-istered and paid for the December exam will receive a refund if they are chosen to receive a scholarship.

Each applicant must meet all of the qualifica-tions for registration as a CFA candidate, reside or work within 200 miles of CFAP and, if a student, be enrolled in a college or university within 200 miles of CFAP. Immediate family members of CFAP officers, directors, commit-tee chairs or employees of CFAP are not eli-gible to apply for a scholarship.

Scholarship winners will be announced by June 30, 2012.

2012 CFA Scholarship Program

In April, CFAP participated in Drexel University’s Finance Week. This series of events focused on educational and network-

ing opportunities in the finance industry for Drexel’s business students. Drexel conducted a CFA Mock Exam for students, and CFAP board president, David Shepherd, spoke to the stu-dents about the value of the CFA Charter to over 100 students, faculty and alumni.

Drexel Finance Week

Register Early! Seating is limited and may sell out.

Fee: $1199 for non-members $999 for members

Registration fee includes: • 16 Week Live Instruction – Center City (runs Tuesdays, August – November) • Schweser Class Workbooks • SchweserNotes • SchweserPro QBank • Practice Exams, Vol. 1 & 2 & More

Signup now to get materials delivered quickly before classes start

Contact Peter Conners at pconners@cfaphil.org to sign up

Fall 2012 CFA of Philadelphia Level 1 Review Course and Study Program

June 30th marks the end of our fiscal year and a change in

board leadership for our Society and I wanted to take this opportunity both to look back and to look forward. This year was an extremely busy one, with much of the activity taking place behind the scenes. The upcoming year will be

an exciting one as we celebrate our 70th year and the CFA Institute celebrates 50 years of the CFA Charter.

With Pete Conners joining as the Society’s Executive Director last year, we were able to undertake several organizational initiatives. Pete wrote and began implementation of five strategic plans including: membership, spon-sorship, member benefits, programs and orga-nization. The board focused on each of these plans as well as our overall organization in a full-day strategic planning meeting in March. We are already seeing the benefits of these ini-tiatives and I hope you will communicate with the board and Pete additional changes you would like to see.

The board assisted Pete in his efforts and I would like to highlight a few of this past year’s initiatives. Board member Chris Tidmore and his team did a remarkable job bringing Level 1 class preparation in house and help-ing dozens of candidates prepare for the June exam. We had another remarkable year of events led by board members Jeremy Bach (programs), Jeremy Tenenbaum (conferences), Jim Barnes (forecast dinner) and Mark Byers (professional day). Pete Maher directed this year’s investment research challenge which featured the efforts of nine local universities and Pete also led efforts to build ties with local universities including Drexel and Philadelphia University. Other outreach efforts led by Kristen Chryssikos, Jon Fioravanti, and Sharon Hayman included our “Operation Hope” initia-tive encouraging financial literacy and efforts to increase our ties to other professional

groups in our industry. CFAP members can now get discounted pricing with several local professional organizations. If you are reading our newsletter online, you are benefiting from the efforts of our technology committee, led by Walter Lenhard, who implemented our new web site.

At the CFA Institute’s annual meeting in Chicago John Rogers, CFA President and CEO, led off the conference with a three point plan to restore trust in our industry, including:

1. A bolder voice for professional ethics2. A focus on financial activities that enable

economic and social progress3. An effort to extend our knowledge, our skills

and our behaviors to wider communities within the field of finance

John’s speech is available on the Institute’s web site and you will find useful tools includ-ing a comprehensive list--“50 Ways to Restore Trust in the Investment Industry,” the Asset Manager Code of Professional Conduct, and the Research Foundation’s recent guide to trustee responsibilities. John’s speech and these resources represent an important call to action for all of us and its success will depend on the daily efforts of each of us.

The annual conference also featured the roll-out of the CFA Institute’s new logo (featured below). We expect to be implementing the new logo locally in a branding initiative start-ing this fall.

Pete Conners and the board will continue to work throughout the summer on these ongo-ing initiatives. I would like to take this oppor-tunity to thank them for their tireless efforts on behalf of your Society. Additionally, I would like to thank all of our members for their input, support and participation this past year. Have a great summer and we will look forward to seeing you at one of our many fall events!

Letter from the President

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Please describe your Personal and Professional Background

I grew up in the Philadelphia area but have mainly lived and worked in the major finan-cial centers including San Francisco, Chicago, and London. I returned from London to attend graduate school back in New York City.

While in B-school, I consulted on a go-to-market feasibility study focused on the testing of counterfeit prescription pharmaceuticals. That entrepreneurial experience led me to start a small financial consulting practice back in Philly. The firm specializes in financial statement preparation & analysis and valua-tion. I have performed work in the financial, pharmaceutical, utility and telecom services industries. However, my recent interests have been focusing the business functionally more on bottom-up valuation, specifically within the investment management industry.

What was your motivation for volunteering?

Although I had grown up in the local area, most of my professional career had been spent elsewhere. CFAP was one means for me to more proactively engage with professionals in the Philadelphia investment community.

A year later I won the Annual Drawing for an entire year of pre-paid CFAP events. Although most CFAP events have a nominal charge, it was incentive enough to attend a few more that year! Volunteering for the Society seemed a logical way for me to both ‘pay it back AND forward’.

Can you provide some details related to your volunteer activity?

I have been involved in facilitating various CFAP-sponsored events such as the Downtown & Suburban Luncheon Speaker Series as well as the Annual Conferences. Additional help has been lent writing about these events in the Newsletter.

How was volunteering a rewarding experience?

I have met some dynamic individuals – both as presenters and as CFAP colleagues. However, some time ago before relocating to London, I was actively involved – both on the Board and as a mentor/Big Brother - in an enrichment children’s charity called Horizons for Youth in Chicago. Having once again felt the ‘need to serve’, I can honestly say my time spent tutoring children and their parents during Community Outreach activities has been the most rewarding.

Volunteer Recognition – Andrew L. Lange

The CFA Institute Research Challenge con-cluded in New York City in April, where Thammasat University, representing the

CFA Society of Thailand, was crowned 2012 champion. Congratulations to our CFA Society of Philadelphia team from the University of Pennsylvania, who succeeded in advancing within the Americas Region, however fell just

short of qualifying for the Global Finals. The 2012 Research Challenge involved over 3000 students from over 650 universities, represent-ing 85 local challenges from 111 participating societies. Over 2000 volunteers graciously gave of their time on behalf of the students, and once again we thank those that helped to make our local challenge a great success in 2012.

Global Investment Research Challenge

We’ve invited representatives from the Association of Delaware Valley Independent Schools, Cambridge As-sociates, Children’s Hospital of Philadelphia, Commonfund, Delaware Valley Grantmakers, Drexel University, Glenmede, Haverford College, The Investment Fund for Foundations, The Johns Hopkins University, The Pew Charitable Trusts, Princeton University, Swarthmore College, The University of Pennsylvania, The Vanguard Group, and many others!

Limited Seating is availableRegister now at www.cfaphil.org

CFAP Members $110Non-profits $110

Non-members $175

Sponsored by

ENDOWMENT, FOUNDATION, AND PHILANTHROPY CONFERENCEThursday June 7, 2012The Hub at Cira CentrePhiladelphia, PA8:20 am – 4:00 pm

7:30 am Registration begins

7:30 am - 8:20 am Breakfast

8:20 am - 8:30 am Introduction by David Shepherd and

Jeremy Tennenbaum

8:30 am - 9:20 am A. Laura Solomon on legal and regulatory

developments impacting non-profits

B. Peter Canelo on understanding the

long-term impact of Fed policy

9:30 am - 10:20 am A. Panel: Should we build portfolios based on

risk not on expected returns?

B. Panel: Improving investment committee

performance

10:20 am - 10:40 am Coffee break

10:40 am - 11:30 am A. Panel: Is a 5% real return still attainable?

B. Panel: What’s a smaller non-profit to do?

11:40 am - 12:30 pm A. Panel: Should you hire an outsourced CIO?

B. Panel: Impact investing, is it a fad or trend?

12:30 pm - 2:00 pm Luncheon keynote: Mark Yusko from

Morgan Creek

2:10 pm - 3:00 pm A. Panel: Chief investment officers on the

most attractive investments

B. Panel: How we got our biggest gift

3:10 pm - 4:00 pm Keynote: George Gephardt from the

Academy of Natural Sciences

The conference registration includes breakfast, lunch, and coffee break

When registering for an event via the CFAP website, you will know your registration is complete ONLY when you receive an EMAIL CONFIRMATION from CFAPpage 4

Upcoming Events & Programs

CFAP Annual Meeting and Wine Tasting

Tuesday, June 19, 20125:00 P.M. – 8:00 P.M.The Racquet Club of Philadelphia215 South 16th StreetPhiladelphia, PA

Plan to attend the CFA Society of Philadelphia’s annual meeting of mem-bership. Hear from the CFAP board

of directors on the state of your Society. Participate in the ballot process that elects new Officers and Directors to the CFAP board. Immediately following the annual meeting, we will hold an exclusive wine-tasting event. The wine tasting will be conducted by Henry Greenly, Sommelier at Del Frisco’s Steak House in Center City. Del Frisco’s award-winning wine list contains over 1,000 selections from around the globe.

Complimentary hors d’oeuvres and a cash bar will be available

Wilmington Happy Hour Tuesday, June 26, 20126:00 P.M. – 8:00 P.M.Ernest & Scott Taproom902 North Market StreetWilmington, DE

Join us for some summer fun at CFAP’s Wilmington Happy Hour. Meet your col-leagues at the newly renovated Ernest &

Scott Taproom (formerly the Public House) in downtown Wilmington.

Complimentary appetizers and a cash bar will be available. We look forward to seeing you at the Taproom!

Save the Date!CFAP Outing Philadelphia Union Soccer Night

Thursday, September 20, 2012Night gamePPL Park, One Stadium DriveChester, PA

Join your colleagues for a night of soccer excitement as the Philadelphia Union take on the D.C. United at PPL Park on Thursday

night, September 20, 2012.

Past Event and Luncheon SummariesFebruary 22, 2012 - How to Start an Investment Management Firm

On February 22, investment profession-als from the Philadelphia area gathered at the Conshohocken Marriott to listen

and engage in discussions with experienced panelists on the topic of Starting and Running an Investment Management Firm.

The panelists included Tim Riddle CFA, Greg Nowak Esq., and Maris Ogg CFA. This standing-room only event was moderated by Jeremy Bach CPA, CFA.

(For additional bio information on the panel-ists, please see the CFAP recent events page.)

What follows is a snapshot of the comments and advice offered by the panelists in different categories related to the topic.

Capital

Effectively raising capital and sufficient capital is the single most difficult aspect of starting an investment management firm, but here are some tips to help you succeed.

Budget

Take your conservative budget of what you think your capital needs are and multiply that by 2x or 3x.

Develop a three-year plan. Have a clear path defined for your first $25 million – this is your survival money. Have a clear path to the next $75 million. The hardest jump is obtaining the second $100 million.

Fundraising

Begin your capital raising efforts with fami-ly, friends and colleagues. After your imme-diate resources are extinguished, network, network and… network.

Despite your investment skill or plan, if you are unable to sell yourself or your firm, it will be difficult to obtain the financing you require.

Do not give away too much. Despite your need for capital, offering excessive own-ership stakes to your partners or outside parties defeats the purpose of having your own firm.

Marketing

The ability to market effectively will drive the success of your fundraising efforts. The single greatest challenge for marketing is overcoming the lack of a performance record to sell. This ties back to networking and relationship building.

Performance record

Track record could be for firm, team or product. The performance track record is the property of the firm. However, if you meet certain requirements, you may be able to use your performance record from your prior firm with the proper disclosures. Some hurdles that you must complete

include obtaining your firm’s permission to use the performance figures, having a complete set of records to back the per-formance, demonstrating that you are primarily responsible for the returns. Seek consultation for specific guidance on your unique situation.

People

A bad hire in a small firm can be poison. People will determine your firm’s ultimate success. Consider working with a hiring firm who knows your business to help with the process.

Shareholder Agreement

Have a strong written agreement between partners that defines structure, compensa-tion, decision making, as well as an exit strategy and contingency plan.

Hiring

When hiring in a small firm, look for “util-ity” players who have some overlap. Niche employees are not ideal during your com-pany’s infancy.

Make sure you and your employee under-stand their contract. Review the contract with the employee, including possible sce-narios, and then live by it.

You can hire formally through the use of a head hunter, and informally through your network.

Working in a small firm or start-up is a dif-ferent psychology versus a large corporate environment. Have the discussion with the prospective hire. Employees in a small com-pany atmosphere may have to wear several hats and troubleshoot non-investment problems personally.

Compliance

Compliance should be primary not secondary if you wish to have a going-concern business. Ensure you understand rules and regulations and have properly documented policies and procedures for your firm.

It is recommended to have a dedicated Chief Compliance Officer (CCO). You cannot out-source this critical function. Your CCO should have the will to challenge the investment team or CEO when necessary.

Fee Structure

Having a well thought out fee structure is important and ties in with your marketing efforts. Use creativity in your fee structure, base versus performance fees, to help attract and sell to a wide base of clients.

Do not start with a lower fee and raise it; Do start with a higher fee and “waive” it down if necessary.

continued on next page

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Past Event and Luncheon Summaries (continued)

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Outsourcing

Consider carefully what you would like to out-source versus what you would like to do your-self. This involves being honest with yourself in identifying your weaknesses.

Although it is expensive to outsource systems, having systems supported by dedicated IT pro-fessionals significantly reduces your operating risk.

It is possible to outsource operations, custo-dian, transfer agent responsibilities.

If you are having difficulty fundraising or con-necting to potential clients, there are market-ing firms that can be hired to specialize in this function.

May 2, 2012 – The Battle for Alternative Exposure

On Wednesday, May 2, 2012, the CFA Society of Philadelphia held a discussion panel enti-tled, “The Battle for Alternative Exposure: Can Mutual Funds Replace Hedge Funds?” at the Desmond Hotel in beautiful Malvern, PA. The panelists were as follows: Thomas Chapin, CFA, Chief Investment Officer at Mill Creek Capital Advisors; Matthew Glaser, Chief of Investment Strategies at Turner Investments; Afroz Qadeer, CEO and co-CIO at Tapestry Asset Management; and Brian Vargo, JD, Counsel at Dechert, LLP. The panel was moder-ated by Jeremy Bach, CFA, CEO at Bach Capital Advisors and CFAP’s Events Chair. The panel discussion began with Brian highlighting some of the key differences between hedge funds and mutual funds, which include major differences in transparency, liquidity, and reg-istration requirements. He spoke about the intrusiveness of the ’40 Act, specifically in how it limits the use of derivatives, as a potential shortcoming of the mutual fund structure. Although Dodd-Frank has started to increase hedge fund regulation, hedge funds can still qualify for exemptions by limiting the number and/or nature of investors.

Matt was the biggest proponent of mutual funds on the panel, particularly when talking about hedged and long/short equity strategies. His experience has been that clients’ desire for greater transparency, greater liquidity, and lower fees has led them to prefer mutual

funds, especially in the long/short equity category, where there has not been much dif-ferentiation in performance between hedge funds and mutual funds of late. Similarly, with respect to hedge funds, he has observed the trend within the institutional space moving toward investing directly with hedge fund managers in order to avoid the extra layer of fees that comes with investing in fund of funds (FOF). He also said that he does not believe that the holdings reporting require-ment of mutual funds gives them a significant disadvantage.

Afroz, whose firm deals with hedge funds and fund of funds, said that the most important niche that hedge funds occupy is in strate-gies which don’t lend themselves well to the mutual fund structure, in which daily liquidity is required. Examples of strategies that fit that description include distressed and event driven strategies. He also said that some of the typi-cal criticisms of hedge funds can be mitigated by a client opening a managed account, in which he or she can have greater liquidity and transparency, as well as negotiated fees. The most attractive hedge fund managers to him in the long/short equity space are those who dynamically manage their net exposure.

Also a believer in the merits of hedge funds, Tom described how the characteristics of max-imizing flexibility and minimizing the number of constraints, when managed correctly, are what create hedge fund outperformance ver-sus mutual funds. However, he does recognize the attractiveness of a good actively managed ’40 Act fund that can be had for an expense ratio in the neighborhood of 1.25%.

The panelists seemed to agree that mutual funds will never completely replace hedge funds; however, the recent explosive growth in the liquid alternative space is starting to give fee-sensitive investors potentially better investing options.

March 6, 2012 - Investment Strategies in Today’s Energy Sector

On Tuesday, March 6, 2012, the Society hosted a luncheon that focused on a theme that has been getting a lot of attention lately in mass media and popular culture – clean energy. The luncheon was held at the DuPont Country Club

in suburban Wilmington, DE, and featured John Moore, CEO of Acorn Energy, a holding company whose subsidiaries focus on different aspects of the clean energy sector.

John has extensive experience in the energy sector, and started out with Comverge, a com-pany that focuses on active energy demand management for its clients, and started out actively managing use for air conditioners during peak demand periods. The company was later sold to a group of investors led by Citigroup and Goldman Sachs, and still exists today.

Unlike most discussions on the topic that tend to incorporate social and environmental fac-tors as major reasons to develop clean energy, John discussed the sector from a purely eco-nomic perspective to show its investment potential, no matter what one’s views on social and environmental policy may be.

John started off his presentation by put-ting what his company does in an historical context. In 1850, the economy of the United States was roughly equal to the size of the economy of Italy, and 40 years later it was the largest in the world. The reason behind this explosive growth was the development of the railroad network. In today’s world, the global economy is developing a digital “neural net”, and a mastery of that net is vital to prosperity.

According to John, there are currently five major dogmatic “truths” that repeatedly are presented in the mass media concerning the modern society’s energy situation. However, upon analysis these following points reveal themselves to be more “myths” than “truths”:

1. We’re running out of energy

• Energy supplies are as infinite as the human imagination. When supplies of wood, the energy source that powered the human civi-lization for centuries, became in danger in the 1700s due to extreme deforestation, coal power was discovered and developed. Oil and nuclear power are more recent examples of the same type of progression.

2. Environmental Crisis is inevitable

• A comparison between the growth in energy consumption to such statistics as the growth in GDP and total vehicle miles traveled shows that emissions have fallen despite a substan-tial increase in consumption.

3. Wind and Solar power are the solution

• These two sources can have unexpected costs associated with them, and due to their nature, work well only in some places and/or specialized applications.

• Extreme focus on these two sources is part of an overall way of looking at the energy situation that focuses too much on specific elements, and not on the system as a whole, especially on how to make that system work better.

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4. High oil prices are driven by scarcity and cost of extraction

• Oil price variations are tied much more to geopolitical and regulatory changes than to the real discovery and extraction costs.

5. More efficient energy use will decrease total energy consumption

• Data actually shows that the more efficient we become in our energy use, the more total energy we actually consume, and the more total energy we find.

In addition to the above misconceptions, John also presented two major hurdles that the energy sector currently faces. The first is a “people” crisis. There is currently a severe shortage of engineers and workers, and that shortage is only projected to get worse. Possible solutions to this problem would include “digitizing” the network by, for exam-ple, replacing traditional electronic-board sen-sors with fiber optic cable, and implementing 4D seismic imaging to improve oil recovery.

The second major hurdle is an infrastructure crisis. Major components of our electrical grid are reaching obsolescence, and many trans-formers are close to or past their life expec-tancy. This issue was brought to the forefront when NYC’s ConEd had the insurance on their transformers canceled due to aging reasons. In addition to renewing the infrastructure, we need to start improving the efficiency of the whole network, and expand active manage-ment of energy demand.

A brief Q&A session followed. Overall, this was a very interesting lecture that provided some fresh looks at one of today’s most pressing issues.

March 15, 2012 - Boombustology

On Thursday, March 15, the Society hosted a luncheon with Vikram Mansharamani and his presentation on the dynamics of boom and bust cycles entitled “Boombustology” (borrow-ing the title from his book of the same name). The luncheon was held at the Racquet Club of Philadelphia.

Vikram, an experienced global equity investor and a renowned lecturer at Yale University, started his presentation with a brief discussion of differences between puzzles and mysteries. Puzzles, according to him, do have answers, and finding them is just a matter of data gathering and time. Mysteries, on the other hand, don’t have clear answers, and the best approach is to use existing data to come up with multiple possible scenarios, and then to connect the dots between them.

Dealing with the anatomy of bubbles and boom-bust cycles, Vikram uses a “five-lens” approach that consists of the following parts:

1. Microeconomics – involves the discussion of

true nature of the capital markets – are they really efficient or, in fact, reflective, with higher prices resulting in higher demand?

2. Macroeconomics – credit-related factors are especially important in this category, as credit-fueled speculations are particularly problem-atic. An important point here is a tenet from the Austrian school of economic thinking that states that mispriced money is misused money.

3. Psychology – significant bubble contributors from here include hubris, “new age” thinking, and overconfidence.

4. Politics – government action in areas such as regulation and monetary policy influences the price mechanisms.

5. Biology – concepts from this cat-egory include a translation of an area of Epidemiology that studies “infection” and “removal” rates when dealing with epidemic outbreaks in a population, and results from the study of the Chaos theory that show that individual “chaos” in fact leads to group “order”.

As a break from the heavy academic discussion of the normal statistical data that goes into the above approach, Vikram next discussed some “fun” indicators that can signify an imminent bubble. The mentioned indicators included landmark skyscrapers, inflated art markets, magazine covers, and TV shows.

Next, the presentation moved into a topic that is a concern for many economists and busi-ness leaders today – the long-term prospects for the growth for the economy of China. Using many aspects of his Five-Lens approach, Vikram pointed out many signs that could be predicting an imminent bubble in the Chinese economy. These include such events as a tre-mendous increase in home and commercial loans over the past decade, misallocated capital that resulted in empty new shopping malls and modern ghost cities, an overheated art market that produced some irrational prices for recently-auctioned items, and 5-Year Plans that resulted in less-than-wise economic decisions.

In addition to these factors, according to Vikram, there has recently been no net labor growth, the current levels of capital growth are not sustainable, and productivity-related data from Chinese government sources is under extreme question as to its reliability.

Some current predictions include an average 2011-2021 annual growth of 4% (a lot less than previously expected), a loss of the China “bid” for industrial commodity investors, and a prolonged period of significant industrial overcapacity.

While Vikram admittedly states that the burst-ing of the Chinese “bubble” could be a low-probability event, it’s an event that has mas-sive global economic implications – a textbook “black swan” almost. Likely casualties of such a

collapse would include the Chinese industrial complex, commodity currencies, “commodity” countries (i.e. countries whose economies rely primarily on export of raw materials), com-modity producers, drybulk shippers, and capi-tal goods suppliers (shipbuilders in particular).

As usual, the presentation was followed by a lively Q&A session. Overall, it was a very fasci-nating presentation by one of the premier eco-nomic lecturers that did raise a lot of points to think about regarding the future global economic situation.

CFAP Happy Hour

The CFA Society of Philadelphia held a happy hour at the Tir Na Nog on April 10, 2012. The event was well attended as attendees enjoyed cocktails and conversation with their col-leagues within the financial industry.

Mock Exam

The CFA Society of Philadelphia administered a Mock Exam on Saturday, May 19, 2012 for those candidates who are sitting for the June CFA examinations. Roughly 150 individuals participated in the experience. Taking the Mock Exam is a great way for candidates to gain additional practice before the actual exam day. All three exam levels were tested and consisted of a three hour morning and three hour afternoon session. The exams were fully proctored to help replicate the pressure of exam day. The CFA exams will take place on Saturday, June 2 at the PA convention Center.

Past Event and Luncheon Summaries (continued)

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The U.S. economy grew at a 2.2% annual pace during the 1st quarter of 2012 compared to 3.0% the prior quarter.

Consumer spending was a bright spot for the U.S. economy as personal consumption jumped 2.9% during the quarter, the larg-est quarterly increase in more than a year. Consumers continue to spend despite high unemployment and lackluster earnings growth. The unemployment rate ended April at 8.1%, the lowest rate since January 2009, but remained high relative to the historical average. Also through April, average hourly earnings for workers increased 1.8% over the past year compared to a 2.3% increase in the Consumer Price Index over the same time period. Despite the gap between consumer wage and price inflation, consumers continue to spend money on a variety of products and services.

The Federal Reserve has maintained its federal funds target rate at 0.25% since late 2008 and has reiterated its intentions to keep the interest rate low until late 2014. The European Central Bank (ECB) has held its main refinanc-ing rate steady at 1.00% in 2012 and has also provided another round of 3-year loans to financial institutions operating in the euro

zone to help promote stability in the European financial system. So far, the ECB has equipped banks with over 1 trillion euros through the long-term refinancing operation programs. Unfortunately, more action by the ECB may be necessary as Spanish bond yields have crossed 6.00% and fears of a disorderly Greek exit from the euro currency have resurfaced.

The S&P 500 Index increased 11.88% through the first four months of the year as stability in the euro zone and positive domestic economic growth propelled the market higher. However, through May 18, the Index has lost 7.17% as investors’ appetite for risk has quickly declined. Headline news out of Europe has been a signif-icant contributor to recent investor risk aver-sion. For the year, the Consumer Discretionary, Consumer Staples and Telecommunications sectors have returned over 8.00% for investors compared to the worse performing sector, Energy, down 6.91%. The 10 year U.S. Treasury yield continued its decline in 2012 dropping 16 basis points from 1.88% on December 31, 2011 to 1.72% on May 18, 2012. Also during this time period, the price of a barrel of oil dropped from $102.96 to $91.48 and the value of the euro relative to the U.S. dollar declined from 1.2934 to 1.278.

Economic Update

Community Outreach

The CFA Society gave back to the South Philadelphia community by providing vital financial education/information to

54 12th grade students at Audenried Charter High School. Students learned about the Basics of Banking (and Budgeting); Checking and Savings Accounts, Credit, and the Basics of Investing.

The CFA Society volunteers utilized the Banking On Our Future curriculum by Operation HOPE (www. Operationhope.org) to teach the four modules of financial literacy, as the CFA Society and Operation HOPE have a successful partnership that entails engag-ing the CFA Society volunteers, and other community partners/volunteers to raise the financial IQ of youths ages 9-18. The volun-teers enjoyed their time in the classroom as this was a wonder-ful opportunity to impart their knowl-edge and professional background with the students. The stu-dents were engaged and excited about discussing money and how to get and keep more of it!

Since becoming a Charter School in 2011 (managed by Universal Companies), the school administration and staff are committed to building pertinent partnerships with such enterprises as PNC Bank to augment the rigor-ous academic core curriculum with life skills education. The CFA Society and Operation HOPE sincerely thank Universal Companies and Audenried Charter High School admin-istrators for welcoming the program to their school.

If you would be interested in volunteer-ing, please contact Jon Fioravanti or Sharon Hayman.

CFA Society of Philadelphia Quarterly Reading List

Family: The Compact Among GenerationsBy James E. Hughes Jr.

This book takes families and the profession-als who serve them beyond the now widely accepted practices offered in Family Wealth and offers a view of Hughes’s panoramic insights into what makes families flourish and fail.

Fault Lines: How Hidden Fractures Still Threaten the World EconomyBy Raghuram G. Rajan

Raghuram Rajan was one of the few econo-mists who warned of the global financial crisis before it hit. Now, as the world struggles to recover, it’s tempting to blame what happened on just a few greedy bankers who took irratio-nal risks and left the rest of us to foot the bill. In Fault Lines, Rajan argues that serious flaws in the economy are also to blame, and warns that a potentially more devastating crisis awaits us if they aren’t fixed.

John Neff on InvestingBy John Neff

In John Neff on Investing, Neff delineates, for the first time, the principles of his phenome-nally successful low p/e approach to investing, and he describes the strategies, techniques, and investment decisions that earned him a place alongside Warren Buffett and Peter Lynch in the pantheon of modern investment wizards.

Thinking, Fast and SlowBy Daniel Kahneman

In the highly anticipated Thinking, Fast and Slow, Kahneman takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical.

Boombustology: Spotting Financial Bubbles Before They BurstBy Vikram Mansharamani

Based on a popular undergraduate seminar, entitled Financial Booms & Busts, taught by the author at Yale University, Boombustology presents a multi-disciplinary framework for identifying unsustainable booms and forth-coming busts.

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Privately held companies offer higher returns, but suitability is limited

By Sherree Decovny

The lackluster performance in the public equity markets over the last several years is driving investors to look for alterna-

tives. Meanwhile, baby boomers are reaching retirement age, and those without a succes-sion plan need to find a suitable exit. For some investors, taking a stake in a privately held company may be advantageous as long as they are willing and capable of doing rigorous due diligence.

Privately held companies are attractive because many have delivered better returns than pub-lic equity benchmarks recently. Much of the outperformance is attributable to cost cutting, cash conservation, debt reduction, and (in some cases) the restructuring of weak balance sheets and proactive negotiations with credi-tors. Moreover, interest rates remain at historic lows, so financing is cheap, assuming credit is obtainable.

“For most businesses, 2009 was a bad year,” says Susan Rosner, managing partner of Calder Associates of Pennsylvania, a middle-market merger-and-acquisition intermediary and busi-ness brokerage. “2010 was good, and 2011 was great. Now, they’re into their third year of growth.”

To take advantage of the opportunities, inves-tors can participate in private equity funds and funds of private equity funds or make direct investments. In exchange for potentially higher returns, however, they must be willing to sac-rifice liquidity and assume greater risk over an extended period. Many investors are families that have built up a successful company and have substantial liquid net assets to put to work. Some have already sold their company while others are looking to capture synergies by acquiring a stake in another business.

“They’re comfortable being in an illiquid position, and they’re looking for diversifica-tion across their other assets,” explains Ward McNally, managing partner of McNally Capital.

Private equity fund investors tend to allocate around 5–7 percent of their total portfolio over a 7–10–year period to build a program diversi-fied by vintage year, stage of investment, and sector. Returns are negative as the money is being deployed, but then the cash flow can be positive over the long term as companies are sold from the portfolio and proceeds are distrib-

uted back to investors. The target return is typi-cally about 3–4 percent above a public market equity fund, such as the S&P 500.

The best-performing private equity fund man-agers tend to sustain their track record over time. Much of that has to do with their access to the right opportunities, their operational ability to execute on these opportunities when they arise, and their access to capital. Over the past decade, the median private equity man-ager earned 12.4 percent annually, according to Deirdre Nectow, managing director of busi-ness development at Cambridge Associates in Boston. Top managers in the 25th percentile earned 21.9 percent, and those in the 5th per-centile earned 39.3 percent. In contrast, on the lower end, managers in the 75th percentile earned only 7.4 percent. But gaining access to funds run by the best managers is not easy. Investors have to go out and meet the private equity fund managers and tell their story to try to get into the fund.

Smaller clients with a total portfolio worth around US$100 million may want to invest in a private equity fund of funds, which provides diversification and access to a range of manag-ers and strategies. Funds-of-funds managers range in size, scale, and offerings. Many do their own due diligence. Usually, the required minimum investment ranges from US$1 mil-lion to US$2 million, but a commitment of at least US$3 million–US$5 million is preferred.

Know Your CompanyRigorous due diligence is critical for success. Before a privately held company is put on the market, an expert assesses the owners’ readi-ness to sell from a financial perspective, the approximate value, and the likely deal struc-ture. The process involves looking at three years of the company’s tax returns and finan-cial statements (hopefully audited) to deter-mine whether the company is generating cash flow. Next, they ascertain whether the owners can achieve their objectives and are motivated to follow through on a transaction.

“We look at line item by line item to see where there are increases and decreases,” says Rosner. “They could have changed an accountant, or they could have changed the way they’ve done accounting. So the numbers could be totally misleading. We look at gross margins, and we look at the ratios to see if there’s anything that we should be concerned about.”

Importantly, the net profit may have to be adjusted. For example, multiple owners may be taking money out of the business each year. Business owners that own the property may be paying themselves rent. If they are, the rent may be extraordinarily high to minimize their tax liability.

The adjusted net profit varies depending on the type of business. But it is essential to understand why a business is doing better or worse than expected and how that might affect the selling proposition. Rosner recom-mends hiring a consultant who has expertise in the specific industry.

“Buyers could do all the financial due diligence in the world. But at the end of the day, if they don’t ask the right questions, they’ll never get the answer,” she says.

Prospective buyers typically want to obtain customer and employee feedback, but that can be a challenge, given the need for confi-dentiality. To overcome that problem, they can engage a research organization to make enqui-ries under the guise of collecting customer satisfaction data. In addition, investors can ask employees to meet with a general manager they are thinking of hiring. Sometimes, buyers do a random test of the company’s operational processes and procedures by following a trans-action from the purchase order to resource procurement, fulfillment, and billing.

In addition to the information provided directly by the company, an array of secondary sources can be used to check payment records, plans for expansion, and potential risk exposures.

Public companies are required to file a U.S. SEC form 10-K, which includes the company history, organizational structure, executive compensation, equity, subsidiaries, audited financial statements, and other relevant infor-mation. Generally, the SEC will have informa-tion on a privately held company only if it has raised capital through venture capitalists, angel investors, and certain pooled investment funds.

State and federal government databases are a mine of information, according to Chris Roush, senior associate dean specializing in business journalism at the University of North Carolina–Chapel Hill. “Most private companies don’t file documents with the SEC, but they do file documents somewhere,” he noted as part of a Donald W. Reynolds National Center for Business Journalism webinar.

When a company or person borrows money from a lender and puts up collateral against the loan, they submit a Uniform Commercial Code (UCC) filing with the state. These docu-ments show the amount and terms of the loan and whether the payments are up to date. One can search the Public Access to Court

Worth the Risk?

Privately held companies are attractive because many have delivered better returns than public equity benchmarks recently.

continued on next page

The best-performing private equity fund managers tend to sustain their track record over time.

page 9

Employment OpportunitiesThe following is a sample of the most recent positions found on the CFAP website. Please see the full listings for additional details and instructions on how to apply.

1. Senior Manager Specialist – King of Prussia, PANationwide Investment Management Group (NIMG) is the investment arm of Nationwide Financial Services, Inc. The candidate will be responsible for the production and review of investment analytics of the IMG sub-advisors and their products. Perform analysis on risk/return statistics, two factor and multi-factor ex-post risk analysis. Will also be responsible for implementing the institutional investment process on all passive investments, and pro-vide additional level of analysis for the Senior Consultants on sub-advised mandates in our NVIT and NMF funds.

2. Director of Investment Advisor Research – Philadelphia, PAA Fortune 500 company, PNC is one of the larg-est and most respected banks in the country. The Director of Investment Advisor Research for PNC Asset Management will develop, establish and manage a state-of-the art due diligence process that supports the client needs of the four business segments: Wealth Management, Hawthorn, Institutional and PNC Investments. The due diligence process has responsibility for the evaluation, selec-tion and monitoring of various investment

management products such as mutual funds, exchange traded funds, managed accounts, and alternative investment products.

3. Junior Financial Analyst – Princeton, NJValuation Research Corporation (VRC) is an independent 30-year-old valuation firm provid-ing authoritative valuations and financial opin-ions for financial reporting, tax reporting, and transaction purposes. We have served more than half of the Fortune 500 and many leading hedge funds. The position is in our portfolio valuation practice, which primarily conducts valuations of various investment securities for hedge funds and other investment companies. The position is ideal for someone interested in gaining a wide introduction to a variety of investment securities and valuation methodol-ogy as well as pursuing a CFA designation.

4. Manager Research Analyst – Philadelphia, PAFIS Group, Inc., a leading national investment manager-of-managers advisory firm based in Philadelphia, seeks an experienced analyst to perform due diligence and evaluate invest-ment management firms. Candidates must have strong quantitative and qualitative analytical skills as well as direct experience in interviewing, evaluating, and recommend-ing investment mangers to/for institutional clients. Candidates must have at least a Bachelor’s degree in economics, business, finance, mathematics or related discipline.

Successful completion of Level I CFA or a Masters degree in Business Administration is desired.

5. Quantitative Analyst – Equity Research – Philadelphia, PAARONSON JOHNSON ORTIZ, an established Philadelphia asset management firm is seek-ing a new hire to assist in developing global equity strategies. Our investment strategies use a disciplined, quantitative investment process that relies upon proprietary quantita-tive research. Team members contribute in the areas of investment research, as well as portfolio management/implementation, with specific responsibilities related to experience and expertise.

6. Financial Planning Analyst – Radnor, PAHillview Capital Advisors, LLC, a growing, inde-pendent wealth management firm, is seeking a Financial Planning Analyst to assist in provid-ing financial planning and investment-related services to their client base of high net worth individuals. Responsibilities include prepar-ing detailed wealth management plans for clients and prospective clients, assisting with the preparation of all client review meeting materials along with the corresponding per-formance and financial reports/schedules, and writing white papers/position papers on changes to tax and estate law changes that impact our clients.

Electronic Records (PACER) system, a database of federal court documents, to determine whether the company is a creditor in bank-ruptcy proceedings or has sought protection itself. Further, the U.S. Patent and Trademark Office’s database is a useful source of product information, especially when researching tech-nology and consumer products companies.

The state’s department of labor should be able to verify a company’s employee num-bers and indicate whether that number is likely to decrease. Although the U.S. Worker Adjustment and Retraining Notification Act requires most employers with 100 or more employees to provide notification 60 calendar days in advance of plant closings and mass layoffs, some companies spread layoffs over a period of several months or pay the fine to avoid exposing the company to bad publicity.

Federal and state government databases may reveal whether the company has exposure to specific risks or liabilities. Among them are the Occupational Safety and Health Administration, the Consumer Product Safety Commission, and the Environmental Protection Agency. State occupational licens-ing boards can supply information about cus-tomer complaints that have been filed against

companies. In addition, a database main-tained by the Equal Employment Opportunity Commission will show whether a company has discrimination complaints filed against it.

Uncertainty continues to take a toll on the outlook for the economy and the financial markets. In the next few years, investors may increasingly look for alternatives to the public equity markets. Taking a stake in privately held companies is only suitable for those with suf-ficient capital, a high risk tolerance, and the patience to stick with a long-term commit-ment. For investors with these characteristics, there are clearly opportunities to profit from the restructuring of businesses.

Sherree DeCovny is a freelance journalist spe-cializing in finance and technology.

Copyright 2012. CFA Institute. Reproduced and republished from the CFA Magazine, 2012, with permission from CFA Institute. All rights reserved.

Worth the Risk? (continued)

RECOMMENDED RESOURCES“The Sale or Monetization of a Privately Held Business”

CFA Institute Webcast (www.cfawebcasts.org)

Join a Study Group

As a service to local CFA Candidates, the CFA Society of Philadelphia offers a study group referral program. This pro-

gram provides contact information for you and other candidates so that you may form study groups. A typical group meets once a week and reviews the readings from the previous study session. Although the groups are self-run by the members, we have received much positive feedback through the years. If you are interest-ed in joining a study group, please go to www.cfaphil.org/study-groups to register.

• Completing the CFA Program exams can take as little as 18 months, but on average, it takes about four years to earn a CFA charter.

• Successful candidates report spending an average of 300 hours preparing for each exam. Your preparation time will vary based on your prior education and experience.

• For each level of the curriculum, there are 18 study sessions, so a good plan is to devote 15−20 hours per week, for 18 weeks, to studying the material. Use the final four to six weeks before the exam to review what you’ve learned and practice with sample and mock exams.

Best wishes to all candidates!

President David Shepherd, CFAMonadnock Capital Management

Vice PresidentBrian R. Lauzon, CFAAdvisor Assist, LLC

Vice PresidentChris Tidmore, CFAButchers Hill Capital, LLC

Treasurer/Vice PresidentMaggie Creed, CFAWilmington Trust

SecretaryJon FioravantiIndependent Consultant

Past PresidentsLucy Momjian, CFAThe Vanguard Group

Domenic D’Ginto, CFAPNC Bank

Walter Lenhard, CFAThe Vanguard Group

Paul Emata, CFA PNC Delaware

James J. Rowley, Jr., CFAThe Vanguard Group

DirectorsJeremy Bach, CPA, CFABach Capital Advisors

James T. Barnes, CFA, CIPMNational Penn Investors Trust Company

David Brune, CFAHaverford Trust Co.

Mark ByersWilmington Trust

Kristen Chryssikos, CFAThe Threshold Group

Sharon Hayman, CFADelaware Investments

Sean Heron, CFAGlenmede Trust

Walter Lenhard, CFAThe Vanguard Group

Peter Maher, CFAPresbyterian Board of Pensions

Greg Rogers, CFAAronson Johnson Ortiz

Jeremy TennenbaumSpouting Rock Consulting

Executive DirectorPeter ConnersCFA Society of Philadelphia. 100 North 20th Street, Suite 400 Philadelphia, PA 19103-1462 (215) 320-4980 Fax: (215) 557-0180 (609) 519-0056 pconners@cfaphil.org

2011 • 2012 Officers and Board of Directors

Copyright 2012 by CFA Society of Philadelphia, Philadelphia, PA. All rights reserved. This publication or its contents may not be reproduced in any form without written permission from the publisher. For permission to reprint articles or to send correspondence, write to:

CFA Society of Philadelphia, 100 North 20th Street, Suite 400, Philadelphia, PA 19103-1462 Phone: (215) 320-4980 Fax: (215) 557-0180 Email: pconners@cfaphil.org

page 10

1. Certain issues may arise when sampling data. Which sampling bias occurs when a study tests a relationship using sample data that was not available on the test date?

A. Data-mining biasB. Time-period biasC. Look-ahead bias

2. The free cash flow to the firm (FCFF) formula includes the following variables when adjust-ing net income except?

A. Interest expenseB. Fixed capital investmentC. Net borrowing

3. When valuing a mortgage-backed security, which spread measure should investors use when valuing the security?

A. Nominal spreadB. Zero-volatility spreadC. Option-adjusted spread

Answers to previous CFA Trivia questions:

1. Based on a normal distribution, what per-cent of the distribution will be within +/- 1.96 standard deviations of the mean? A. 90%B. 95%C. 99%

2. Which form of market efficiency states that security prices fully reflect all information from both public and private sources?

A. Weak-form market efficiencyB. Semi-strong form market efficiencyC. Strong-form market efficiency

3. The following are monetary policy tools the Federal Reserve uses to conduct monetary policy except _________________.

A. SpendingB. Reserve requirementsC. Open market operations

CFAP Trivia Questions

New MembersRyan E. Adams

Kingsley Emmanuel Aigbe

Mark Bono

Julia Wallace Hall

Peter B. Kokolus

Michael LoMonaco

Matthew W McDaniel

Anthony Moretti

Andrew Joseph Patterson

Bradley Robert Redding

Kyle Alan Reinfeld

Abimbola I Salami

Alvar Soosaar

Lisa Marie Swatkoski

Yamile L. Toledo

Wei Wei

The volunteers of the CFA Society of Philadelphia are a great resource to the Society and its mem-bers. Their efforts have proven to be invaluable in all activities conducted by the Society. The board members would like to take the opportunity to thank the following volunteers for their

assistance on recent events:

Thank You Volunteers!

Morgan Avitabile, CFA – Events

Michael DiJoseph, CFA – Education

Michael Dowgala - Education

Yevgeny Kushnir – Events

Kenn Lamson, CFA – Community Outreach

Dianne Manges, CFA – Media & Communications

Randall McCumber, CFA – Education

Michael Neely – Events

We are currently looking for additional volunteers to assist with future events and activities. There are openings within committees that may be of interest to you. Please contact Peter Conners, CFAP Executive Director, or logon to the website for more information.