2010 Baltimore Business Review

8/13/2019 2010 Baltimore Business Review

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BALTIMOREB U S I N E S SR E V I E W J A N

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M A R Y L A N D S B U S I N E S S O P P O R T U N I T I


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Baltimore Business Review January 2010

Produced jointly by the Baltimore CFA Society and

the Towson University College of Business and Economics

Edited by Joanne Li, Ph.D., CFA, Towson University Department of Financeand Niall H. OMalley, President, Baltimore CFA Society

Designed by the Towson University Design Center,Rick S. Pallansch, Director Patricia Dideriksen, Designer

For more information about the contents of this publication, contact theTowson University College of Business and Economics press contact, Joanne Li, 410-704-3342,or Baltimore CFA Society press contact, Niall H. OMalley, 443-600-8050.

This publication is available online at www.baltimorebusinessreview.org

All opinions expressed by the contributors quoted here are solely their opinions and do not reect the opinions of Baltimore CFA Society,Towson University, Towson University College of Business and Economics or afliates, and may have been previously disseminated by them on television, radio, Internet or another medium. You should not treat any opinion expressed in this journal as a specic induce-ment to make a particular investment or follow a particular strategy, but only as an expression of an opinion. Such opinions are basedupon information the contributors consider reliable, but neither Baltimore CFA Society, Towson University, Towson University Collegeof Business and Economics nor their afliates and/or subsidiaries warrant its completeness or accuracy, and it should not be reliedupon as such. The contributors, Baltimore CFA Society, Towson University, Towson University College of Business and Economics, itsafliates and/or subsidiaries are not under any obligation to update or correct any information available in this journal. Also, the opinionsexpressed by the contributors may be short-term in nature and are subject to change without notice. The contributors, and Baltimore CFASociety, Towson University, Towson University College of Business and Economics or afliates do not guarantee any specic outcome orprot. You should be aware of the real risk of loss in following any strategy or investment discussed on this Web site. Strategies or invest-ments discussed may uctuate in price or value. You must make an independent decision regarding investments or strategies mentionedin this journal. Before acting on information in this journal, you should consider whether it is suitable for your particular circumstancesand strongly consider seeking advice from your own nancial or investment adviser.


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Shohreh A. Kaynama Ph.D. The GeorgeWashington University,1991, is the Dean of theCollege of Business andEconomics and Professorof Marketing at TowsonUniversity. Her researchinterests include servicesmarketing, e-Commerce/e-Business solutions,marketing research,international marketing,and decision supportsystems in marketing. Herwork has been publishedextensively in many crediblejournals (nationally andinternationally). She wasnamed one of the 2005 Top100 Women in Maryland byThe Daily Record and is anhonored member of EmpireWhos Who of Womenin Education. In addition,she serves on the boardof SBRC, the Academy ofFinance (NAF), MarylandCouncil on EconomicEducation, and TowsonUniversity Foundation.

Message from the Dean Towson University College of Business and Economics

Dear Colleagues and Friends,

It is a pleasure to share with you the inaugural issue of the Baltimore Business Review.This issue is made possible by funding from CFA Institute and the College of Businessand Economics at Towson University. It is our goal to provide you the most insightfuland thought-provoking analysis of the Baltimore/Maryland economy.

With the economy experiencing the worst nancial downturn since the 1930s, I amcondent that you will take interest in a wealth of industry knowledge covering suchdiverse topics as focused investment strategy, specic sector analysis, real estate trends,

the prospects of a green economy, innovative market rms, strategic advantages of a CFAcharterholder, and strategic partnerships with China. We are committed to presentingcutting edge economic and nancial research to the Baltimore community.

I encourage you to provide us feedback and share with us your comments on this inau-gural issue. If you wish to be a supporting sponsor in the future, please contact me atyour convenience.

Best regards,

Shohreh Kaynama, Ph.D.

Dean, College of Business and Economics

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The Baltimore CFA Societywww.baltimorecfasociety.org

Dear Members, Students and Employers,

I am thrilled to share the inaugural issue of the Baltimore Business Review with you. It represents thecollective efforts of numerous contributors. The inaugural issue of the Baltimore Business Reviewseeks to leverage the resources of the College of Business and Economics at Towson University andthe Baltimore CFA Society. The goal is to provide insight for members, students and employers that isspecically focused on Baltimore and the companies in Maryland. The funding for this joint project hascome from the College of Business and Economics at Towson University and the CFA Institute.

The Baltimore CFA Society (BCFAS) is a not-for-prot professional organization dedicated to life-long

learning in matters related to the nancial markets while advocating ethical conduct. The BCFAS hasa rich history that dates back to 1948. In 2006, the membership elected to change the name from theBaltimore Security Analysts Society to the Baltimore CFA Society. The societys primary objective isto offer educational programs and provide networking opportunities for its membership. The BCFAShas over 600 members. Eighty-seven percent of BCFAS members are CFA charterholders. However,being a candidate in the Chartered Financial Analyst Program is not a requirement of BCFAS member-ship. The societys membership shares one attribute in common which is a commitment to life-longlearning. The member price for events is subsidized to the point that membership pays for itself overthe program year.

The Baltimore CFA Society is dependent on volunteer contributions to make its programming, net-working, educational, and public awareness initiatives possible. The societys twelve member Board ofDirectors is representative of local rms. Baltimore has a tradition of being a regional nancial center,

and relative to its size Baltimore plays an above average role in the nancial markets.The parent organization of the Baltimore CFA Society is the CFA Institute which is based in Char-lottesville, Virginia. The CFA Institute is a global organization that has over 95,500 members in 57countries that participate in 136 regional societies. The membership has varying occupations that includeportfolio managers, research analysts, chief executives, consultants, investment banking analysts, andrelationship managers. For more information please visit www.cfainstitute.org

In a challenging period, I am pleased to share the collective efforts of many contributors. I encourageyour feedback on how we can improve future issues.

Best regards,

Niall H. OMalleyPresident, Baltimore CFA Societywww.baltimorecfasociety.org

Top 10 Employersof Baltimore CFASociety Members1. T. Rowe Price 89

2. Stifel Nicolaus & Co. 30

3. Legg Mason & 29Legg Mason CapitalManagement

4. MTB Investment 22Advisors & MTB Bank

5. PNC Wealth 21Management & Bank

6. Brown 17Investment Advisory

7. Wachovia/ 11Wells Fargo

8. Morgan Stanley 6Smith Barney

9. Adams Express 5Company

10. Campbell & 5

Company


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To Be or Not to Be CFA Charterholders andTheir Strategic Advantages in Baltimore

Joanne Li, Ph.D., CFA Chair and Professor, Department of Finance,

College of Business and Economics,Towson University


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I t is difcult to get a CFA charter. Everyone knowsit. The historical passing rate for just Level I examis around 44%, which includes all the repeatedattempts. The CFA exams are often perceived as themost rigorous and challenging exam in the investmenteld. We all have heard horror stories about how indi-viduals work many years in the industry, retake eachlevel of the CFA exams and still cannot pass Level IIIby the tenth attempt.

While there are over 200,000 registrations in 169 coun-tries for the CFA 2008-2009 program, there are onlyapproximately 83,000 CFA charterholders. Thats nota lot of charterholders to serve the investment industryaround the world. What could be the problem here?Dont we all cry for more qualied professionals sothat we can take proactive measures to prevent thenext nancial meltdown?

Regardless of how you answer the question, industrylikes what is asked of a CFA charterholder the abilityto pass three levels of very demanding exams and atleast four years of industry experience in investment.Having a CFA charter is almost equivalent to a seal ofapproval from the industry that you have proved toknow something about investment.

Anyone who ever picked up a CFA curriculum bookwould agree that the program requires high motivationfrom the candidates to do a self-study course on graduatelevel materials. The program covers a vast curriculumof global standards and professional codes of conduct,knowledge of complex investment tools, understand-ing of asset classes, and applications of comprehensiveportfolio management and wealth planning.

Based on CFA Institutes 2008 annual report, there isa demand to get a CFA charter among professionals.This is not surprising considering the CFA charter pro-vides a comparative advantage for professionals whenmore and more jobs are requiring the designation allover the world. According to Hong Kong EconomicTimes, the registration for the CFA exam in Hong Kongcontinued to rise in 2008. This trend is also evidentin other countries outside United States. Based on theCFA Institutes 2009 presentation, demographics havechanged from 68 percent of CFA candidates being fromthe United States to 71 percent of candidates being fromother countries. The CFA Institute has a network of136 member societies in 57 countries with ve ofces

strategically located in Charlottesville, Virginia, NewYork, Hong Kong, London, and Brussels. The loca-tions cover four global investment playgrounds: NorthAmerica, South America, Asia-Pacic and Europe, withthe inclusion of Middle East and Africa.

Local Employment Opportunities forCFA Charterholders and MembersHow do CFA charterholders or members fare in Bal-timore? Based on a CFA Institutes survey, there areroughly 600 active members in the Baltimore CFASociety. Among the 600 members, 87% are charterhold-ers. Table 1 provides the top 20 employers of BaltimoreCFA Society Members. Among the top 20 employers,two are 501(C) organizations: Johns Hopkins University,and the Maryland State Retirement Agency. Four areprivately held companies: Brown Investment Advi-sory, Brown Capital Management, Camden Partners,and Dwight Asset Management. Also, the list includesquite a few well known public companies in Baltimoresuch as T. Rowe Price, Stifel Nicolaus (capital marketsubsidiary of Stifel Financial), Legg Mason, DeutscheBank, and Citigroup.

Table 1: Top 20 Employers of

Baltimore CFA Society Members1 T. Rowe Price2 Stifel Nicolaus & Co.3 Legg Mason & Legg Mason Capital Management4 MTB Investment Advisors & MTB Bank5 PNC Wealth Management & Bank6 Brown Investment Advisory7 Wachovia /Wells Fargo8 Morgan Stanley Smith Barney9 Adams Express Company10 Campbell & Company11 Constellation Energy12 Brown Capital Management13 Deutsche Bank14 Investment Counselors of Maryland15 Johns Hopkins University16 LaSalle Investment Management17 Maryland State Retirement Agency18 Camden Partners19 Citigroup20 Dwight Asset Management

Source: Baltimore CFA Society self-reportingsurvey regarding employers from its members


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Table 2 presents some market information on the top10 public employers of CFA members in Baltimore.Out of the top 10 public companies, nine are listedon the NYSE; T. Rowe is listed on NASDAQ. Ninetop employers are in the nancial services or bankingindustries; Constellation Energy is in the energy industry.Five are headquartered in Baltimore: T. Rowe Price,Stifel Nicolaus, Legg Mason, Adams Express Companyand Constellation Energy.

Four Baltimore Employers at a GlanceT. Rowe Price

T. Rowe Price, headquartered in Baltimore, is arespected participant in the mutual fund industrybut its investment services go beyond mutual funds.As of 9/30/09 its assets under management were $366billion of which $218 billion were in mutual funds.T. Rowe Price also offers subadvisory services andseparate account services. T. Rowe Price is the largestemployer of CFA Charterholders and candidates inBaltimore, and historically has been one of the largestemployers of Towson University graduates. T. Rowe

Price manages more than 25 domestic stock funds, 25bond funds, 15 international funds, 20 asset allocationfunds, and 5 money market funds. Based on Morn-ingstar Inc.s analysis, T. Rowes mutual funds havenished in the top third of their categories on averageover the past three, ve and ten years. Figures 1 and 2provide 1-year and 5-year performance comparisonsbetween T. Rowe and three major benchmarks: Dow

Jones Industrial Average (DJI), S&P 500 (S&P) andNASDAQ.

l l l l l

Dec08 Feb09 Apr09 Jun09 Aug09 Oct09

Figure 1: T Rowe Price Group Inc. 1-year performance versus three benchmarks

As of Nov. 6, 2009 Source: Yahoo Finance

TROWNASDA

S&DJ

+40%

+20%

0

-20%

-40%

+60%

l l l l l2005 2006 2007 2008 2009

Figure 2: T Rowe Price Group Inc. 5-year performance versus three benchmarks


TROW

NASDA

S&DJ

+40%

+20%

0

-20%

-40%

+60%

Table 2: Top 10 public employers of Baltimore CFA Society Members

Ticker Exchange Market Cap stock price P/ECompanys name symbol traded (in billions) end of day ratioT. Rowe Price TROW Nasdaq 11.48 44.83 36.36Stifel Nicolaus & Co. SF NYSE 1.55 54.39 28.21Legg Mason LM NYSE 4.56 31.71 n/aM&T Bank MTB NYSE 7.79 66.02 25.55PNC Fin. Services PNC NYSE 20.48 44.70 35.56Wells Fargo and Co. WFC NYSE 136.46 29.21 32.03Morgan Stanley MS NYSE 43.62 32.09 22.15Adams Express Co ADX NYSE 0.85 9.92 n/aConstellation Energy CEG NYSE 6.61 32.96 n/aDeutsche Bank AG DB NYSE 48.58 78.60 n/a

Source: Price data are collected on 10/9/2009 from Yahoo Finance site

+80%+100%+120%

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Stifel NicolausStifel Financial Corp. is a nancial services holdingcompany headquartered in St. Louis. Stifel Nicolausis a wholly-owned subsidiary of Stifel Financial. TheStifel Nicholas Capital Markets unit is headquarteredin Baltimore. Through a series of acquisitions StifelFinancial has built a strong presence in equity and xedincome research, investment banking and investmentadvisory services. Two of the larger regional acquisi-tions Stifel Financial made were the purchase of LeggMason Capital Markets in 2005 and Ryan Beck in 2007.Stifel Financial is recognized as having the fth largestresearch department in the U.S., and is recognized asthe largest provider of small company research in theU.S. Stifel Financial has a signicant xed income andinvestment banking presence. Assets under managementas of 6/30/09 were $64 billion. Figures 3 and 4 providea 1-year and 5-year performance comparisons betweenStifel Financial Corp. and three major benchmarks:Dow Jones Industrial Average (DJI), S&P 500 (S&P)and NASDAQ.

Legg Mason

Legg Mason Inc. is headquartered in Baltimore. LeggMason is one of the ten largest institutional asset manag-

ers in the world with $703 billion under management asof 9/30/09. Legg Mason operates with a diverse groupof asset managers around the globe. Western AssetManagement xed income business, with about $500billion accounts for over 70% of the rms assets undermanagement. A well recognized local asset manager isBill Miller who heads the Legg Mason Capital Man-agement and the Value Trust. Within Legg Masonsmulti-manager structure are different asset managerswith differing approaches and styles. Figures 5 and 6provide a 1-year and 5-year performance comparisonsbetween Legg Mason Group and three major bench-marks: Dow Jones Industrial Average (DJI), S&P 500

(S&P) and NASDAQ.

l l l l l


Figure 3: Stifel Nicolaus Corp. 1-year performance versus three benchmarks


S

NASDA

S&

DJ

+20%

+10%

0

-10%

-30%

+30%

l l l l l


Figure 5: Legg Mason Inc. 1-year performance versus three benchmarks


LM

NASDA

S&DJ

+40%

+20%

0

-20%

-40%

+60%

l l l l l2005 2006 2007 2008 2009

Figure 4: Stifel Nicolaus Corp. 5-year performance versus three benchmarks


S

NASDA

S&DJ

+50%

0

l l l l l2005 2006 2007 2008 2009

Figure 6: Legg Mason Inc. 5-year performance versus three benchmarks


LM

NASDA

S&DJ

-60%

-80%

+250%+200%

0%

+150%

-20%

+100%

-40%

+300%

+20%

+60%+100%

-20%


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M&T Bank & MTB AdvisorsM&T Bank has a signicant regional presence builton regional acquisitions of Allrst Bank in 2003 andProvident Bank in 2009. The M&T Bank offers com-mercial banking services, international trade nance,lease nancing and insurance. While M&T Bank isheadquartered in Buffalo, New York, its asset man-agement arm MTB Investment Advisors is based inBaltimore. MTB Advisors serves as the investmentadvisor to MTB Group of Funds, a family of mutualfunds and institutional clients. Figures 7 and 8 providea 1-year and 5-year performance comparisonsbetween M&T Bank and three major benchmarks:Dow Jones Industrial Average (DJI), S&P 500 (S&P)and NASDAQ.

CFA Partnerships in BaltimoreCFA Institute has actively established partnerships withmany universities to deliver executive programs on varietyof topics. In addition, universities in the Baltimore region,such as Towson University, are taking advantage of theStudent CFA scholarship program. The Student CFAscholarship offers reduced costs for university studentsenrolling in the CFA program.

Student scholarships are awarded with the sponsorshipfrom full-time professors who are also CFA charter-holders. For instance, the Department of Finance atTowson University currently has two full-time professors

that are also CFA charterholders. Each CFA professorcan sponsor up to ve student scholarships for each scalyear based on her own established criteria. However, amaximum number of scholarships that a university canoffer in a year cannot exceed ten in total.

This kind of scholarship program creates a uniqueadvantage for students enrolled in a CFA-staffed univer-sity. To help students prepare for their CFA Level I exam,Towson University Department of Finance has establisheda CFA mentoring program. Since the inception of theprogram in 2006, graduate as well as undergraduatestudents have been attracted to participate in the CFA

program. A similar scholarship program is also offeredat the CFA Society level.

The Board of Baltimore CFA Society (BCFAS) hasapproved a student membership category and participa-tion in society activities and seminars since December2006. BCFAS subsidizes up to 10 slots for students for anominal fee. It should also be noted that while professorsare encouraging students to pursue a CFA designation,curriculum development has often attracted the atten-tion of faculty. After working for more than a year asan editor-in-chief in a CFA prep provider business, Ibelieve CFA 3-level curriculum might be too demandingto execute in an undergraduate curriculum. However, aclear division of topical areas is often a good model todevelop undergraduate nance curriculum.

When a CFA charter is awarded, it is a notable accom-plishment. The recognition is both in the industry andglobal arena. Through a strong network of professionalsand partnerships between BCFAS and universities, CFAcharterholders and members should fare much betterin the economic downturn as a result of the strategicadvantages created through the CFA charter and theknowledge learned as a CFA candidate.

References12008 Annual Report, Reecting the Past,Envisioning the Future, CFA Institute.

l l l l l


Figure 7: M&T Bank and M&T Advisors 1-year performance versus three benchmarks


MTB

NASDAQS&PDJI

+20%

0

-20%

-40%

-60%

l l l l l2005 2006 2007 2008 2009

Figure 8: M&T Bank and M&T Advisors 5-year performance versus three benchmarks


MTB

NASDAQ

S&PDJI

-60%

+20%

0

-20%

-40%

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Seth Dadds, CFA

Eric DeVilbiss, CFA

Robert Connors, CFA

Michael Baudendistel, CFA

Frederick Hopkins, C FA

Jason Dudderar, CFA

David Metz, CFA

Alex Humphries , CFA

Michael Monahan, CFA

Cheryl Price-Scungio, CFA

Matthew Murphy, CFA

Congratulations

and best wishes to

our members who

have earned the

CFA credentials

in 2009.

Those listed are among the 95, 5 00 professionals worldwide who hold the prestigious Charted Financial Analyst

designation, the only globally recognized credential for investment analysis and advice. Around the world you will

find CFA charterholders in leading investment firms, as well as in local organizations like the Baltimore CFA Society.

Only those who have mastered three rigorous exams and gained at least three years of hands-on experience earn the

right to use the CFA designation. Every year they reaffirm in writing their continuing commitment to the CFA institute

Code of Ethics - to act with integrity, exercise independent judgement, and put investor interest first. All of which

makes these professionals an asset to our society and our community.

Its a commitment.Its not just a credential.

Jason Frost, CFA

Patrick Guthrie, CFA

Dr. William Ryan, CFA

Todd Skacan, CFA

Luke Torretti, CFA

Kirk Streckfus, CFA

Kwame Webb, CFA

Dongmei Lin, CFA

New Baltimore CFA Society Charterholders

For further Information please visit www.baltimorecfasociety.org.


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Value Investing or Investing for Value

David Stepherson, CFA Portfolio Manager,

Hardesty Capital Management, LLC


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V alue is in the eye of the beholder. I have been inthe investment business for 18 years and havemet all kinds of different investorsgrowth,value, momentum and technical. The one commonthread among them is that they believe they are pur-chasing stocks at a good value. Quite simply put, theyare buying a stock trading below their estimate of whatit is worth. In this sense, all investors are investing forvalue. But value investing trumps investing for valueover long periods of time.

Investing for value and value investing are very dif-ferent. Value investing is an often-misunderstoodinvestment style. Benjamin Graham and David Doddare the founding fathers of value investing. Theirbook Security Analysis is still considered the bible fortrue value investors and a must-read for all investors.Although value investing has evolved over time, it isbased on fundamental analysis used to derive the intrin-sic value of a company. This calculated value is comparedto the current share price for relative attractiveness.Ratios like price-to-book value, price-to-sales, price-to-earnings and price-to-cash ow are used to assistin valuation. Typically, value investors will purchasestocks where the intrinsic value is sufciently belowthe current stock price and whose valuation multiples

are at the lower end of their historic ranges. Finally,value investors are often, but not always, bottoms upinvestors, which means they pay very little attention tothe economic cyclethey are evaluating the companyon its own merits.

While the value philosophy has a straightforward de-nition, it is far more difcult to dene a value stock.There is not an agreed-upon denition, and each valueindex defines value stocks a little differently. Stan-dard and Poors, probably the most well-known andrespected creator of indexes, denes value for theirvalue indexes using four variables: book value-to-price,cash ow-to-price, sales-to-price and dividend yield.Interestingly, the most commonly used value ratio, theprice-to-earnings ratio, is not used. To complicate theissue, the current S&P 500/Citigroup Value Index holds374 different companies, of which 160 (42.7%) are alsoin the S&P500/Citigroup Growth Index. A stagger-ing 55.9% of the companies in the growth index arealso in the value index.

Studies show that value investing is the superior stylechoice over long periods of time . As we can see fromthe chart below, over the last 25 years, the value stylehas the highest rates of return while taking lowerrisk. This dynamic is what investors should seek tomaximize. Within small capitalization stocks, as mea-sured by the Russel 2000, the difference is even morepronounced. To be sure, in any given year, differentinvestment styles will work better than others. But,over the long term, value has proven to be the bestinvestment style for investors.

Table 1: Style ComparisonIndex 1984 1985 1986 1987 1988 1989 1990 1991 1

S&P500 6.27% 31.73% 18.67% 5.25% 16.61% 31.69% -3.11% 30.47% 7500 Value 10.52% 29.68% 21.67% 3.68% 21.67% 26.13% -6.85% 22.56% 10.5500 Growth 2.33% 33.31% 14.50% 6.50% 11.95% 36.40% 0.20% 38.37% 5.06%R2000 -7.13% 31.04% 5.68% -8.80% 25.02% 16.26% -19.48% 46.04% 1R2000 Value 2.27% 31.01% 7.41% -7.11% 29.47% 12.43% -21.77% 41.70% 29.14%R2000 Growth -15.84% 30.97% 3.59% -10.48% 20.37% 20.17% -17.41%51.19% 7.77%

Index 1993 1994 1995 1996 1997 1998 1999 2000 2

S&P500 10.08% 1.32% 37.58% 22.96% 33.36% 28.58% 21.04% -9.11% -1500 Value 18.61% -0.64% 36.99% 22.00% 29.98% 14.69% 12.73% 6.08% -1500 Growth 1.68% 3.13% 38.13% 23.97% 36.52% 42.16% 28.24% -22.08% -12.73R2000 18.88% -1.81% 28.45% 16.49% 22.36% -2.55% 21.26% -3.02% R2000 Value 23.77% -1.54% 25.75% 21.37% 31.78% -6.45% -1.49%22.83% 14.02R2000 Growth 13.37% -2.43% 31.04% 11.26% 12.95% 1.23%43.09% -22.43% -9.23

Avg AnnualIndex 2002 2003 2004 2005 2006 2007 2008 Return Std

S&P500 -22.10% 28.68% 10.88% 4.91% 15.79% 5.49% -37.00% 9.77% 1500 Value -20.85% 31.79% 15.71% 5.82% 20.81% 1.99% -39.22% 9.81% 17.57%500 Growth -23.59% 25.66% 6.13% 4.00% 11.01% 9.13% -34.92% 9.37% 20.79R2000 -20.48% 47.25% 18.33% 4.55% 18.37% -1.57% -33.79% 7.88% 1R2000 Value -11.43% 46.03% 22.25% 4.71% 23.48% -9.78% -28.92% 10.28% 19.63%R2000 Growth -30.26% 48.54% 14.31% 4.15% 13.35% 7.05% -38.54% 5.02% 23

* Source: Standard & Poors, Morningstar


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Given the information in Table 1 (previous page), it isnot wise to commit all of your money to one style ashistory shows that any one style can underperform othersfor long periods of time. Growth, as measured by theS&P 500/Citigroup Growth Index, has outperformedvalue in 13 of the 25 years. Value, though, has provideda higher return with less risk. Diversication amongstyles is just as important as it is among securities andasset classes. Blending the two styles in your portfoliois the strategy that should provide the most consistentreturns for your portfolio.

The value philosophy can be used to get exposure toother investment styles. This is done by screening forvalue attributes on all stocks, not just stocks of a specic

style. A multitude of stocks can be identied that would

otherwise be overlooked, as they may not t the deni-tion of value. Table 2 (below) presents a comparison ofsix different companiestwo value, two pure value andtwo pure growth. Pure value and pure growth aredened as stocks that are only in each respective index.Clearly, the two pure value stocks are the cheapest on avaluation basis. Interestingly, though, the pure growthstocks are relatively cheaper than the value stocks. Thisis due to the industries in which these pure growthcompanies operatedefense and biotechnology. Withbudget decits skyrocketing and impending regulationin healthcare, these two stocks are out of favor withinvestors, causing low valuations. Value investors can

take advantage of cheap growth stocks and not giveup their discipline.

The purpose of the data is not to recommend purchasebut to illustrate that using the value philosophy canunearth some hidden gems in every area of the equitymarket. Having a disciplined, consistent investmentapproach employing the value philosophy can lead tosuperior returns over time. Diversication among stocksof different styles is just as important as diversicationamong asset classes. While diversifying among stocks,employing the value philosophy rather than investingfor value should lead to superior results. Isnt that the

real value in investing?

Table 2: Using Value Style to Select Growth StocksValue Stocks Price to Book Price to Cash Flow Price to Sales Dividend YieldT Rowe Price 4.5 20.7 6.4 2.2McCormick 3.3 11.2 1.4 2.8

Pure Value Stocks Price to Book Price to Cash Flow Price to Sales Dividend YieldLegg Mason 0.9 4.3 1.5 0.4Constellation Energy 1.8 5.6 0.3 2.9

Pure Growth Stocks Price to Book Price to Cash Flow Price to Sales Dividend Yield

Lockheed Martin 10.1 6.2 0.7 3.4Martek Biosciences 1.1 7.7 2.1 0.0

* Source: FactSet

The value philosophy canbe used to get exposure to

other investment styles.

Reference1The Cross Section of Expected Stock Returns,by Fama and French, 1992, Journal of Finance

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ETHICS

TENACITY

RIGOR

ANALYTICS

2 0 0 9 C F A I n s t

i t u t e .

C F A i s a r e g i s t e r e d

t r a d e m a r k o f

C F A I n s t

i t u t e .

The CFA charterholderhas an appetite forintellectually difcultwork, for self-pacedachievement, and foran unambiguous ethical

standard. The letters CFAindicate that this personhas the ability to face therigor of a higher bar.Learn more about CFA charterholders around the worldand the CFA Program at cfainstitute.org/virtues


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De-bunking the Myths of Mid-cap Stocks

David Robertson, CFACEO & Founder, Portfolio Manager,

Arete Asset Management, LLC


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W hen investors evaluate stocks, they oftenprefer the comfort and familiarity of large-cap stocks and view mid-cap stocks* asless desirable. Interestingly, as an analyst and portfo-lio manager, I have found many of the beliefs aboutmid-cap stocks are inaccurate. In fact, as a professionalinvestor with a mandate to outperform a benchmark, Ihave especially gravitated to mid-cap stocks because ofthe market opportunities they present. As one analystdescribed it, if your objective is to purchase the stockof a company which will rank in the top ten in totalreturn in the Fortune 500 ten years hence, dont lookin the current Fortune 500. You are shing in the

wrong pond.1

In this article, I will discuss why I believemid-caps are the right pond and in doing so, addresswhy many of the beliefs about mid-sized companies areoften false beliefs, or myths.

Business life cycleMuch of the investment communitys perspective onmid-sized companies is formed by market capitalization.This is not surprising given that most market indexesare based on capitalization. The strong bias towardscapitalization (which is a function of the markets),however, can belie the size and nature of the underlyingbusinesses themselves. By focusing more specicallyon business fundamentals, it becomes much easier tosee how many mid- sized businesses tend to be experi-encing an especially interesting part of their businesslife cycle.

Business life cycle theory describes that in a companysformative stages, it is focused on establishing recog-nition in the market place, optimizing its productor service, nding the right employees, and gettingnancing. 2 While companies can generate substantialgrowth during this period, they also face a wide varietyof risks. By the time a company becomes mid-sized,it tends to have proven product lines, sound infra-structure, established market positions and seasonedmanagement. 3 Despite this level of development,mid-sized companies often have substantial growthavailable from core markets and still have productand geographic markets left to penetrate.

Industry structureThe mid-cap universe represents a very diverse set ofindustry groups comprised of a variety of differentgrowth rates, competitive dynamics, and economicexposures. Virtually all industries across the universe are

well-represented in the mid-cap universe both in termsof market capitalization and number of companies. Ascompared to the mega-cap universe, the mid-cap uni-verse averages more than twice as many companies perindustry and represents 50% more economic industries.As a result, there is substantially greater choice in themid-cap universe.

Some industries in particular tend to be rife with mid-capcompanies. Whether due to the size of the industry, thenature of competition, or other reasons, representationof these industries almost necessitates consideration ofmid-cap companies. Historical examples of industriesdominated by mid-cap companies include industriessuch as medical and dental instruments, casinos andgambling, and paper and plastic containers. In addi-tion, many industries in the energy and utility sectorshave historically been disproportionately populatedby mid-cap companies. Finally, the nancial servicessector provides an excellent example of the differencein industry composition between the large and mid-capuniverses. The large-cap nancial services sector is heavilyinuenced by nancial conglomerates. Conversely, themid-cap nancial services sector sports several industrieswith signicant and disproportionate representationsuch as asset management and REITs.

Yet another interesting characteristic of mid-cap industries,in addition to their representation of economic exposure, istheir representation of head-to-head competitive dynamics.Most mid-cap companies operate a single business andthus have relatively pure business models. Many alsodisplay a relatively high level of concentration among directcompetitors which often conveys meaningful competitiveadvantages for those participants.

Along with the process of industry structure formationcomes an increasingly clear picture of the appropriatescale for industry competition. Many industries are ofa size such that a few mid-sized companies can realize

optimum economies of scalebig enough to enjoysignicant advantages over smaller counterparts, andon equal footing with large company participants. Inaddition, many larger competitors may fail to see suf-cient opportunity in such an industry, have a materialcompetitive advantage over existing players, or identifythe opportunity at all.

* In this paper mid-cap stocks refer to the universe of stocks in the samecapitalization range as stocks in the Russell Midcap Index, approximately$1 billion to $20 billion. Large-cap and mega-cap stocks refer to stocksin the same capitalization range as stocks in the Russell Top 200 Index.


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Universe SizeIt stands to reason that all else equal, a larger universeof stocks represents more opportunities than a smallerone. This is indeed the case with the mid-cap universeas it represents far more stocks than the large-cap uni-verse. One proxy for the respective size of the universesis the Frank Russell 1000 Index. This index is designedsuch that the 200 largest stocks are large or megacap stocks and the 800 smallest stocks in that indexare mid cap stocks. If consideration is given to allU.S. stocks that span the current range of market capi-talizations represented in the Russell Midcap index,the universe expands to over 1,300 stocks. Clearlythere are a lot more mid-cap companies to choose fromthan mega-cap companies which makes the universeof mid-cap stocks relatively attractive based simply onthe law of large numbers.

Management QualityMid-sized companies also tend to be relatively fertileenvironments for skilled management teams. By the timesmaller organizations grow into mid-sized companies,the management team has generally developed valuableexperience along the way and has also had the chanceto resolve major internal conicts in order to become

a cohesive unit. In addition, mid-sized rms are oftenable to attract very talented and experienced managersfrom conglomerates who have had experience runninglarge businesses. The development and migration ofmanagement talent throughout the mid-cap universehas provided an extremely high level of professional-ism at these rms.

The war for talent is a two-way street and mid-sizedcompanies often attract high-level talent because of theunique opportunities they present to grow and createvalue. Due to their stage in the business life cycle, manymid-cap companies are small enough to have attractive

growth opportunities that are still meaningful. Theseopportunities may take the form of complementaryproducts, new customer segments, new geographicmarkets and the like. Many, if not most, tend to enjoyreasonably strong organic growth opportunities andtherefore have little need to engage in forays outsideof their realms of expertise. As a result, managementenjoys a relatively entrepreneurial environment and isbetter able to focus on business execution.

DurabilityDiscussion of the business life cycle implies that,Mid-caps are survivors. Many are small-cap companiesthat have grown to adolescence. 4 As one managerdescribes, Those companies that survive a move beyondthe challenges of a small, startup companystiff com-petition, inexperienced management, and insufcientcash ow, among othersmay enter an extended growthphase that can last for decades. s While this descriptionts a large number of mid-cap companies, Tiffany andHarley Davidson are two extreme examples of mid-capcompanies that are more than one hundred years oldand still have double digit growth expectations. Amerely cursory review often understates the durabilityof many mid-sized businesses.

Special SituationsA number of businesses make their way into the mid-capuniverse through unique circumstances that rarely occurin the mega-cap universe. For example, a number ofcompanies debut in the mid-cap universe as spin-offsfrom larger corporations. Often, the market does notfully appreciate the attractiveness of these businesseswhen they are masked by the more mature, slowergrowth businesses of a large company. Some notableexamples of spin-offs include Hanes Brands (from SaraLee), Gamestop (from Barnes and Noble) and TimHortons Inc. (from Wendys). Although these situationsare not extremely common, they occur often enoughto merit investor attention.

Other special situations that can facilitate realizationof intrinsic value include initial public offerings, andacquisitions and mergers. Mastercard and Burger KingHoldings are both well-established, well-known fran-chises that initially offered shares as mid-cap stocksin the last few years. In addition, mid-cap companieshave always been targets of larger corporate suitors,

but increasingly large pools of private equity over thelast several years has also brought mid-cap companiesinto their purview. Two relatively recent examples ofmid-cap stocks acquired by larger rms at signicantpremiums are Medimmune and Barr Pharmaceuti-cals, as the pharmaceutical industry has continued itsconsolidation.

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The Myths of Mega-Cap Stocks Just as many of the attractive characteristics of mid-capstocks are often under-appreciated, so too are the inher-ent difculties companies face when they grow verylarge. One prominent investor illustrated this phenom-enon in Barrons seventy years ago, Just as no racingenthusiast would buy an old stud horse to competewith younger horses whose records give promise ofmany more years of racing victories, no wise investorwould put his money in one of the old-line companieswhich has passed its peak and is resting on its laurelsA good horse cant go on winning races forever, and agood stock eventually passes its peak, too. 6

A number of studies strongly suggest that size and lon-gevity can actually serve to inhibit stock performance. Consider the following:

Forbes created its original Forbes 100 in 1917. In1987, Forbes revisited its rst list and compared itwith the most recent list of top companies. Of theoriginal 100, 61 no longer existed and another 21had dropped off the leading company list. The 18that remainedthe survivorsdelivered shareholderreturns roughly 20% less than the overall market. 7

Standard and Poors initiated its 500-company index

in 1957. Only 74 of the original 500 made it to 1997.Only 12 of the survivors outpaced the market, andthe original group, as a whole, underperformed themarket by one-fth. 8

Mauboussin and Bartholdson 2003 ran the numbersfrom 1980 through 2002 and found that for eachholding period, the S&P 500 outperformed the Fortune50 portfolio Its hard for the largest companies tomeaningfully outperform the market because they aresuch a large percentage of the market. 9

In recent years, Fortune has measured the total returnto investors (income plus appreciation) for the priorten years for all of the companies in its annual Fortune500. We have taken the top ten in this ranking forthe past ve years and determined where they rankedten years earlier. As we expected, most of these com-panies were not included in the Fortune 500 tenyears earlier. (Only 32% were listed and none wasin the top 100 in revenues). 10

The business life cycle serves as a useful paradigm fromwhich to explain the relatively poor performance oflarge-cap stocks. As Clayton Christensen notes, there ispowerful evidence that once a companys core business

has matured, the pursuit of new platforms for growthentails daunting risk. Roughly one company in ten isable to sustain the kind of growth that translates intoan above-average increase in shareholder returns overmore than a few years. 11 In other words, by the timea company becomes a large company, it has generallysubstantially penetrated its markets and at that stage,it becomes progressively more difficult to generatesuperior growth.

The daunting risk faced by companies as they growlarge is expressed even more explicitly in a study con-ducted by the Corporate Strategy Board. That studyfound that growth tends to stall for large companiesat a certain threshold: That stall level has risen overthe decades, but looked to be in the $20-30 billionarea in the late 1990s. 12 Therefore, one reason for thepoor performance of large cap large-cap stocks is thatimpediments to growth become especially intense oncethe companies eclipse a certain size threshold.

Additional obstacles exist for the largest companies aswell. For example, Aging public companies rarely havean interest in going out gracefully. Corporate execu-tives often strive, rst and foremost, to perpetuate thebusiness. 13 Several incentives exist for managementto perpetuate a business at the expense of shareholder

returns, but such poorly aligned interests may be onlya symptom of a deeper problem: Companies that havebeen around for a while tend to accumulate inertiaand biases, making them inherently more rigid thanthe broader, ever-changing stock market. 14 Analyz-ing companies in a dynamic world poses an especiallydifcult challenge: In a rapidly changing businessenvironment, a companys mental modelsbased onexperience, expertise, and knowledgeip from an assetto a liability. For many companies, mental model inertialies at the root of an inability to adapt. 15 The difcultyfor management of large companies, and analysts alike,is to determine when the cultural attributes that helpcreate a companys success eventually become a burdento successfully adapting to a new environment.

It is not hard to see how this can happen. Indeed, thelife cycle of a corporations emotional phases baresa strong resemblance to that of human beings. 16 Inthe early years of a corporation, just after its founding,the dominant emotion is passionthe sheer energyto make things happen As the corporation ages,the bureaucracy begins to settle in. Passions cool andare replaced by rational decision making Eventu-ally, rational decision making reveals that the future


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how far our energy can take your organization.Call or visit our Division of Economic andCommunity Outreach (DECO) today.


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Leaders in Technology, Mediaand Telecommunications

Kevin M. Moore, CFA, CMT Managing Director, Portfolio Manager,

KM Moore & Associates, LLC


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Checking Everyone OutMicros Systems, Inc. (Ticker: MCRS). Over the lastforty years, the humble cash register has evolved intothe ubiquitous point of sale (POS) terminal that notonly calculates the amount that a customer owes butis completely integrated with the entire operation ofthe enterprise including key functions such as inven-tory management. When it comes to providing POSterminals to the restaurant, hotel and specialty retailindustries, Micros is the largest in the world. Its clientsinclude premier brand names such as Ruby Tuesdaysrestaurants, Marriott Hotels and specialty retailerssuch as Armani Exchange. Micros has been relativelyless affected by the economic downturn. It saw a 4.4%decrease in sales for the year ending June 30, 2009 andthe consensus among nancial analysts is that revenuegrowth will accelerate to double digits over the nextseveral years. The companys shares have outperformed69% of U.S. stocks over the last twelve months.

Micros Systems, Inc. was founded in 1977 and isheadquartered in Columbia, Maryland. It designs, manu-factures, markets and services enterprise informationsolutions for the hospitality and specialty retail indus-tries. The companys enterprise solutions comprise hotelinformation systems, restaurant information systemsand specialty retail information systems. The companyoperates in the United States, Europe, the Pacic Rimand Latin America. Its fiscal 2009 revenues wereapproximately $900 million (54% international) andit employed approximately 4,700 people.

A National BroadcasterSinclair Broadcast Group, Inc., (Ticker: SBGI). Theconversion from analog to digital broadcasting acrossthe U.S. on June 13, 2009 marked the greatest changein over-the-air television broadcasting since the intro-duction of color TV. In addition to freeing up preciousspectrum, the transition to digital television (DTV)

promised the capability for broadcasters to providebetter quality and more diverse services. Sinclair isat the center of this transition with its national foot-print of stations that extends from Nevada to Maine,includes all six networks and reaches over 20% of theU.S. population. The company has been negativelyaffected by the current economic crisis but the consensusamong nancial analysts is that revenues will stabilizeover the next several years after dropping more thanan estimated 15% in 2009. Investors seem more san-guine than some about the future of this broadcaster.Its shares have outperformed 98% of U.S. stocks overthe last twelve months.

Sinclair, a television broadcast company, was foundedin 1952 and is based in Hunt Valley, Maryland. It oper-ates exclusively in the United States. As of December31, 2008, it owned and provided programming andoperating services or provided sales services to 58 tele-vision stations in 35 markets. Its scal 2008 revenueswere approximately $750 million and it employedapproximately 2,500 people.

Closing ThoughtsWe expect TMT to continue its historical role as akey driver of U.S. economic growth over the next 12

months. However, we believe that over the long termglobal economic growth and growth in demand forTMT will likely come from outside of the U.S. But nomatter where the growth comes from, we expect thatBaltimore will play an important role as a provider ofnancial and intellectual capital, an attractive consumermarket and a home for providers of leading productsand services.

The Baltimore area has played anoften unheralded leadership rolein the success of the global TMT

sector in several key areas

SourcesCompany Reports

Yahoo Finance

Starmine (a division of Thomson Retuers)

Investors Business daily

IDC

Morningstar

DisclosuresThe author holds a position in the shares of Comcast (CMCSA).

This report is not a recommendation or offer to buy or sellany security.

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For more information visit www.towson.edu/cbe

College of Business and Economics8000 York RoadTowson, MD 21252-0001410-704-3342

Towson UniversityCollege of Businessand EconomicsTowson Universitys College of Business andEconomics (CBE) specializes in providinghigh-quality, applied business education withan international perspective that preparesindividuals for positions of responsibility andleadership in business and society. CBE programs

are entrepreneurial, innovative and market-driven,and attract top talent from across the country. CBE isthe largest undergraduate business school in Marylandand is the only institution in the University System ofMaryland to offer a major in e-Business.For those that want to take their education to thenext level, Towson University has enriched itsgraduate education opportunities by offering twograduate programs with the University of Baltimore,the UB/Towson MBA program and the Masters ofAccounting and Business Advisory Services.

is the only University System ofMaryland institution with AACSBInternational (the Association toAdvance Collegiate Schools ofBusiness) accreditation for itsbusiness administration, e-Businessand accounting programs. AACSBis the premier accrediting agencyfor bachelors, masters and doctoraldegree programs in businessadministration and accountingand the highest distinction thatbusiness schools can receiveworldwide.

TowsonUniversity


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How is Chinas Growth CreatingOpportunities in Maryland?

Niall H. OMalleyManaging Director, Portfolio Manager,

Blue Point Investment Management, LLC


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The Denition of GrowthThere are many ways to look at investments. As aportfolio manager, I use growth at a reasonable price(GARP) as a framework to shape my observations. TheGARP investment framework is a blend of growth andvalue investing. As a rule, value investors focus on theprice of the security, the numerator of the P/E ratio,while growth investors focus on earnings offered bythe security, the denominator of the P/E ratio. GARPrepresents a blended approach and is often referred toas a market oriented investment strategy.

When looking at an equity investment it is importantto bear in mind that equity is a residual claim, i.e. whatis left over after a companys liabilities. The residualclaim does not increase in value unless there is growthin assets or the equity of the company was undervaluedwhen the investment was made. In a nutshell, growth isvery important to equities. The worlds largest emergingmarket China offers growth; however, investingin companies beneting from Chinas growth can bedone at a local level. There are a number of Baltimorecompanies participating directly in Chinas growth.

The Chinese Consumer and GDPThe severe nancial shocks of 2008 have created anuncertain environment which is not as friendly togrowth. This is reected in the generally anemic growthbeing experienced in the developed market economiesaround the world. Unprecedented government stimulushas been used to offset weak consumer demand. Giventhe challenges of the current operating environment,where are the growth opportunities?

Growth opportunities do exist; they are just harderto identify. One growth story we are familiar with isChina. An emerging economic powerhouse, China hasfour times the population of the United States. Therising afuence of the Chinese consumers creates ahuge potential; however, the contribution the Chineseconsumer makes towards Gross Domestic Product(GDP) is very different. The easiest way to think of it isas an inverse relationship: 70% of the U.S. economy isdriven by consumption while only 35% of the Chineseeconomy is driven by consumption. The inverse is truewith industrial production which accounts for 30% ofthe U.S. economy, while industrial production accountsfor approximately 65% of the Chinese economy.

This fundamental difference carries over into the imbal-anced trade patterns between the U.S and China. Chinajust surpassed Canada to become the largest exporterto the U.S. The dollar value of goods China exportsto the U.S. is approximately ve times what the U.S.currently exports to China.

The nancial crisis of 2008 is creating fundamentalchanges in consumption patterns. The Chinese govern-ment is using vouchers and other stimuli to increaseChinese consumer demand, while the U.S. savings ratehas swung from a negative gure to approximately 6%.Net U.S. consumption is falling, while structural changes

are occurring in China geared towards stimulatinggreater internal consumption. The Chinese governmentis actively seeking to correct Chinas unhealthy exportdependency which has been overly dependent on theU.S. consumer. This creates an export opportunity forU.S. companies that have products and services thatmeet Chinas internal consumption needs.

Marching into China

A less told story is the impressive success U.S. rmsare achieving as they grow exports to China. Forthe purposes of this article the focus will be on howChinas growth is creating opportunities for Maryland

based companies. Detailed in gure 1 (next page) isthe growth in Marylands exports to China over thepast ten years.

The chart indicates a signicant accelerating rate ofgrowth in Marylands exports to China. After observingthe signicant rate of growth, the question becomes,what Maryland companies are behind this growth?What are the products and services which they provide?Is Marylands export success just based on agriculturalproducts such as soybeans and chicken parts, or is theremore? The following narrative is a representative sampleof the dynamic companies based in Maryland that are

already beneting from Chinas growth.A Journey to ChinaIf you were to take a trip to China, how would theseMaryland companies possibly interact with yourjourney? The most common way of getting to Chinais ying. When a plane lands it needs to immediatelyreduce its speed. One of the largest sellers of thrustreversers to the Chinese airlines is Middle River Avia-tion Services (privately owned by GE). Thrust reversersare those doors that open up on the side of the enginesand permit a reverse ow of air to slow a plane when


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it lands. Middle River Aviation Services headquartersis adjacent to Martin State Airport where it operatesa 1.7 million square foot production facility. Nowthat you have arrived in China the question becomes:where to stay. Marriott (ticker MAR), a well establishedMaryland company, makes that decision easier. Marriottoffers over 16,290 hotel rooms at 41 new and attractiveproperties. In the city of Shanghai alone Marriott hasten major hotel properties.

Now that you are rested, you are interested in gettinga meal. You may be surprised to know that a growingprovider of seasoning to quick serve restaurants in Chinais McCormick & Co (ticker MKC). The unfortunateproblems associated with large scale food contamina-tion in China have led to the rst national food safetylaws. This removes a thicket of conicting provinciallaws that restricted McCormicks growth to regionalmarkets near its three production centers in coastalChina. Now McCormick has the opportunity to pursuegrowth initiatives across the country as the new foodsafety laws come into force.

As you explore China you will notice numerous manu-facturing operations. You may wonder what goes on inthe factories. What is produced and how? If companiesare producing coatings for fiber optics or coatingsfor automotive components, there is a chance thatthey are using ultraviolet curing systems manufacturedby Marylands Miltec (private). If the manufacturingfacility is producing high technology items, they mayhave contracted Washington Laboratories (private)which specializes in Electro Mechanical Compatibility(EMC) certication, which is required by the FederalCommunications Commission for any electronic goodsexported to the U.S. EMC certication establishes that,among other things, new electronic devices will notinterfere with airplane avionics or medical devices such

as pacemakers. During your travels you may decideto visit a store and nd Black & Decker (ticker BDK)power tools for sale. Black & Decker is quietly buildingout a sales network in China as it expands its presencein the worlds largest emerging market.

One travel concern that is always important is whereto seek medical attention. The largest private hospitalsystem in China is run by Chindex (ticker: CHDX) aMaryland based company. Chindex operates a networkof private hospitals and clinics in Beijing, Shanghai, andGuangzhou. Chindex also sells western medical equip-ment and instrumentation to the Chinese market.

ConclusionAs you can see, Chinas growth is creating a numberof opportunities for Maryland based companies. Someof the most promising investment opportunities are incompanies that are positioned to meet Chinas growingconsumer demand. From a GARP perspective the chal-lenge is to identify the companies with a rst moveradvantage and that are positioned to capitalize ontheir market position. Beyond the forward thinkingmanagement teams at the companies mentioned, creditshould also be given to the efforts of the Asia Ofceof Marylands Department of Business and Economic

Development which has helped facilitate the growingprivate sector initiatives.

Reference:SEC lings

U.S. Department of Commerce

Press releases and company websites

Maryland Department of Business and Economic Development

Disclosures:The author does not hold a position in any of thecompanies discussed

The report is not a recommendation or offer to sell any security

illi

Figure 1: Marylands Exports to China

Source: U.S. Department of Commerce

$500

$400

$300

$200

$100

$ Millions

1999 2001 2003 2005 2007 20082000 2002 2004 2006

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In fact, there is ultimatelya limit to how muchregulation can do. In thefinal analysis, you could write all the rules you want, but there has to bea philosophy of ethicalbehaviour that comes fromhuman beings operatingin a professional way.William H. Donaldson, CFA

Learn more about CFA charterholders around the worldand the CFA Program at cfainstitute.org/virtues

William H. Donaldson, CFA

Former Chairman of the SEC

BORN:

Buffalo, New York

EDUCATION:

CFA charter

MBA with DistinctionHarvard UniversityBA, Yale University

2 0 0 9 C F A I n s t

i t u

t e . C

F A i s a r e g i s t e r e d

t r a d e m a r k o f

C F A I n s t

i t u

t e .

ETHICS

TENACITY

RIGOR

ANALYTICS


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Marylanda Hotbed forInnovative Marketing Firms

Rodney Stump, Ph.D Chair and Professor, Department of Marketing,

College of Business and Economics,Towson University


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G.1440Founded in 1998 by entrepreneur and IT maven LarryFiorino, G.1440 has rapidly expanded from its originsas a software development rm to become a regionalIT powerhouse that provides consulting, stafng andsoftware development services to a client list that readslike a Whos Who among Fortune 500 businesses,Federal and State Government agencies, and prominent

nonprot organizations. Among its numerous acco-lades in recent years is its recognition as a Future 50company by SmartCEO magazine, listing on the Inc.5000 list of fastest growing privately held companies,being ranked #5 in Baltimore Magazines 25 Best Placesto Work, and being identied as a Small Giant by the

Greater Baltimore Technology Council.

Phillips SeafoodA family-owned business for four generations, Phil-lips has obtained international recognition for itsaward-winning restaurants and quality Phillips brandof retail seafood products. Growing from a single res-taurant in Ocean City, Phillips Seafood Restaurantsnow operates both company-owned and franchisedrestaurants around the country. But with its successarose a dilemma; its menu was driven by crab mealsand shortages began to grow in its local supply. In 1990,Phillips opened crab processing facilities in Southeast

Asia to ensure dependable year-round supplies. Followedby the addition of manufacturing facilities in Asia andthe US, Phillips is now a highly successful verticallyintegrated company.

Under Armour

Former University of Maryland football player KevinPlank founded Under Armour in 1996 to produce per-formance apparelgear engineered to keep athletes cooland dry and light during a game, practice or workout.Over little more than a decade, Under Armours successas a purveyor of technically advanced products has ledto the expansion of its product line to encompass a

wide range of sportswear, casual apparel, and athleticfootwear for men, women and children. More recently,Under Armour has moved into retailing, opening its rststore in Annapolis during 2007. It has since expandedto a network of 17 retail outlets.

RenegadeFounded in 1988 as a newsletter publisher and trainingvideo producer for the cable industry, Renegade hasrapidly grown to become a full-service production houseand creative agency under the leadership of TimothyWatkins, who acquired the rm in 1993. AlthoughRenegade provides its clients with a wide range ofofferings, the rm concentrates on ve areasaudio,video and photographic studio and production services;more traditional agency services, such as advertising;new media support, including web design, e-commerceand social media; training support services, such asinstructional design and course facilitation; and content,which includes documentary production. Located inHunt Valley, its state-of-the-art facility includes a studio,soundstage and production ofces and the latest indigital/HD technology.

Nationwide, (the Bureau of Labor Statistics)projects that employment of marketing, sales

managers, and related positions is expectedto increase by 12 percent through 2016.

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Community AnalyticsRecognized as being on the forefront of research orga-nizations that apply the principles of social networking,Community Analytics helps organizations map inu-ence networks and identify the trusted advisors withintargeted communities. Community Analytics is lead byCEO Myra Norton, who is regarded to be among an elitegroup of social networking experts and entrepreneursin the newly published book, Design and Launch anOnline Social Networking Business in a Week. Usingan innovative combination of direct contact, technol-ogy and mathematics, Community Analytics helpsclients, such as MIT Sloan School of Management andAssociated Black Charities, communicate with trustedadvisors and deliver resources.

DTLR

Expanding from its inner city origins in Baltimore,DTLR (originally called Downtown Locker Room) hasgrown to be one of the leading Urban Fashion retailersin the U.S. In just over two decades, DTLR has grownfrom a single store to become a formidable regionalchain of 64 stores located throughout the East coastand Mid-West. Propelled by its novel merchandisingthat features the latest urban footwear, apparel and

music and its pioneering, innovative marketing strat-egy that employs regional street teams, DTLR hassuccessfully positioned itself at the top of the urbanretailing industry.

BreakAway, Ltd.Starting out in 1998 as a developer of popular entertain-ment games, BreakAway has created hundreds of titlesin strategy, action/stealth, and sports games, and alongthe way has developed a core competency in creatingtools for modeling, simulation and visualization. Thisprociency in turn allowed the rm to design a strategy-

based platform that enables military, homeland security,medical and corporate customers to solve real-world

problems using experiential, game-based simulations.BreakAways track record of developing innovativetechnology has resulted in the companys being named

to Deloitte and Touches Fast 50 program for threeconsecutive years, and founder Doug Whatleys beingrecognized as Ernst and Youngs Entrepreneur of theYear in 2004.

These rms and the many more that employ TowsonUniversity marketing students in internships are provid-ing a valuable experiential learning environment. Byworking under the tutelage of seasoned professionals toperform meaningful projects and tasks, these studentsaugment their academic backgrounds and graduatebetter prepared for the rigors of subsequent full-timeemployment. Based on recent research, this emphasison practical experience is paying off for CBE graduatesand is one of its hallmarks, distinguishing them fromtheir peers at other universities.

But this is a two-way street: the sponsoring rms haveaccess to a talented pool of individuals who, after dem-onstrating their aptitude and ability to perform in theirinternships, are often recruited for full-time employmentafter graduation. Both sides benet greatly from theseout-of-the-classroom experiences.

as economic conditions improveInternet and mobile communicationsare expected to continue to grow atdouble-digit rates, whereas traditional media,such as print, broadcast television and radio,are expected to see declines.


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Seeing Green in the Baltimore Economy

Tobin Portereld, Ph.D. Assistant Professor,

Department of E-Business and Technology Management,College of Business and Economics,

Towson University


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The push is on for businesses to go green, and someBaltimore rms are already nding bottom linesavings, generating new revenue streams andexpanding opportunities by tapping into the greeneconomy.

In todays challenging global economy, almost every-one is concerned about how to do business in a moreenvironmentally friendly and sustainable fashion, sayslocal business incubator TowsonGlobals director ClayHickson 1. While being green is desirable for altruisticreasons, being environmentally friendly and sustainablewill only receive attention in this economy when it leadsto tangible savings, revenues and job creation.

As the sustainability tide rises across our landscape,Baltimore continues to ride high on many fronts. Spurredby increasing fossil fuel prices, global warming concernsand government tax incentivesBaltimore companiesare pushing the edge of the green envelope. The 2008EmPOWER Maryland: Energy Efciency Act com-mitted the state to a 15 percent decrease in electricconsumption by 2015 2. This legislation coupled withthe renewable energy portfolio standard (RPS), whichrequires a portion of all Maryland retail electric salescome from renewable sources, ensures a future forgreen initiatives in the local economy.

The global energy situation is a key driver for some ofthese green initiatives. Natural gas and oil price increaseslast year fueled interest in energy saving technologies andthe use of alternate energy sources, which in turn led,by late summer 2008, to lower energy prices becauseglobal demand had decreased (Figure 1) 3. This year oilprices rose again, peaking in early summer. Meanwhile,natural gas prices continue a steady decline as domesticproduction outstrips demand. Experts suggest thateconomic recovery will feed increases in energy pricesthrough demand growth.

The development and use of green technologies arecaught in the pinch between the constrained creditmarket and the uncertainty of future energy costs. Whenenergy costs are up, technology investment is good,but when costs are down, the return on investmentsin green initiatives is uncertain. But this situation hasnot kept rms in the Baltimore region from movingforward in the green economy.

Marylands Green Economy

Maryland is recognized as a leader in two of the 15segments of the green economy. According to a recentreport commissioned by the National Governors Asso-ciation, the state has approximately 1,300 jobs in thegreen research segment and 5,600 related to a secondsegment which includes emissions monitoring, envi-ronmental consulting and environmental remediation 4.Excluding a drop in 2007, Maryland also shows stronggrowth in venture capital investment in clean technology(CleanTech) reaching a high of $162 million in 2008.The report also recognizes Marylands success in greentechnology patents over the past 15 years.

Baltimore, too, is claiming its share of patents andventure capital through innovative rms like SolaroadTechnologies and Exis Inc. These two young firmsparticipate in a regional business incubator, Towson-Global 5. Solaroad Technologies is developing and testingsolar tubes. These cylinder devices are less sensitiveto the angle of the sun than traditional solar panelsand support more exible applications. These curvedpanels are a smaller format than at solar panels andcan even save space by being installed upwards ratherthan spread out. Installed along the highway jerseywalls or light poles, the tubes would collect energy

from the sun by day and energy from headlights atnight. A potential extension of the technology currentlyin development is a cube tube that collects wastedenergy from ofce lights which can then be used topower ofce equipment.

Game developer Exis Inc. began at the TowsonGlobalincubator in 2003. In addition to traditional videogames, it develops interactive training simulationapplications to meet the training needs of businessand government. Implementation of these solutions in

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the corporate world would enhance distance-learningeffectiveness and potentially reduce the need for travelrelated to training employees on new equipment andsoftware.

Supporting these companies is the mission ofTowsonGlobal. We actively search for young compa-nies that are developing innovative products, servicesand processes that can be applied in this arena, saidits director, Clay Hickson. We use our physical facili-ties, advisory board, staff and international networkof resources to support these companies so that theirtechnologies have a better chance of actually reachingthe market. 1

Employment OutlookIn the long term, the green economy may produce newjobs. However, the Governors Workforce InvestmentBoard indicates expansion in existing occupations 2.Marylands Energy Industry Workforce Report notesthat jobs in the green economy will include scientists,engineers, truck drivers and salespersons. While thisprediction lacks the marketing appeal of glitzy newcareer paths, the current thrust of the green economyis about infusing the infrastructure with new prac-tices and technologies that reduce negative effects on

the environment. It takes a broad spectrum of jobs tomake that happen, and Baltimore may be poised tobenet from that growth in job opportunities acrossall skill levels.

Baltimore SpotlightKCI Technologies

Baltimore-area engineering firm KCI Technologies(KCI) is living green in its new corporate headquarters.Its new facility in Sparks includes low-emitting paints,green-label carpeting, furnishings that contain recycledcontent, a white solar reective roof, water efcient

landscaping, and efcient mechanical systems. KCI hasapplied for Leadership in Energy and EnvironmentalDesign certication (LEED) from the U.S. Green BuildingCouncil, which, when granted, will provide additionaltax benets. 6

Were saving resources and at the same time savingmoney. Its a coincidental benet, said KCI Chairmanand CEO Terry F. Neimeyer. 6

Ranked as the second largest engineering rm in theregion by the Baltimore Business Journal, KCI provides

engineering, consulting and construction services and isinvolved in many green construction projects. Neimeyeradmits that the recession may slow companies fromtaking more environmentally friendly steps. I think therecession has dampened the enthusiasm, he said. Intight times, people wont invest the extra dollars requiredto go green. I see a declining trend in 2010. 7

However, local governments are trying to nudge busi-nesses, which have to overcome the estimated 6 percentincrease in typical construction costs they incur frombuilding green. 8 Legislation in Baltimore City, Howard,and Baltimore counties increases the performance stan-dards for certain building projects and complementstax incentives to stimulate green construction.

Beyond government incentives, rms are listening totheir workers. Many young employee entrants inthe market have been brought up with the save theEarth mentality that forces the decisions from thebottom up, Neimeyer said. Decreased operating costsand nancial incentives from municipalities drive thedecisions from the top down.

McCormick

In January 2009, McCormick celebrated the comple-tion of a major solar energy project. McCormickpartnered with Constellation Energy to install 2,100solar panels on two roofs at its Sparks facility. McCor-mick expects immediate savings of 30% in electricitycosts in the rst year. In a recent statement, McCor-mick President and CEO Alan Wilson commented,These solar panels provide renewable energy, reducegreenhouse gases within the community and provideMcCormick with energy cost savingsthe classicwin-win. 9

This solar energy project is the latest and most signi-cant initiative in the spice makers strategy to reduceenergy costs and their environmental impact. Upgrades

to the plants lighting system reduced energy use by10% and recycling efforts in the spice mill resulted in a50% reduction in solid waste generation. McCormickbegan developing sustainability metrics and goals in2005 and continues to see progress in many key areasrelated to electric consumption, greenhouse gas emis-sions and waste water volumes. Thinking and actinggreen has become part of the companys DNA. AtMcCormick, we dont view sustainability as a side issue,but something that is an integral part of our businessand essential to our success, Wilson said. 10

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Diversied Insurance IndustriesWhile paper recycling programs have become the stan-dard in business today, Baltimore-based DiversiedInsurance Industries (DII) has found real bottom-linesavings through its recycling efforts and through theelimination of paper documents 11. DII reports annualsavings of $10,000 as a result of its recycling initia-tives. Becoming green actually saves resources andmoney in the long run, said DIIs senior vice presidentMike Papa.

While many of DIIs environmentally friendly pro-cesses are transparent to customers, the rm allows

customers to decide whether to receive an electronicor printed copy of their insurance policies. Someprefer the electronic le, Papa said. These tend tobe younger and/or more progressive customers. Overtime, I expect more contracts will be delivered thisway. This saves money, timeand trees. 12 At DII,being green is a natural outgrowth of being lean andefcient. Eliminating all forms of waste is part of itsculture of continuous improvement, not to mentionimproving its bottom line.

BGE HOME

Given their experience in energy related products, manyeyes can be cast on BGE Homes commitment to theenvironment. But the company is walking the environ-mental talk with its new LEED certied headquartersin White Marsh. The facility incorporates state-of-the-art technology inside and out. Inside features includeoccupant sensors to reduce the energy used for light-ing, low-ow water xtures with infrared sensors, lowemitting paints and carpet materials, and specializedentry mats that prevent contaminants from enteringthe building. Visitors will notice runoff water collec-tion pools to support natural ltering and absorption,as well as drought-tolerant indigenous plants. 13 Bysetting an example for the efcient use of energy atits own facility, BGE Home may be better positionedto attract customers to its residential energy productsand services.

For its residential customers, BGE Home operatesan online Energy Saving Center, launched in 2008. Itprovides customers with access to resources to improvethe efciency of their homes and reduce their energyconsumption. The site includes a self-guided homeassessment, a virtual home to identify savings in energy

and water use, and an online store for do-it-yourselfersto order everything from electricity consumptionmonitors to outdoor solar ovens. 14

Customers also may request a full home energy analysisby one of BGE Homes certied auditors. The 4-houraudit identies specic areas where improvements towindows, doors, insulation, and HVAC systems canincrease the homes energy efciency. The home energyaudit is often the rst step when customers are lookingto reduce energy costs. When asked about the currenttrends in energy product sales, BGE Home vice presidentof marketing and customer care Catherine M. OBriencommented, We see ongoing evidence of energy relatedproduct interesteverything from high efciency HVACequipment, to attic insulation, to smaller do-it-yourselfitems that can be purchased from our Energy SavingCenters Online Store. 13

While the difcult business climate has increased thepressure on rms to choose carefully where they investtheir resources, Baltimore rms are not avoiding sus-tainability initiatives. Baltimore is on track, saysKCIs Neimeyer.

References1 C. Hickson, telephone interview, October 2009.2Maryland Governors Workforce Investment Board, Marylands Energy IndustryWorkforce Report: Preparing Todays Workers for Tomorrows Opportunities, July 21, 2009,http://www.mdworkforce.com/pub/pdf/energyworkforce.pdf.3Energy Information Administration, Ofcial Energy Statistics from the U.S. Government,http://www.eia.doe.gov/oil_gas/natural_gas/info_glance/natural_gas.html. (October 2009).4National Governors Association, Maryland: Prole of the Green Economy, September 29, 2009,http://www.subnet.nga.org/downloads/GEStateProles/MARYLAND.PDF.5TowsonGlobal Members. October 2, 2009, TowsonGlobal International Incubator,http://www.towsonglobal.com/dotnetnuke/Membership/Members/tabid/86/Default.aspx.6KCI celebrates new green HQ with Baltimore County, KCI Corporation, May 13, 2009,http://www.kci.com/company/newsroom/press-releases/kci-celebrates-new-green-hq-with-baltimore-county.7T. Neimeyer, e-mail to the author, October 12, 2009.8G. Washington, Green building is now a business practice, so handle with care,Baltimore Business Journal, September 21-October 1, 2009, page 23.9McCormick and Constellation Energy Celebrate Completion of Solar Power Installation,McCormick Corporation, January 30, 2009,http://www.mccormickcorporation.com/NewsRoom/McCormick-and-Constellation-Energy-Celebrate.aspx.10A. Wilson, e-mail to the author, October 13, 2009.11 J. Brockway, Going Green Makes Lots of cents for Mid-Atlantic Insurers, Agencies,August 5, 2009, http://ifawebnews.com/link/31.12M. Papa, e-mail to the author, October 12, 2009.13C. OBrien, e-mail to the author, October 16, 2009.14Energy Saving Center, BGE Home, October 12, 2009. http://www.bgehome.com/energy_saving_center.php.


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Residential Real Estate Pricesin the Baltimore Region

Matthew Chambers, Ph.D.Associate Professor,

Department of Economics,College of Business and Economics,

Towson University


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T he last three months have witnessed a potentialshift in home prices. The S&P Case-Shiller 20-CityHome Price Index has reported price increasesin May(0.4%), June (1.4%), and July (1.6%). Overthe same time horizon, the Federal Housing FinanceAgencys (FHFA) seasonally-adjusted purchase-onlyhouse price index (HPI), showed a similar pattern withincreases in May (0.6%), June (0.1%), and July (0.3%).Given this 3 month pattern of stabilized home prices,many believe the housing market is ready for a turnto the upside.

Measuring Home Prices

The Case-Shiller and FHFA Home Price Indexes are thetwo most watched measurements of home prices. Bothindexes use a repeated sales technique that tracks thechange in prices on individual homes. That is, the initialsale of the house is recorded. Later when the house isresold, the new price is measured and the correspondingprice change is recorded. Given that the same house isused to measure prices at two points in time, the indexesdo have some ability to control for quality effects inthe price of housing. Even though these two measuresuse the same basic techniques to track prices, they dodiffer in several important ways.

The Case-Shiller indexes use only purchase pricesin creating the index. The FHFA follows a similarapproach in their purchase-only indexes. However,the FHFA also calculates all-transaction indexeswhich use purchases and renance appraisals forpricing data.

The FHFA price information is generated from mort -gage information obtained from Fannie Mae andFreddie Mac. The FHFA only tracks FHA backedmortgages. This means the FHFA index misses thehomes which had non-traditional nancing, such assubprime, adjustable rate, or jumbo mortgages. The

Case-Shiller indexes use information from countyofficials and homes measured are not limited byvalue or mortgage type.

The Case-Shiller indexes are value weighted, givinggreater importance to more expensive houses. TheFHFA indexes weigh each home equally. Thus, theCase-Shiller Indexes are more applicable to studyingthe effects of changing home prices on householdwealth. The FHFA indexes are more associated withlooking directly into home valuations.

The FHFA National indexes use data from all 50 statesand Washington, D.C. Assuming that at least 1000transactions have taken place in a given area, theyprovide indexes for all nine Census Divisions, all 50states and Washington D.C., and every MetropolitanStatistical Area (MSA) in the U.S. except for PuertoRico. The Case-Shiller National Indexes only usedata from 37 states and the Washington D.C.. Thestates missing are Alabama, Alaska, Idaho, Indiana,Maine, Mississippi, Montana, North Dakota, SouthCarolina, South Dakota, West Virginia, Wisconsinand Wyoming.

Residential HousingPrice ComparisonsGiven the readily available MSA level indexes throughthe FHFA, we can easily take a snapshot of how pricesin the Baltimore housing market have performed rela-tive to other markets during the nancial crisis. Whenlooking at price levels, one can get a different impressionbased on how far back one goes. From the peak of thehousing bubble to the 2nd quarter of 2009, averagehousing prices in Baltimore have dropped 7.8%. Thisis consistent with the national reading that shows a 9%drop from the peak. Baltimore has fared better thanWashington, D.C. where house prices have dropped15.3% from the peak. Looking further back, we stillsee a market that has moved substantially higher. Whencompared with 1992 levels, Baltimore housing priceshave risen 149%. That is higher than Washington, D.C.at 144% and substantially higher than the U.S. averageof 104%. Given this information and assuming that thehousing bubble is mostly a macroeconomic shock, wehave to consider the possibility that housing prices inBaltimore and D.C. may still have some room to fall.

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Figure 1: National Comparison of Average House Price Changes

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National ComparisonThe best way to get a handle on the state of the housingbubble, either inating or deating, is to look at thetrends in the rate of housing price changes. Figure 1presents a comparison of housing prices changes in theBaltimore-Towson MSA, Maryland, and the U.S.

Figure 1 shows two distinct trends for Baltimore andMaryland versus the U.S. First, the period between1992 and 1997 marks a time when house prices weremildly appreciating nationally, but were pretty much atin Baltimore and Maryland as a whole. This indicatesthat Maryland was a late entry in the housing bubble.

After 2001, Maryland and Baltimore entered a periodof price ination that exceeded national levels. In early2005, the annualized percentage change in home pricespeaked at over 20 percent, more than double the nationalrate. Since that peak, price ination quickly changedinto price deation that was roughly in-line with thenational average. As of the 2nd quarter of 2009 homeprices were decreasing at an 8% annualized pace.

Regional ComparisonWe can also stu

Documents

2010 Baltimore Business Review