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ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER Issue 1
IN THIS ISSUE
The Association of Financial Analysts has seen amazing growth over the last two years with well over 23,000 members now part of our LinkedIn group.
We are pleased to launch this first newsletter and keen to hear your feedback on what you want to read and hear about in 2015.. And also keen to hear from any analysts interested in contributing an article in their field of expertise.
We are also pleased to have partnered with The Economist ahead of this year’s Buttonwood Gathering and to be able to offer three members free pasees to the event.
To be eligible simply submit an article for the next newsletter along with a short bio.
Contents In 2015, Boost your Career by Building a Strong Professional Network
2
Buttonwood Gathering 5
Investment Strategies in 2015 6
An overview of project finance
8
CPA vs CMA Infographic 11
Innovation and Idea Generation
14
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 2
by Nicolas Doumenc
Every year on January 1st, hordes of finance
professionals swear that they will « network more »
and stop contacting people ONLY when they need
something from them.
Obviously, networking helps if you want to land a
new job, but more importantly it can get you
promoted faster. As hierarchies in banks and finance
departments got « flatter », your job title became less
and less relevant. 20 years ago, being a manager
meant that people in other departments answered
your phone calls and actually worked on what you
asked.
In 2015, in order to get ANYTHING done, you need a
solid internal network whether you are an analyst or
the CFO of the company. You use your network to
convince your colleagues to support your project, put
your deal on a fast track or even get someone from
legal to answer your emails.
Now that you know why networking important, let’s
talk about how to create your networking strategy.
1. Define your Objective
Networking can do wonders for you: help you find a
new job, get you promoted faster, generate more
deals, improve your skills… All those possibilities
create the illusion that you should be doing it all at
the same time. This is a recipe for DISASTER. Focus
on one objective exclusively and work on it for three
months before you even think about adding more to
your plate.
If you want to get promoted faster for instance, you
need to focus ONLY on building your network at your
current company. Are you going to miss out on
growing your network at other banks? Sure and
that’s the whole point! Better miss out on something
than trying to do it all, getting overwhelmed and
dropping the whole «I’ll network more» idea after 10
days.
2. Create « Buckets » for your Network
Now that you know you can’t « do it all », don’t fall
into the trap of thinking you can treat everyone the
same.
If you know 200 people at other banks and want to
follow-up monthly, phone calls would be a very bad
idea because even if you only chat for 10 minutes, it’d
take you eight hours a week. On the other hand, if
you just publish a link to an article on LinkedIn once a
month you are not improving any relationship.
In 2015, Boost your Career by Building a Strong Professional Network
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 3
Creating different buckets within your network will
allow you to have a strong impact without spending
five hours a day on the phone or sending emails.
Let’s have a look at a potential split for our those 200
bankers you want to keep in touch with:
Bucket 1: 3 very close friends you have lunch
or dinner with every week
Bucket 2: 20 people you worked with directly
in the past whom you call at least once a
month
Bucket 3: 30 guys you send individual emails
to monthly to update them on what’s going
on and exchange ideas
Bucket 4: 150 people you met at conferences
and stay in touch with via a « newsletter »,
more on that in the next step
3. Start Writing Newsletters
Newsletters are an undervalued tool for « personal »
networking because we are used to receiving
newsletters from brands but not from individuals.
They are great for the « Bucket 4 » we described
earlier. For those 150 interesting people we met but
don’t know that much, staying in touch individually
would be too time-consuming.
If you want to stay in touch with a “bucket” of former
colleagues at a company you left you could send a
newsletter where you talk about:
A conference you went to last month and the
main highlights
Your upcoming trip to San Francisco where
you’d be happy to have coffee with anyone
based there
One or two interesting articles to share
The power of newsletters is that they “eliminate” the
awkwardness. If people you haven’t spoken to in the
last 3 years want to contact you, they’d feel weird
about it. BUT if you’ve sent them newsletters
regularly then contacting you would be much more
natural.
On a side note, newsletters will also make you more
interesting because every three months you’ll have to
sit down and write about cool things you did or are
about to do. Nothing is worse than a newsletter
where you have nothing interesting to share so in
your daily life you’ll start doing more things which are
« newsletter -worthy ».
4. Cultivate the Habit of Networking
What differentiates successful networkers and
people who give up after a month is “the habit” of
networking. You need to create this habit by
dedicating a specific time in the day to networking.
For example, every weekday I contact three people
by email or with a quick phone call right before I leave
the office in the evening.
Instead of relying on willpower alone, networking can
become second nature if you create your habit the
right way.
Another enemy when it comes to networking is the
awkwardness. “Should I send this email? Is it the right
title? I feel silly contacting this guy after 2 years”. The
best way to destroy awkwardness is to think about
what you feel when you receive an email from an old
friend or someone you met a while back. You feel
GOOD. Someone thought about you and wants to
reconnect, that’s great. You even tell your spouse
about it when you come home! Thinking about the
difference between your feelings as a sender vs. a
receiver of emails will help you kill the awkwardness.
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 4
Conclusion
Networking is the best resolution you can make for
your career in 2015. So don’t get caught up in the
tools and the tactics and instead follow the strategy
outlined here to boost your network!
Nicolas Doumenc is the Founder of 300 Finance
Gurus a website where he grills 300 Managing
Directors, CFOs, Vice-Presidents, Associates and
Headhunters on their best networking and
interviewing techniques.
Nicolas has also advised 100+ Investment Banking,
Corporate Finance and Private Equity professionals
on their networking strategy, LinkedIn profile,
resume and Interview Preparation.
If you want to know more about his coaching
services, please visit 300 Finance Gurus.
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 5
The Association of Financial Analysts is pleased to
partner with The Economist to offer three free passes
to this year’s exciting 2015 Buttonwood Gathering in
New York City.
The Buttonwood Gathering is an internationally
renowned conference focused on the future of finance
and global economic growth. The annual event
features The Economist magazine's unmatched insight
and analysis alongside the diverse perspectives of many
of the investment world's most sought after opinion
leaders.
As investors and business leaders begin to bridge the
divide from economic uncertainty to determined growth,
this conference will arm delegates with critical
information to innovate, lead and drive profits for the
year ahead.
To be in with a chance of winning a free pass to the
event AoFA is looking for the sharp contributors to
submit articles for the newsletter.
Simply propose an article and submit it to
info@alltheanalysts.com for inclusion in the next
newsletter.
Win a place at the Buttonwood Gathering
in partnership with the Association of Financial Analysts and The Economist
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 6
Recent years have been tumultuous for global
markets but several macro-trends look to be shaping
2015 into a year for either big wins or big losses
depending on the investment strategy you follow.
Recent wild swings in the stock market have been
driven by multiple global factors, ranging from
political uncertainty in Syria and the rise of the
Islamic-caliphate to stuttering attempts to return to
growth in Europe and ongoing bond worries.
Despite several shock waves that have reverberated
around global markets the last few years have been
undeniably good for investors with the right strategy.
The Standard & Poor’s 500 stock index has returned
more than 200% since the March 2009 market
bottom, while bonds have posted a respectable 34%
gain.
1) Strategy-based ETFs Exchange-Traded Fund or ETFs have grown in
acceptance in recent years and with new types of
funds coming available to investors. ETFs attempt to
replicate investment strategies of "guru" investors,
hedge funds and "smart money."
Find the best ETF to balance the rest of your portfolio
and take advantage of the investment of strategies
This is accomplished in various ways, based on the
ETF's trading methodology. Some strategy-based
ETFs have researched the strategies of successful
investors, such as Warren Buffett, and incorporated
his practices into their trading approach. Other ETFs
track publicly disclosed stock purchases by major
hedge funds, attempting to replicate the return of
the funds. Another strategy-based ETF group is
managed futures. These ETFs invest in futures
products in an effort to profit in up, down or sideways
markets.
2) U.S. stocks remain growth driver While returns from stocks are likely to be lower over
the next 10 years than they have been in the previous
decade the long-term trend is still for double digit
growth in core U.S. stocks.
The U.S. economy still faces structural difficulties
that are likely to dog performance in the near term
but U.S. stocks are still set to outperform most other
markets over the medium term as insourcing and
greater manufacturing output provide strong
fundmanetlas for U.S. industry.
Current high valuations are unlikely to rise as
meteorically as they have in the past. The average
Investment Strategies in 2015
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 7
stock in the S&P 500 is trading at a price of 16 times
this year’s estimated earnings, about 30% higher
than the long-run average.
The U.S. economy still faces structural difficulties
that are likely to dog performance in the near term
but U.S. stocks are still set to outperform most other
markets over the medium term as insourcing and
greater manufacturing output provide strong
fundamentals for U.S. industry.
3) Social investing to expand A major change in investment technology in recent
years has been the rise of social investing. Similar to
social networks such as Facebook or Google+ social
investment networks allow users to connect with
each other and share information.
The key difference between Facebook and social
investing networks however is that these networks
allow users to view and follow others investment
strategies. A number of these networks also allow
users to invest in real time via their interface.
Though many social investing sites trade the foreign
exchange market, or forex, some sites do offer the
ability to buy stocks and other investments, and they
let investors follow and automatically copy the trades
of stock, futures and options traders.
While there are undeniable risks in following
investment strategies of strangers via the internet
the wealth of data becoming available on investors
performance is set to change how people think about
and structure investment decisions.
Site such as e-Toro, Ayondo, Zulutrade and Tradency
all look set to gain further acceptance in 2015.
4) Bonds to offer safety at a price Fixed-income investors have few options right now.
Today’s
Rock-bottom interest rates today are expected to
move a bit higher but Bonds look a weak prospect for
any investors seeking income. What they do offer is
safety in a year that is set to see political tensions in
several key region of the globe rise further before
resolving (if they resolve at all)
After years of relative calm, volatility is expected to
return to the stock market—and higher-quality bonds
offer a hedge against stock losses. Over the long run,
intermediate-term rates are likely to remain below
their historical average of 5%. If you want higher
income, your only alternative is to venture into riskier
investments.
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 8
Everybody concerned with investment banking knows
about areas like sales and trading, mergers and
acquisitions and equity capital management. But have
you ever heard of Project Finance? If not, no worries, we
can change this today.
Project Finance is a rather small area of investment
banking. The main purpose is to help companies
to finance long-term projects that require a huge
amount of external financing. Constructing a new
office building can usually be done with a single credit
facility. But if a company wants to build a nuclear power
plant or an offshore wind park, there is a need for much
more money than one bank is willing to provide.
Financing is provided off-balance sheet
The biggest difference between an ordinary bank credit
and Project Finance is that an ordinary bank credit goes
directly to the client. In Project Finance the money is
given toa separate legal entity – the so-called special
purpose entity (SPE). This SPE is created just for one
specific project.
Let’s take a look at an energy producer who wants to
build a nuclear power plant. He would found a new
company – the SPE – having the power plant and other
project related assets as its only assets. The other side
of the balance sheet would consist of the debt provided
by the banks and the sponsor’s equity. The sponsors are
in most cases the company who initiated the project
itself and private equity investors.
There are several reasons for the creation of the SPE:
1. Risk allocation: The risk for the sponsor is
reduced. If the power plant will not generate
enough cash-flow to pay off debt and interest
rates, the SPE will get into financial distress.
However, the sponsor’s assets will be protected.
2. Credit standing: The bank’s decision to provide
debt is mostly dependent on the future cash
flows of the SPE, not on the credit standing of
the sponsor. Therefore, it is possible for a
company with a bad credit standing to get
access to external financing.
3. Debt-to-equity ratio: These projects usually
require a huge amount of debt financing.
Therefore, taking the project on to their own
balance sheet would significantly increase the
sponsor’s debt-to-equity ratio. Instead,
maintaining the assets and debt related to the
project on the SPE’s balance sheet will mean
that the sponsor will only show his equity stake
in the project.
Several banks form a syndicate
As no bank wants to finance a nuclear power plant
alone, a syndicate of banks is formed to bring in the
required money. The sponsor mandates one bank to be
the leader of the syndicate, the so-called Mandated
Lead Arranger (MLA).
An Overview of Project Finance
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 9
The MLA’s role is to handle the communication
between all participating banks and the sponsor. He
has a lead role in underwriting the project and usually he
also provides a portion of the debt. The other
participants just provide their tranche. A banker once
explained it to me with the following words: ‘As a
participant you get offered a piece of the cake but as an
arranger you make the cake.’
A project includes more parties than just the sponsors
and the banks. There are also technical advisers, legal
advisers, public agencies, and sometimes even more,
depending on the project. While the participants handle
all their communication with the MLA, the MLA itself has
to talk to all parties.
This is especially important because the MLA has to
collect all the information for the financial model for the
underwriting process. Generally speaking, financial
models in Project Finance are more complex than other
models in corporate finance. The projects have a long
time horizon and therefore quite a lot of different risk
scenarios have to be covered. Hence sensitivity
analysis is one of the most important concerns in this
kind of financial modeling. Examples for different
scenarios could be a change in revenue after a certain
number of years, the construction will take longer than
expected, increasing costs, etc.
The market is growing
Projects have mainly three things in common: They are
long term, the required amount of money is huge and the
financing is off the sponsor’s balance sheet. Most of
these projects are in the areas energy, mining,
transportation, public institutions (for example
universities) and telecommunications.
According to the European Investment Bank (EIB), the
market volume in Project Finance is around 450 Billion
USD per year. The market is growing at an annual rate
of 15%. The main reasons for this growth are the
growing population, industrialization in emerging markets
and the aging infrastructure in developed countries. The
EIB estimates that until 2030, there will be cumulative
investments over 50 Trillion USD for roads, energy,
water, airports, telecommunication and rail in OECD
countries alone.
Banks can earn money in different ways
Obviously, banks can earn money from the
loan’s interest rate. However, after providing the loans,
some banks sell them on the secondary market, often
as part of a bigger package. Various entities have the
appetite to purchase these loans as investments. For
example insurance companies have an interest in such
long living cash flows, because they can use it for
duration matching. And finally, the MLA can gain profit
from the advisory fee.
Daily work is not always easy, but it creates a good
feeling
Especially now, in the wake of the financial crisis,
many banks hesitate to take over such projects. They
know it would involve a substantial amount of money
and involvement in the project for many years, so there
is a significant risk. Moreover, theBasel II
regulations do not favor long-term investments. In fact,
banks are reducing their risk-weighted assets.
This makes the actual work in Project Finance
sometimes difficult. Whenever you want to take over a
new project, at first you have to fight a troublesome war
against various internal authorities to get the credit
approval.
Those internal restrictions can sometimes be a bit
depressing. However, from my personal point of view,
Project Finance is still one of the most interesting
areas in investment banking. You actually create
something real, something you can touch and something
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 10
that helps people. If the project is completed you can
say: ‘I helped to build this power plant’. That is indeed
rewarding.
Lukas Hofer studied business and economics in
Germany and started his career in investment banking
and management consulting. He currently works as
freelance writer and translator focusing on business &
finance, economics and conflict & security. For more
information on him, you can visit his site
at www.LJHofer.com
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER Issue 1
by
Traditional understanding of innovation associates it with
idea generation. Organizations find themselves creating
think tanks or brain trusts that sit in a room and think
about how to disrupt their business. The fundamental
thought behind this approach is that the magic of
innovation lies with a new idea. Most think it is the
companies that develop better ideas that gain the
advantage in the marketplace.
Similarly, conventional thought associates the risks of
innovation with the quality of the ideas generated by the
organization. This type of thinking reinforces the need to
focus on good idea generation. When ideas fail, the
approach becomes to gather the smartest people and
have them come up with better ways to overcome
challenges in the business.
These conventional thoughts about innovation are
wrong. Innovation is not idea generation and the risks of
innovation do not lie in idea quality. Innovation is rapid
execution, and rapid execution mitigates the risk of
failure.
An idea without action is only an idea. As connected as
today’s world is, ideas are no longer special. Everyone
has ideas and so many of them are great. The idea you
think is special is far more prevalent than you think. You
and can no longer differentiate based on idea
generation. You will only be known by your execution.
The difference, the only difference, is that solid
execution and action toward a common goal is still a
rarity.
Create Culture with a Bias Toward Action
Successful innovation starts with creating a culture that
has a bias toward action and rewards execution. There
shouldn’t be one small team or department tasked with
innovation. It should be part of your culture. Remember
that action begets more action, and that idea generation
only begets more ideas. Sometimes careful planning and
thought about execution is important, but at some point it
is important to stop the creativity process and focus on
execution, even when an idea is not perfect. Executing
on that idea and moving it forward with action will
naturally help the idea evolve. It will also bring you more
ideas naturally as you face real problems and challenges
in your business.
In the book “Making Ideas Happen” Scott Belsky offers
some great advice on how to create a culture based on
action. He makes the point that creativity and
productivity are linked. Often truly game-changing ideas
come from trial and error, because innovation is a
numbers game. Here are just some of the thoughts I’ve
noted from reading the book:
Energy is fixed, you must prioritize
Innovation and Idea Generation
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 12
Think about how you usually allocate your
energy
Keep lists
Make a daily focus area
Don’t dwell on or worry about negative outcomes
Don’t hoard urgent items (delegate)
Create a responsibility grid
Create windows of non-stimulation to get
projects done
Listen to what others start nagging about
Make the most of meetings, don’t meet just
because it’s Monday
Always leave meetings with action items
Keep shipping
Recognize failure is OK
Remember constraints increase productivity
Recognize you need a community to make big
things happen, you can’t do it on your own
Act While Ideas are Fresh
Time is the one resource that you cannot buy. You
cannot create more of it or accumulate any surplus.
When you have an idea, you must act on it quickly.
Realize that the energy people have to give to an idea is
greatest when the idea is born. Without action, this
energy will decay over time. You must capitalize on the
excitement that comes from the creative process to
launch your team into action. Once people act, their
energy will be sustained by the progress they see
around them and the natural energy that comes from
working together.
Just as time deflates the team’s energy to rally behind
an idea, it will also deteriorate the quality of the idea.
The longer you let an idea sit on a piece of paper or on a
white board in a conference room without actively
engaging the team on that subject, the foggier the idea
becomes in each individual’s mind. Details and context
are forgotten. Remember that even if some are actively
executing aspects of the project, others will need to
remain engaged. Find ways to keep them engaged and
communicate often.
If enough time passes and the organization habitually
develops new ideas and experiences excessive delay
before their execution, resentment towards future new
ideas and projects can creep in. When this happens
individuals feel that any energy they give towards a new
idea will ultimately be wasted energy. They know
execution will not happen and preemptively withdraw
from the process. This is clearly a dangerous
atmosphere you do not want to create. Remember that
your action helps inspire commitment by others.
Embrace Failure
If you are going to fail, fail quickly and cheaply.
Remember that part of innovation means change. Any
new territory embarked upon will heighten the probability
of failure. That is not a bad thing. In fact, if you can learn
how to fail quickly and cheaply, learn from that
experience, modify actions or plans and maintain
velocity, then you have a huge advantage over others.
There are many benefits to acting early on ideas, but
one of the costs is that details will not get fully vetted.
You will experience missteps. You will find that certain
opinions were not considered. Be ready to address
these things quickly. Try and build a culture that can
react in a constructive way to pivots in direction or
adjustments in the plan. Acknowledge those that
experience additional pressure or stress due to these
challenges. Reallocate resources to areas of struggle
and be supportive.
The faster you take action and execute on your ideas,
the faster you will discover real challenges that either
warrant a change in strategy, or will require a testing of
commitment. Breaking through these challenges is
critical. If you fail to overcome these things or wait to
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 13
overcome them, they start to own you. At the same time,
breaking through these challenges can be inspiring.
When you get behind your idea, and reach a point of
commitment, others in the organization follow. The
change in your mindset permeates everything. Those
who must rise to the challenge are inspired to stretch
themselves for the benefit of seeing all to succeed.
Conclusions
Innovation is more about action that it is about ideas.
Good ideas are far too common. Before you worry about
what the next great idea is, think of how you can work
with a bias toward action. Action consumes energy, but
often yields more energy than it takes. If you are not
failing some of the time, you are not pushing yourself
enough. Embrace failure and learn from it. You can only
do your best and constantly try to do better.
Patrick Tam is author of The Constant Analyst website
(theconstantanalyst.com)
ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 14
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