haha ok. Thanks for the link.
Thanks for chiming in “Destroyer of Worlds”. I didn’t make a point to begin with but rather expressed a concern that industry trends may make the CFA less appealing (perhaps I shouldn’t have used obsolete). Specifically, I’m concerned that the CFA Charterholders are in high demand in the active mgt industry which will continue to shrink. And I may have some gripes about the lack of emphasis the CFAI puts on Quant skills both theoretical and practical. Based on the responses so far I think my concerns are both legit and exaggerated at the same time.
you know that saying in karate “don’t fear the belt, fear the man wearing it” ? well in finance and certification land, I feel like it’s mostly the other way around. no one is going to remember how to calculate by hand the value of a swap after 10 days, what an anova statistic is, or what year the gips rule changed. it’s “oh nice you have the charter, you are dedicated to your job”. it’s never “wow you must be a finance guru and investing genius”
I think your thought is quite right considering the rise of AI and other quant-based investment strategies / declining portion of active bet(active share, tracking error etc… whatever measure) and shrinking expense ratio etc. Although the knowledge I have learned from CFA Program is important for me to understand quite broad range of financial world, it is not end of goal but starting point to take further steps into narrow things. Nobody knows future of finance. The one thing I can certain about is that the financial world after 10 years or so is quite different from that of today.
if you think they are obsolete, just because you don’t fully understand it and not be able to apply it in real word’s cases. To me, the reason why CFA is so popular is because they are updated with the market and the knowledge gained from CFA designation is valuable.
I dont think cfa skills are obsolete or else i wouldn’t write for L3 next year. I expressed concern about whether said skills will become obsolete (less useful/appealing/whatever) as the active mgt industry continues to decline. You can point out that even many passive companies like vanguard employ cfa charterholders like others in this thread have done so, but just by saying you the think the cfa is popular cuz it’s keeps updated may mean you’re in for a surprise.
I got it for the letters only.
They’ll never become obsolete.
The key is the IPS: doing what’s in the client’s best interest.
I think my original question was pretty legitimate
http://blogs.wsj.com/moneybeat/2016/10/21/the-incredible-shrinking-fund-managers/
I think it’s fair to say that “stock picking” is declining, but the CFA doesn’t really focus that much on that.
Something like valuation is applicable in many different areas, and a lot of the level 3 portfolio management is based on things like asset allocation and goal setting that works just as well (if not better) when you assume the use of index funds.
Obsolete seems kinda drastic to me, It makes it sound like more than half of what you learn across all three levels won’t be useful to people working in finance, which does not seem to be true at all in my opinion.
I got the CFA charter because I needed a sturdy cardboard tube to prop open my closet door where my cat, Smaug, kept shutting himself in. If I was unavailable to answer his meowing, he would get angry and claw up my jackets. “Jesus Christ, were you attacked by raccoons?”, one person at Goldman exclaimed, as I showed up for my interview. “Sir, we do not allow homeless people into this office”, said another.
Anyway, to make a long story short, 3 years later, I obtained an ideal door propping cylinder. Smaug is now able to focus his destructive urges on small animals and furniture, rather than my clothing. No longer am I escorted out of offices for torn apart clothing and the vague scent of cat urine.
As an additional benefit, the charter itself is made of a sturdy and absorbent paper, and it is quite large. So, it is useful as a place mat, or to wipe up food spills in the kitchen. So, I decided to keep it, rather than toss out the otherwise useless paper when I received the tube.
Agreed with ohai. The cardboard tube makes years of having no social life totally worth it.
Bachatero, I think you need to understand what the terms “active management” and “data analytics” mean.
Decline in active management? Isn’t that great? More passive management = more inefficiency = more chances to exploit opportunities in the market. How does that make the skills you learned in the CFA program obsolete?
Data analytics simply mean analyzing data. Correct me if I’m wrong, it seems you are trying to discuss algorithms or machines trading more than data analytics. That being said, there are 2 ways to think about the rise of using AI/machine in trading or investing:
-
Let the machines do all the trading - we as humans only program the rules for trading - incorporate machine learning if you want to be fancy, but bottom line is we don’t make the decisions, the machines make the decisions
-
Let the machines gather all the relevant data, including whatever information you use for fundamental analysis - we humans then make decisions based on data provided by the machines - the main argument for this is that we have very powerful computers now that can find or calculate the information we need for our analysis faster or better than we can (manually, using calculators, reading financial statements…)
I got the above from an article I read - if I’m not mistaken it’s from Matt Levine at Bloomberg but I couldn’t find it.
“Decline in active management? Isn’t that great? More passive management = more inefficiency = more chances to exploit opportunities in the market. How does that make the skills you learned in the CFA program obsolete?”
You’re absolutely right that the shift of money to index funds will make it easier to exploit market inefficiencies even if we’re a ways away from that point. Here’s my argument (more of a concern): 1) the active mgt industry employs a lot of ppl with CFAs 2) huge sums of money will continue to shift to passive mgt where individual stock analysis isn’t needed 3) As active mgt shrinks many jobs will be lost and the offset in job gains in passive mgt won’t be sufficient.
So by the time markets are so inefficient that its easier to exploit these opps there won’t be nearly as many of us to do so. I think the 3rd part in my argument is the weakest. Maybe job increases in passive mgt will be enough to absorb the losses in active. Also, maybe the demand for ppl with CFAs won’t drop but instead the nature of work will be different (less individual equity analysis) and earning potential may be lower.
EA & Bachatero…I would suggest that you’re both incorrect in your logic of markets becoming less efficient as a result of flows trending to passive management.
Rather than give a long explanation I’ll use an example. You’re in Las Vegas playing poker with nine other people. Two of them are professionals, there’s you with limited experience but knowledge of the game, and there are seven beginners who barely understand the game and why they’re there. We know that over a long period of time playing, the professionals are going to profit off of the beginners. While the beginners might get lucky sometimes, we know they will make easy mistakes and provide some additional profits to the experts through these errors.
Now, if three of these beginners decide, rather than playing the game, to just get up and leave…has the game gotten easier or harder? If you were the third best at that table, you were in the top 30% of talent at the beginning. Now you’re #3 of 7. What if two more leave? Now you’re #3 of 5.
Does the game get easier or harder? Do more or less mistakes get made? Do the experts have more or less chance of generating profits? Do you have more or less chance of generating profits?
If the last two beginners look around and realize they’re losing because their skill is inferior…who’s the sucker at the table?
As the percentage of true experts rise, the game gets more difficult. Who is abandoning active management…is it Ray Dalio? Or is it employee 401k plans? Is it Stanley Druckenmiller, or is it small endowment funds? As fewer and fewer under qualified investors decide to play the active management game, the game gets harder and prices become more efficient, not less.
In my view, there are thousands of jobs tied to active management that just will not be absorbed in the passive space. I believe this because passive management is built on the principal that fees matter. Low fee passive funds replacing active funds reduces the dollars spent on investment analysis, research and management. A $50B fund that charges 1% generates $500M in revenue per year. A $50B fund that charges 0.10% generates $50M in revenue per year. That’s a difference of $450M in revenue. Where does that revenue go? Into the pockets of investors.
There’s a positive outlook here though. I would argue that the $450M that was going to active managers was wasted money for society. We know the vast majority of active managers underperform, so why not remove a large chunk of them and allow the highly talented managers to do the work efficiently? That $450M that investors had can go to more productive members of society. Let’s keep it in the financial services industry… financial planners, estate planners, tax planners, risk management… all of these services can be opened up to investors significantly. And these are efforts that actually have a positive impact on society. Clients actually get value from a financial plan, they actually get value when they visualize a sound estate plan or tax plan. What does society get when two people that only slightly know what they’re talking about take opposing views on Apple? Nothing. There’s a balance here…society doesn’t need 7 Billion people with views on Apple and we need more than 2 people with views on Apple. Right now we’ve got too many, and the bottom of that barrel of people need to go find more productive work for society.
Huskie87-
I disagree with your vegas story. I think that as money continues to flow to passive mgt markets will become less efficient. This is because as less people get paid for price discovery there will be less securities reflecting fundamental values. These distorted values provide opps. But this is long ways away still so it doesn’t seem too relevant.
As for active managers being a waste to society I again disagree with you. I think active mgt does offer value to investors. For example, active mgt has more products to offer to specifically tailor to investors needs. At my company we choose alternative fund managers who’s strategies offer low correlation to the market. That’s value. Im sure there are alt strategies offered in passive mgt but I would be willing to bet these are more restricted. Also, active mgt is the only game in town to provide alpha. That’s worth money paying for. Now if active managers consistently fail to provide alpha then investors will shun them. But its hard to argue that active mgt doesn’t offer value.
Let me ask you this, how do prices become distorted from fair value?
Alpha is the outperformance over the assigned benchmark, yes? So for active managers to add value from a return standpoint, we’d need to see >50% of them outperform their benchmark, yes?
83% of active equity mutual funds underperformed their benchmarks over the 15 years ending December 31, 2015
93% of active fixed income mutual funds underperformed their benchmarks over the same time frame
Do you have a guess as to why these percentages are so high?
Perhaps distorted was the correct word. prices become less efficient as fewer managers true to determine their intrinsic value. So as we move to more passive mgt asset prices drift from these intrinsic values thus creating opps.
I’m well aware that many active managers fail to provide alpha. How many passive managers provide alpha? zero?
opps i meant perhaps distorted wasn’t* the correct…