The CFA Exam is on Saturday --- Good Luck to the AIM Class of 2011!

Most of the recent AIM program graduates have been preparing to take the Chartered Financial Analysts (CFA) exam. The CFA Level I exam is scheduled each year during the first week of June and the first week of December. Specifically for 2011, the exam dates are June 4^th and December 3^rd. For the AIM graduates not taking the exam in June, the latest that they can register for the December exam is mid-September.

Dr. David Krause, AIM program director said, “The CFA Institute is quite clear about the rules for college students taking the CFA Level I exam. If you are in college, you can only register for the CFA exam if you are in your final year of study - so you must be a college senior to register. What’s tricky for students is that during their senior year they will also likely be interviewing on and off campus, networking, and preparing for graduation. So this is not a simple decision, especially since enrollment fees are involved.”

“I’m often asked by students whether or not they should take the exam early (December of their senior year) or wait until after graduation to take the exam? In rare instances I advise students to take it for December; however, if they are interviewing for jobs and taking a full load of classes, then they are better off registering for the June exam. That way they can save enough time to study and pass the exam since the exam is scheduled after graduation and the students can use that time right after school to cram,” Krause said.

What else should students take into account? Like everybody else, students need to maintain a balanced life. If the student is a leader in an organization or working part-time, it is difficult to burn the candle on both ends. Dr. Krause stated, “I often tell students still interviewing that telling a prospective employer that you are taking the CFA exam in June, makes you more attractive for job offers than other students who are not sitting for the exam. Obviously, you need to take the exam – and hopefully pass it – by this can be a strong, positive signal a student sends….that they are serious about a career in investments.”

Good luck on Saturday!

Pictures of the AIM Class of 2011 and all previous classes are on AIM Facebook

Pictures of the AIM Class of 2011 (see below) and all previous Marquette University Applied Investment Management program classes are loaded on the AIM Facebook page.

Best of luck to the AIM Class of 2011. Click here to view the picture of the AIM Class of 2011: http://tinyurl.com/3j6aaeo.

To view the AIM alumni gallery on Facebook, go to: http://tinyurl.com/6exxncr or  http://www.facebook.com/pages/Marquette-AIM/122718327798550.

View the most recent newsletter and the archive of the past year's AIM program newsletters

Besides the AIM Blog, we frequently send out AIM program newsletters to our alumni, students, and Friends of the AIM program.

This link will take you to the most recent AIM newsletter which was sent out earlier in the week: http://eepurl.com/dAJzf. It contains a story about last Sunday's graduation. 


To view the archive of the past year’s AIM program newsletters and equity presentation announcements go to: http://tinyurl.com/3s6eg7c.

You can sign up to be on the AIM program newsletter list by going to: http://tinyurl.com/3rsn88l.

You can also follow the AIM program on a variety of social  media sites. The links below can be used to follow the AIM program on your favorite source:

AIM Website: MarquetteBuz/AIM

AIM Blog: AIM Program Blog

AIM Twitter: Marquette AIM

AIM Facebook: Marquette AIM

AIM LinkedIn: MarquetteAIM

What a Sc#mb#g: Former NASDAQ Managing Director, Donald L. Johnson, pleads guilty to SEC insider trading charges

Dr. David Krause, Applied Investment Management program director at Marquette University, said, “Unfortunately, these headlines are far too common. After reading the SEC’s charges and the accompanying stories about this case, I hope he gets full justice. The integrity of the financial markets took a severe blow in 2008 and now this? I understand why so many Americans are distrustful of those in high places within the securities industry. This guy is a sc#mb#g and I hope that anyone else thinking about doing something like this realizes that the SEC is watching and will prosecute perpetrators like Johnson to the maximum.”

  

The Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging Donald L. Johnson, a former managing director of The NASDAQ Stock Market, with multiple instances of insider trading. The SEC’s statement can be found at this link:   http://tinyurl.com/3cawbms.

In a story from the News & Observer (http://tinyurl.com/3pyydrg) it was reported that a former NASDAQ manager pleaded guilty Thursday to stock fraud after admitting that he made more than $600,000 on insider trading. Donald L. Johnson, 56, was a managing director on NASDAQ's market intelligence desk until he retired in 2009. Johnson admitted to eight trades between 2006 and 2009 in which he profited roughly $641,000 from information that hadn't been publicly disclosed, prosecutor Justin Goodyear said. In some cases, he bought company shares to capitalize on favorable news; in other cases he used short sales to profit on bad news that sent shares tumbling. The trades were done in his wife's name, Goodyear said.

Prosecutors estimate that Johnson actually earned more than $750,000 from insider trading. In one 2007 trade, Johnson made $175,000 by purchasing shares of United Therapeutics before successful trial results were announced for one of its drugs - Viveta, now called Tyvaso. In 2009, Johnson admitted using insider information to purchase additional shares of United Therapeutics ahead of federal approval for Tyvaso. Johnson profited by nearly $111,000 on that transaction.

Johnson also earned $34,000 in 2006 by trading ahead of the announcement of Digene Corp.'s president by short-selling the company's shares. Other companies in which Johnson used insider information to profit include Central Garden and Pet Co., Idexx Laboratories Inc. and Pharmaceutical Product Development Inc.

In a conference call with reporters, Assistant Attorney General Lanny Breuer said the market intelligence desk Johnson worked for provided client relations for companies traded on the NASDAQ. Companies that might have news that would move financial markets or affect shares' trading levels could consult with the market intelligence desk to help understand how markets would react to the news.

"Mr. Johnson was in fact a fox in a henhouse," Breuer said. "Mr. Johnson's actions were a brazen abuse of power. He cheated the system to line his own pockets."

"Don Johnson used sensitive, confidential information as an executive at NASDAQ to pad his retirement by more than $600,000," said Neil MacBride, U.S. attorney for the Eastern District of Virginia. "He thought he could get away with it by using his wife's account and making relatively small trades just a few times a year. But he learned what every other trader on Wall Street must now realize: We're watching."

Johnson faces up to 20 years in prison when he is sentenced Aug. 12. Also Thursday, the Securities and Exchange Commission filed related civil charges against Johnson in federal court in New York.

This week several AIM program students, Dr. David Krause, and John Lohre visited NYC

Matter, Endl, Krause and Hildebrand in NYC

On Tuesday, May 24, Dr. David Krause (AIM program director), John Lohre (Marquette adjunct instructor), Brady Endl (MBA student), Tim Hildebrand (AIM ’11), and Ethan Matter (AIM ’11) trekked to New York City to present their research to the board of directors of a large foundation. During the course of the semester the students completed a detailed analysis of the foundation’s portfolio (consisting of stocks, bonds, and alternative asset holdings). They also evaluated the foundation’s investment performance over the past five years and offered various recommendations to the board of directors.


Dr. David Krause said, “This was an excellent project for the students – it was totally aligned with the subject matter that we covered this semester in the AIM program. The students did an outstanding job and were great representatives of Marquette University. Our visit to NYC could not have gone better.”

Keyes Dean Linda Salchenberger has created an advisory group, the Dean’s Council of Excellence, to assist in long-term planning. The mission of the Council is to assist the Dean and the College of Business Administration’s leadership team in the development and execution of key strategies for growth and innovation.


One of the key strategies of this group - which consists of prominent global business leaders and Marquette alumni - is to expand the number and quality of ‘real world’ applied learning opportunities for the students. The recent trip that Dr. Krause and John Lohre conducted with the AIM students clearly meets this goal. By working on an independent investment audit of a large foundation, the students were able to apply the concepts and knowledge they learned in AIM during the spring semester. 

Dr. Krause stated, "John Lohre and I have talked to Dean Salchenberger about this assignment and she was delighted that the students were able to participate in this applied learning project. She strongly supports and encourages more opportunities like this for our students within the College of Business Administration."


The Dean's office is interested in creating more applied learning projects for students at both the graduate and undergraduate levels. Peg Bernhard, the COBA's director of external relations said, "It is our intention to examine the scope of each potential applied project and match it to the learning objective, create a project charter, develop a timeline, and present the results of the project to the client while meeting the needs of the project sponsor/client during a one semester timeline. Dr. Krause and his students' recent work with the NYC foundation sounds like an excellent example of the type of applied learning projects we are seeking."

A future story that will go into more detail about this assignment is in the works which will likely appear in an upcoming issue of the Marquette Business Magazine. Dr. Krause said, “This was a very rewarding project we worked on this semester. Ethan, Tim and Brady had an amazing opportunity to meet for several hours with a very distinguished board of directors to present their findings and recommendations. They did an outstanding job and it is possible that we might be asked to return next year for a follow up.”


The students – along with Krause and Lohre – had an opportunity to participate in a distinct applied learning environment. Dr. Krause concluded, “It's applied activities such as this that help our students to excel, learn, lead and serve society. We’ll definitely plan more of these "projects" in the future. Thanks to everyone involved in the activity and best wishes to Tim and Ethan as they begin their new jobs this summer.”

Morningstar Announces Their New Sector Structure – And It Does Have an Impact on the Management of the AIM Equity Funds

This week Morningstar announced their new sector and industry structures. For those of you familiar with the AIM program, since the inception of the AIM program we have been assigning student-analysts to be responsible for the management of specific sectors of the AIM equity funds. 


Since 2005, the AIM student-managers have been assigned the responsibility for overseeing the holdings of the AIM domestic and international equity portfolios according to individual sectors and industries that were based on Morningstar’s 'older' classification scheme. With the announced changes to the Morningstar sector structure (which is finally more consistent with Standard & Poor’s global industrial classification standards or GICS), some of the AIM students will be assigned new sectors. This means that the funds might not be ‘sector neutral’ following the change and that some of the holdings will need to be reweighed.

In the practical application of modern portfolio theory, diversification is generally thought of in terms of market capitalization and investment style (large growth, small value, etc.), yet sector diversification is also considered to be important. As demonstrated in recent years, pursuing a growth investment style via Internet stocks could lead to a substantially different portfolio—and results the result could be much different than pursuing a growth strategy via healthcare stocks.

Standard sector systems, such as Morningstar's new scheme, have several drawbacks as well. Most classification systems define some sectors by the types of businesses in which companies are engaged, such as technology or healthcare, and others by the expected behavior of stocks, e.g. consumer cyclical or defensive. Such methods also imply that cyclicality exists only in certain sectors. Moreover, most systems—which require investors to juggle percentages for 10 or more sectors—make it difficult for individuals to quickly grasp a fund’s sector tilt. Nevertheless, the proposed Morningstar sector alignment (shown below) is an improvement over the previous system.

Morningstar’s New Sectors

Morningstar’s introduction of their new sector structure appear to be more unified and consistent than their previous approach. This should allow for a better understanding of the impact of portfolio diversification and make it easier to understand and track the investment choices being made by the AIM funds’ student-managers.

This new structure divides the economy into three “Super Sectors:” the Information Economy, the Service Economy, and the Manufacturing Economy. Each Super Sector contains four sectors, for a total of 12. Within each sector, industry groups composed of individual industries allow for a more in-depth analysis by the AIM student-managers.

While several of Morningstar’s sector names remain the same, most are new and represent a substantial overhaul of the previous categorizations. Perhaps the most significant change is the replacement of the “technology” sector—which included a broad range of companies with different performance trends—with separate sectors for software, hardware, and telecommunications.

The result of the change is a unified system that is applicable to both funds and portfolios. It should allow our student-managers to evaluate the performance of their portfolios to the benchmark and other funds by comparing exposure to the three Super Sectors. The system will also permit further examination of holdings and fund performance at a granular level. This will be particularly useful when the students perform attribution analysis at the sector level.

The new Morningstar sector structure should allow for better portfolio construction by clearly showing how a new stock complements the current holdings or whether it simply overlaps the current sector exposure of the AIM portfolios. While this change will require some juggling of the current AIM student-managers responsibilities, it should allow our students to compare their sector performance to other funds that use the GICS format - helping them to talk about their strategies with other portfolio analysts and managers. 


The following represents a brief description of the three ‘Super Sectors’ and their underlying constituents.

Information Economy

Software

Companies engaged in the design and marketing of computer operating systems and applications. Examples include Microsoft, Oracle, and Siebel Systems.

Hardware

Manufacturers of computer equipment, communication equipment, semiconductors, and components. Examples include IBM, Cisco Systems, and Intel.

Media

Companies that own and operate broadcast networks and those that create content or provide it to other media companies. Examples include AOL Time Warner, Walt Disney, and The Washington Post.

Telecommunications

Companies that provide communication services using fixed-line networks or those that provide wireless access and services. Examples include SBC Communications, AT&T, and Alltel.

Service Economy

Healthcare

Includes biotechnology, pharmaceuticals, research services, HMOs, home health, hospitals, medical equipment and supplies, and assisted living companies. Examples include Abbott Laboratories, Merck, and Cardinal Health.

Consumer Services

Includes retail stores, personal services, home builders, home supply, travel and entertainment companies, and educational providers. Examples include Wal-Mart, Home Depot, and Expedia.

Business Services

Includes advertising, printing, publishing, business support, consultants, employment, engineering and construction, security services, waste management, distributors, and transportation companies. Examples include Manpower, R. H. Donnelley, and Southwest Airlines.

Financial Services

Includes banks, finance companies, money management firms, savings and loans, securities brokers, and insurance companies. Examples include Citigroup, Washington Mutual, and Fannie Mae.

Manufacturing Economy

Consumer Goods

Companies that manufacture or provide food, beverages, household and personal products, apparel, shoes, textiles, autos and auto parts, consumer electronics, luxury goods, packaging, and tobacco. Examples include PepsiCo, Ford Motor Co., and Kraft Foods.

Industrial Materials

Includes aerospace and defense firms, and companies that provide or manufacture chemicals, machinery, building materials, and commodities. Examples include Boeing, DuPont, and Alcoa.

Energy

Companies that produce or refine oil and gas, oilfield services and equipment companies, and pipeline operators. Examples include Exxon Mobil, Schlumberger, and BP Amoco.

Utilities

Electric, gas, and water utilities. Examples include Duke Energy, Exelon, and El Paso.

Summer Reading for Young Aspiring Equity Security Analysts

With summer approaching and time available for some reading outside of the classroom, the students in the  AIM program have been asking me about what books they should be reading to make them better equity research analysts. 


For those of you unfamiliar with equity research analysis here is a basic definition: it is the financial analysis of companies in order to evaluate them as possible investment opportunities.  Sell-side equity research analysis is when the researcher provides their fundamental research analysis to clients outside of their firm (i.e. a buy side firm or institutional/retail investor). Buy-side equity research is when the analyst does their own research to invest their firm's money (i.e. pension fund, hedge fund, or mutual fund).

To become proficient at security analysis it is important to read, ask questions, observe, and be curious. Good investment analysts follow global economics, politics, business, technology, and social trends. Again, the key is to be intellectuality curious and to be a voracious reader. Here are some reading suggestions (feel free to add more suggestions and comments to this posting):

·         The first two suggestions are not actually books, but are outstanding web sites where you will find essential material that should be examined:

o   The first is essential reading for an aspiring equity analyst. It is Warren Buffett's Berkshire Hathaway shareholder letters. Each annual letter is only about 20 pages, but it is classic fundamental investment analysis. Buffett is excellent and witty writer - you will be entertained and educated at the same time. You’ll learn a lot about basic investment equity analysis – so it is well worth the time to check out Warren’s ramblings: http://www.berkshirehathaway.com/letters/letters.html

o   The second is Aswath Damaoridan’s web site:  http://pages.stern.nyu.edu/~adamodar/. Dr. Damaoridan is a Professor of Finance at the Stern School of Business at New York University and his on-line material (including his lecturers and readings) is outstanding. The site is a bit challenging to navigate; however, spending time on this site will be valuable to any student of finance. His valuation texts are very good as well.

·         Security Analysis by Benjamin Graham and David Dodd

o   Also: The Intelligent Investor, Security Analysis, and The Interpretation of Financial Statements by Benjamin Graham.

·         A Random Walk Down Wall Street: The Best and Latest Investment Advice Money Can Buy by Burton G. Malkiel

·         Fooling Some of the People All of the Time by David Einhorn

·         Confessions of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market by Daniel Reingold and Jennifer Reingold

·         Best Practices for Equity Research Analysts : Essentials for Buy-Side and Sell-Side Analysts by James Valentine

·        Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports by Howard Schilit

·         Applied Equity Analysis by James English

·         Financial Modeling by Simon Benninga

·         Valuation: Measuring and Managing the Value of Companies by McKinsey & Company (authors Tim Koller, Marc Goedhart and David Wessels)

·         CFA Program Curriculum http://www.cfainstitute.org/cfaprogram/courseofstudy/curriculum/Pages/index.aspx

·         Other interesting reads about Wall Street include: House of Morgan, Den of Thieves, Liars Poker, When Genius Failed, and Too Big to Fail

AIM Annual Report Posted On-Line

All of the students that have graduated from the AIM program since the fall semester of 2005, have actively managed portfolios of equity and fixed income securities. 

They have been responsible for essentially all aspects of managing the portfolios, which includes establishing the process for screening and evaluating potential stocks and fixed income securities; preparing and presenting recommendations to the AIM Fund Advisory Board; and implementing portfolio trading strategies. 

According to Dr. David Krause, AIM program director, "The AIM students in the Class of 2011 were held accountable for organizing and managing three ‘real’ portfolios of Marquette University endowment funds with a market value of nearly $2 million - and they did an outstanding job. This was the first group of AIM students to produce 'triple alpha,' a significant feat given the level of geo-political turmoil and large scale natural disasters that occurred during the holding period."

As is the custom of each class of AIM students, the group prepared and published an annual report of the performance of the three AIM Funds. You can view this year’s AIM Fund Annual Report at either: http://tinyurl.com/3h39wrr or http://business.marquette.edu/centers-and-programs/aim-annual-reports.

Marquette University Commencement 2011

AIM program director, Dr. David Krause, stated, "Congratulations to the students who graduated at Marquette's Commencement on Sunday, May 22, 2011. We wish not only to recognize the achievements of the graduates but also to acknowledge parents, other family members, and friends for their cooperation and support. Well done and best of luck."

Twenty-one AIM students participated in the College of Business Administration commencement ceremony on Sunday. Dr. Krause, AIM director, said, “This was a highly talented group of students who worked hard right up the end of the semester. While some of these students received significant honors and awards, all of them are special to me. They worked exceedingly hard during the past two years since they were admitted to the AIM program. I could not be prouder of their accomplishments. This was an outstanding group of students.” 

The following table contains information about the 21 AIM students in the Class of 2011 who graduated on Sunday (Click to enlarge).

Dan Fuss Comments on U.S. Debt Limit and Bond Market

Recently the U.S. hit its debt limit, which is the total amount that Congress has authorized the Treasury Department to borrow. Treasury Secretary Geithner warned that we will default on our debt in August if Congress doesn't pass legislation permitting the government to borrow more money to meet its existing obligations.

A recent Wall Street Journal article, “Own Government Bonds? Here's Why You Should Be Worried”  http://tinyurl.com/3ukm66f wrote about these concerns. Various leading fixed income investors commented within the article, including Dan Fuss (Marquette alumnus and a close friend of the AIM program). Mr. Fuss is concerned and you’ll probably find this to be an interesting read.

The following is an excerpt of the WSJ article: “The professional attitude seems to be, 'What, me worry?,'" says Daniel Fuss, who oversees $146 billion in fixed income at Loomis Sayles in Boston. "But will this time because the perception that default is possible? I really am worried about that." Mr. Fuss says that as he visits institutional clients overseas, he keeps being asked, "What's going on? Why can't [the U.S.] get your act together?"