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Denver Meeting: Strategy Based Investing


Wednesday, April 16, 2008 - 6:00pm

TBA
We are pleased to announce our fourth event of 2008. On Wednesday, April 16th, Thomas Howard, PhD and Craig Callahan, DBA will present "Strategy Based Investing ". Please see details below.
 
Date/Time:     Wednesday, April 16th 2008 at 6PM
Location:        Via Trattoria(Located on Wynkoop between 18th and 19th in LoDo) 6PM: Networking, hors d’oeuvres
                          (including vegetarian options), and complimentary wine; 6:30PM: Presentation
Admission:    $10 Members; $35 Guests
RSVP:             Secure your seat by sending your admission check to the address below by April 9th, 2008.
Address:        QWAFAFEW Denver, PO BOX 19013, Boulder CO 80308
Questions:     Email Denver@qwafafew.org
Presentation: “Strategy Based Investing “
Speakers: Thomas Howard, PhD and Craig Callahan, DBA 
  
C. Thomas Howard, PhD
CEO and Director of Research, AthenaInvest, Inc.
 
Dr. Howard is a Professor at the Reiman School of Finance, Daniels College of Business, University of Denver. Since joining the faculty in 1978, he has taught courses and published articles in the areas of investment management and international finance. For many years he presented stock analysis seminars throughout the US for the American Association of Individual Investors, a national investment education organization headquartered in Chicago. Dr. Howard has been a guest lecturer at SDA Bocconi, Italy's leading business school and at Handelsho/jskole Syd in Denmark and was a 2004 Summer lecturer in international finance at EM Lyon in France.
He has consulted with a number of firms, most recently First Data Corp and Janus Capital Group, and is currently on the Board of Directors for AMG National Trust Bank N.A., a financial counseling and investment management firm headquartered in Denver. He is regularly quoted in the local and national press and has made appearances on programs such as NBC Nightly News and Fox Financial News. Howard is the author of A Vest Pocket Guide to Value Investing (1996) published by Dearborn Financial Publishing.
After receiving his BS in Mechanical Engineering at the University of Idaho, Howard worked three years for Proctor & Gamble as a production and warehouse manager. He then entered Oregon State University where he received an MS in Management Science after which he received a Ph.D. in Finance from the University of Washington in 1978. 
 
Craig C. Callahan, DBA
President, ICON Advisers, Inc.
 
Dr. Callahan is Founder and President of ICON Advisers, Inc. He created the ICON valuation model that advances the investment methodology originally developed by Benjamin Graham, the "Father of Securities Analysis," adapting it to today's ever-changing market conditions.
Callahan received a doctorate of business administration degree (DBA) in finance and statistics from Kent State University and a bachelor of science degree from The Ohio State University. Prior to founding ICON, he was a finance professor at the University of Denver and the director of research for a regional brokerage firm. His management of investments dates back to 1986.
Callahan has been a television guest on networks such as CNBC, CNN-fn and Nightly Business Report, and has been profiled in a number of leading business and investment publications. He frequently addresses broker/dealer, institutional and investor conferences.
In 2005, he and Tom Howard founded AthenaInvest of Denver for which he is now a non-management owner. AthenaInvest has conducted research showing that the market cap/value/growth boxes widely used in the equity management industry are hurting performance and are poor risk reduction tools. AthenaInvest developed the Strategy Based Investing alternative which was commercially launched in September 2007.
 
Abstract:
 
We believe the two most important pieces of information regarding an active investment manager are 1) the investment strategy and 2) the successful pursuit of this strategy. We refer to this approach as Strategy Based Investing or SBI for short. 
 
For the equity version of SBI, we have identified 10 strategies for managing equity portfolios.  Detailed open end US and international equity fund prospectus information was gathered, resulting in 45,000 pieces of strategy information which were organized into the 10 strategies. The primary and secondary strategies were identified for each fund using a proprietary, carefully structured, objective algorithm.  As a final step, the actual strategy being pursued by the manager over time was verified by means an analysis based on aggregate strategy holdings.

The fund’s Diamond Rating (DR) captures how active and successful a manager has been in pursuing a strategy. The rating ranges from DR1 or lowest, to DR5 or highest active success. Our proprietary DR algorithm is based on various measures of active management and success. We show that it is possible to identify successful active equity managers using objective measures available before the fact.
 
Top performing funds are unconstrained by market cap and value-growth characteristics, smaller, hold concentrated stocks positions, place industry/sector bets, are active in terms of both trading and pursuing alpha, have high tracking error, are more volatile, and represent between 10% and 20% of assets under management within the open end equity fund universe. Our no look ahead, survivor bias free 1997 though 2007 backtests reveal that SBI constructed fund and stock portfolios outperform their corresponding benchmark by hundreds of basis points annually, as well as being less volatility and less correlated with the market. Other recent academic studies, using data as far back as 1982, support our results. 
 
We believe that this opportunity exists for several reasons. First, there is a strong strategic reason for mutual funds to grow large, but empirical evidence reveals performance declines once AUM exceed $1B. Currently 88% of US open end equity fund AUM are managed by funds with greater than $1b under management. Since there is a strong business motivation to grow assets, we do not believe this situation will change any time soon.
 
Second, the industry wide reliance on the market-cap/PE style grid for categorizing, evaluating, and constructing portfolios leads to poor performance. The most successful managers ignore boxes and relentlessly pursue a strategy wherever it may take them in the equity universe. But ignoring boxes makes it difficult to market a product that does not fit neatly into a box. As long as the industry uses boxes and demands style purity, the opportunity to identify superior managers will continue to exist.
 
Third, the most successful managers have other features, such as higher volatility and smaller number of holdings, that many advisors and investors find unappealing. Indeed, these are the residuals of a disciplined strategy focus which yield higher return and lower risk portfolios. But as long as these incorrect but widely held beliefs persist, the opportunity to identify successful managers will persist.
 
Sincerely,
QWAFAFEW Denver Steering Committee:
Tommi Johnsen, University of Denver
Elisabetta Basilico, Qwest Asset Management
Chris Gantz, AMG National Trust Bank
Anna Coppola, Flagship Global
J.P. Tremblay, Standard & Poor's Investment Services
Jon Tesseo, Denver Investment Advisors
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