UP CLOSE: CFA Singapore President Jan Richards, CFA Files/CFAS... · 2015-08-17 · Jan Richards, CFA Up close with CFA Singapore President Jan was elected CFA Singapore’s President

Issue 18 | July 2015 | www.cfasingapore.org

Quarterly

UP CLOSE: CFA Singapore President Jan Richards, CFA• LOW RISK PORTFOLIOS MAKE MORE MONEY • DETECTING DECEPTION• CASH FLOW SHENANIGANS

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BOARD MESSAGE

CFA Institute has set aside the month of May for “Putting Investors First”. The global theme for 2015 is “being a trusted professional”. Members are invited to endorse ten statements of investor rights at http://investorrights.cfainstitute.org. Endorsement can be done via LinkedIn, and social media platforms such as Twitter, Facebook, Weibo and electronic email.

At the Society’s 29th AGM on 28 April, the following members were elected to the Board for a two-year term from 2015 to 2017.• Alex Ho, CFA (Treasurer)• Jack Wang, CFA• Jan Richards, CFA (President)• Kanol Pal, CFA• Mark Tan, CFA• Rasik Ahuja, CFA (Deputy

President)• Saumya Rao, CFA• Seow Hock Hin, CFA• Simon Ng, CFA• Tan Lay Hoon, CFA (Secretary)

Kevin Gin, CFA and Arun Kelshiker, CFA will continue to serve their two-year term until the next AGM in 2016.

The following Board members retired this year. • Lim Liying, CFA (President)• Marcus Lam, CFA, FCA (Treasurer)• Daryl Liew, CFA• Gary Ng, CFA, CA• Tan Chin Hwee, CFA, CAThe Board thanks them for their contributions to the Society and to our members.

In this issue of The CFA Singapore Quarterly newsletter, we have the following features.

• A personal profile of CFA Singapore President Jan Richards, CFA. article | Up Close - CFA Singapore President Jan Richards, CFA

• Internationally recognized expert in detecting

deception, Dr Mark Frank, on how to spot liars. article | Detecting Deception

• Forensic accounting expert from CFRA, Jennifer Latz, on ways companies can present financial statements to improve cash flow metrics without an underlying change in business fundamentals. article | Cash flow Shenanigans

• Global Allianz director Kunal Ghosh shared his quantitative research findings on low volatility stocks article | Low Risk Portfolios Make Most Money in the Long Run

Please approach us if you wish to be part of our organizing committees, or have an idea to help us improve.

CFA Singapore Society Board

Dear Members,


www.linkedin.com/company/cfa-society-singapore

www.twitter.com/CFASingapore

www.facebook.com/CFASocietySingapore

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CONTENTSThis magazine is intended to be

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detectingDECEPTION

10

Dr Mark Frank

low risk portfolios

MAKE MORE

MONEY

in the long run

7

Kunal Ghosh

cash flow

SHENANIGANS

14

Jennifer Latz

UP CLOSECFA SingaporePresidentJan Richards, CFA

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The CFA Quarterly was privileged to get up close and personal with Jan Richards, CFA, an amazing lady who holds her place in the male-dominat-ed world of banking and finance.

Her three-decade career has spanned three continents and diverse fields from government regulation, credit audit, to debt restructuring, extending loans, and now wealth management advisory.

She is now Group Head at Deutsche Bank’s Asset & Wealth Management, Southeast Asia, which serves the banking needs of wealthy individu-als and families across the globe. It also provides investment solutions to individual and institutional investors worldwide.

Jan Richards, CFAUp close with CFA Singapore President

Jan was elected CFA Singapore’s President in April 2015. Incumbent Chair of the CFA Institute Board of Governors, Aaron Low, CFA, introduced Jan to the Society’s Board seven years ago, when it was looking for more female representation. She has been on the Board since.

How will the Society change with the newly elected President?

The Board, for one, will be kept busy. It currently comprises of 12 CFA Singapore members who were elected by regular members at the Society’s AGM on 29 April. The 12 Board Members also elected the other three Executive Committee members as follows.• Rasik Ahuja, CFA, executive

director with Coutts (Royal Bank of Scotland’s private banking arm) in Singapore is Deputy President.

• Alex Ho, CFA, chief financial officer of CV Shipping (a shipping company jointly owned by the state-owned oil companies of China and Venezuela) is Treasurer.

• Tan Lay Hoon, CFA, former

investment banker (Head of Capital Markets at OCBC Bank) is Secretary.

Executive Committee members met every 2 months last year. Nowadays, they meet every week.

“If we don’t have more meetings, how can we get anything done?” said Jan, who was only back in Singapore from New York for a day, before flying off to Jakarta, which she visits almost weekly.

Jan signalled that CFA Singapore, one of the most active CFA societies in the world, will continue to be active.

It has been highly successful in raising members’ level of professional excellence by rallying senior practitioners to share expertise. It facilitates dialogues between regulatory bodies and other industry stakeholders such as the Singapore Exchange and the Singapore Institute of Directors to look into addressing policy and other structural weaknesses. It has no shortage of networking events such as the appreciation of wine

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and art as alternative investments.The Society has been able to organize a wide scope of events because of the diversity of financial professionals that have rolled up their sleeves as volunteers.

It is vibrant ground for forming a strong business network. That may explain why two out of the four Executive Committee members are private bankers.

On the cards are a members’ survey, initiatives to restore trust in the industry, and plans to enhance its jobs mobility platform.

Jan said being at the right place at the right time helped her get to where she is today. She was willing to leap into what was unknown to her.

Jan started her career in the US Department of the Treasury that ensured national banks were compliant with central bank regulations. For 10 years, she had an arduous schedule that involved 3 to 4 hours on the road commuting daily between home in New Jersey and office in Manhattan, New York City.

Subsequently, she left for the private sector by joining Chase Manhattan Bank to audit the credit worthiness of the portfolio of loans held by its ~70 international offices worldwide. There, she found a mentor in Robert S Strong, its Chief Credit Officer, who recommended her for a transfer to Singapore after 4 years.

“I raised my hand and said, I wanted a regional role. I had learnt about the international customers when I was doing the loan review. Traveling all over the world to countries like Panama, Brazil and Indonesia appealed to me. I wanted to learn something new.”

In 1998 during the Asian financial crisis, she relocated from New York

to Chase Manhattan Bank’s regional HQ in Singapore for a completely new role in debt restructuring. The Rupiah and Thai Bhat had collapsed. The bank’s customers could not pay down their USD loans, when their revenues were in the devalued local currencies. The bank found itself up to its neck with companies that had defaulted on loans, especially in Indonesia and Thailand.

“Chase Manhattan Bank led loan syndicates in Indonesia because of the massive size of its portfolio there. I was a woman on male dominated steering committees for banks in Indonesia. These committees were steering the restructuring of syndicated loans on behalf of 20 to 30 banks.

“I was going head to head with the shareholders of Indonesian manufacturing corporates, negotiating on behalf of the other bank groups. I even negotiated with the lawyers. I had to do that to close the deals. I learnt a lot about negotiation.

“Keep communication channels open and build consensus among the bank group and principal shareholders. The stakeholders need to know what’s going on to agree with you,” she said.

From Singapore, Jan flew to Indonesia every week, and learnt to speak Bahasa from colleagues, taxi drivers and hotel staff.

Her customers owned factories that manufactured products that supported Indonesia’s economy, ranging from PET resin for plastic bottles, laundry detergent, cement, textiles, electrical cable to automobile tyres. She formed deep relationships there, and forged ties with important business people in

Speak up and leap out

Speak the right language


Indonesia. That eventually paved the way for her success in the wealth management sector.

“Indonesians are very warm and down to earth. All my friends were locals, and they are still my friends today,” she said.

In 2000, Chase Manhattan Bank merged with JP Morgan.

When the Asian financial crisis blew over after 2 years, she had to make a decision: Return to New York, or relocate to Jakarta to become its branch manager and credit officer, in addition to her debt restructuring responsibility.

She chose to stay in Asia. On 15 August 2001, she became the branch manager of JPMorgan Chase Bank N.A., (Jakarta).

“I accepted the Branch Manager job because I wanted in stay in Asia. I loved living in Asia. Asians are generally more genuine, and Indonesians are light-hearted and always smiling. Customer service is great - attentive. I like the food, I like the weather and the great service makes things very convenient,” she said.

In 2003, Jan moved on to be the Managing Director of JP Morgan Private Bank in Geneva. She relocated to Switzerland because the opportunity for promotion to managing director was not available in Indonesia. Thus, she took on a new role as Head of Credit for private banking in Asia and Switzerland.

“It was a complete culture shock going from Indonesia to Switzerland. I didn’t speak French and didn’t integrate as well in Geneva. In Switzerland, private bankers do not speak to each other. I hung around colleagues who spoke English. I picked up new interests - learnt golf and skiing. The upside was: I could travel to Asia anytime I wanted. I could go

to London, Austria, Spain,” she said.“Private banking is about client relationship management. It is providing credit and trust services. It is about remembering birthdays, taking care of their kids, flowers. And that is completely different from debt restructuring.

Jan has had bosses and senior colleagues who played influential roles in her career.

In 1997, Jan was offered what appeared to be a great job in Taipei, but Robert Strong had advised that it wasn’t a great place for a career woman like her. For her move from New York to Singapore, he played a role in getting her the new job. A few years later, after the debt restructuring work was done, he helped her land her next job in the Jakarta office.

During the 2008 global financial crisis, there was an exodus of private bankers in Asia. At that time, the CEO of JP Morgan Private Bank for Europe, Middle East and Africa was a Spaniard named Emilio Saracho. He advised Jan to return to Singapore and fill the vacancy for the managing director position of JP Morgan Private Bank here. She heeded his advice.

For her part, Jan is mentoring younger people, and hopefully, making an impact on them. Even though Jan is so busy now that she practically lives out of a suitcase, she remains enthusiastic about mentoring junior Society members in one-on-one meetings.

She advises CFA charterholders to stay close to the Society through its myriad of activities. “Being part of the CFA fraternity helps you find jobs. I always give priority to job candidates who say they are willing to go through the CFA program,” said Jan.

Senior colleagues open doors

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low risk portfoliosMAKE MORE MONEY in the long run

The Capital Asset Pricing Model (CAPM) tells us that the highest returns should come from stocks with high beta, but empirical research findings show otherwise. This is no anomaly, but a persistent irrational investor behaviour that has been around since stock markets began, according to Allianz Global Investors portfolio manager, Mr Kunal Ghosh.

“CAPM’s upward sloping security market line with expected returns growing as beta grows is a myth,” he said.

Using four decades of US stock data, Mr Ghosh found stocks with lower volatility had better share price performance compared to stocks with lower volatility.

The Allianz Global chart above shows stocks in the first 3 quintiles of volatility outperformed those in the 4th and 5th quintiles of volatility.

Mr Ghosh’s findings led him to conclude that empirical evidence from minimal variance portfolios show that the more risk you take, the less money you make.

The longer your investment duration, the more money you make. This means the best returns are made out of fully invested (minimum cash allocation) portfolios with the lowest risk.

Other researchers have derived similar conclusions on the stocks in the Dow Jones Industrial Average since the Great Depression in the 1930s.

This phenomenon has also been observed in 24 of the world’s largest equity markets (including Singapore) as well as for the global bond market.

Cumulative capitalization weighted return of a universe of U.S. stocks quintiled by total volatility over the period from October 1976 to December 2014. Quintiles were formed based on monthly rebalances using total volatility estimates from Barra. Chart: AllianzGI US.

At a professional development talk held at Capital Tower on 19 May, Allianz Global Investors portfolio manager, Mr Kunal Ghosh, spoke on the effectiveness of minimum variance models, pitfalls to consider when forecasting risk and investor irrationality.


Common pitfalls

How does one forecast volatility when past volatility is not a good predictor of future volatility?

Taking a leaf out of the highly successfully Global Allianz co-variance matrix for forecasting risk, Mr Ghosh has a few tips for fund managers.

Let’s say you have a fully invested portfolio and you want to get the lowest forecast risk from your universe of stocks.

While daily data may provide more accurate trends, one has to be mindful of auto-correlation, such as when a stock’s performance is linked to the prior day’s return.

There are software functions that correct for auto-correlation (momentum correction).

Secondly, do not diversify just for the sake of diversification, to the extent of introducing unsound stocks into your portfolio.

Thirdly, countries of lowest risk outperform the highest risk countries. According to MSCI

indices, the lowest risk countries are Malaysia and China, and they have outperformed over the past 20 years.

Micro views for his co-variance matrix account for momentum correction, enhanced diversification and outlier treatment while his macro views include sector and country risk.

Lottery-like Preference

Investors have exhibited lottery-like preference for the longest time. This behaviour transcends time and geography and is not part of structural market anomaly that reflects patterns that can come and go.

Throughout history, investors have exhibited greed-driven instincts to look for jackpots not realising that these have low probabilities of happening.

Nobel Prize (Economics) winner Daniel Kahneman observed the following:

• Most people would prefer to bet $1 to make $5000 even if the probability of success is so low (such as 0.01%) that the expected value of the gamble is negative:

Common pitfalls

Lottery-like preference

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Kunal Ghosh is a portfolio manager and director with Allianz Global Investors, which he joined in 2006. He is head of the Systematic team and has 12 years of investment industry experience.

Kunal was previously a portfolio manager for Barclays Global Investors, where he built and implemented models for portfolio management.

Before that, he was a quantitative analyst for Cayuga Hedge Fund.

Kunal GhoshDirector Allianz Global Investors

(0.01% * $50,000) = $0.50, which is less than the $1 cost of the gamble.

• In contrast, most investors will refuse the opportunity to invest $100 to make $110 if there is a 50% chance of losing the $100, despite the fact that the expected value of the investment is positive: (50% * $110) – (50% * $100) = +$5.00.

In the stock market, we hear remarks like, “The Alibaba IPO must be the next Amazon!” Such remarks reflect investors trying to forecast returns by associating one stock with a former big win. That is when investors overpay and get disappointed.

For more insight into irrational investor behaviour, Mr Ghosh recommends reading New York Times bestseller in medical applied psychology, Thinking, Fast and Slow, by Professor Kahneman.

A word of caution: If the expected return (mean return) of some stocks is greater than its median return over a period of time (high positive

skewness), this stock is likely to be “overpriced” based on a behavioural bias for lottery-like payoffs.

By examining skew and volatility, Mr Ghosh’s empirical research concluded:

• As many as 80% of stocks in the Barra database from October 1976 to March 2011 are positively skewed, i.e. “likely overpriced”.

• Low volatility stocks tended to exhibit higher returns.

• CAPM holds only when there is no skew (i.e. when investors do not overpay for stocks).

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The mean variance principle is more

applicable for investor behaviour rather than speculative behaviour.

- Harry Markowitz


An internationally recognized expert in deception --- Dr Mark Frank, works with the US Federal Bureau of Investigation in the understanding of criminals and terrorists. He has trained national defence agencies in the detection of deception and hidden emotional behaviours at security checkpoint interviews and in counter-terrorism situations.

Last month, he was in town to initiate CFA Singapore members on how to spot a lying CEO. The attendees at his two-day seminar held at M Hotel included fund managers, bank relationship managers and other professionals who manage teams of colleagues.

DETECTING DECEPTION

Most people are not very good at catching liars. Studies have found that people can only spot a liar 54% of the time. The good news is: Ability to spot liars can be trained. Dr Mark G Frank (Professor and Director of the Communication Science Center at University at Buffalo, State University of New York) found this to be true of the law enforcement personnel he works with.

Given the difference expert training makes, knowing how to apply Dr Frank’s research and findings on micro expressions may just save the day for a fund manager who might otherwise be taken in by some smooth talking but unscrupulous CEO.

Micro expressions are fleeting expressions of emotion that occur when a person either deliberately or unconsciously conceals a feeling. Dr Frank found that these fleeting expressions / movements are

surprisingly accurate when it comes to detecting what a person really feels.

“Fleeting facial expressions are expressed by minute and unconscious movements of facial muscles and these micro-movements, when provoked by underlying emotions, are very difficult for us to control,” he said.

He cited a clinical study on a man who had a tumour in the left side of his brain. This man was unable to pullup his right cheek muscles when instructed to smile for a photograph, and he appearedto be giving a cynical smile. This was because the psychomotor function on his right side is controlled by his left brain. Yet, he was able to produce a natural smile when told a joke. The joke had stimulated anotherpart of his brain that controlled involuntary smile muscles.

Micro expressions can happen in a fraction of a second, and generally go unnoticed during dailysocial interaction. Micro expressions betray us when we lie. We can

Involuntary fleeting expressions don’t lie

try to cover our feelings with fakesmiles, but involuntary face muscles reveal these hidden emotions.

The best and most efficient way to evaluate micro expressions is to videotape the interaction, so thatyou are able to go back and replay the expressions in slow motion.

Visible behaviour is a function of thoughts, feelings and actions, which are expressed through 3 channels – our faces, our bodies, and our voices. Expressions of emotions are basically automatic, brief, unbidden, co-ordinated and organized but the liar will try to hide these emotions that are inconsistent with the rest of his message.

While there is no human behaviour that guarantees to reveal that someone is lying, the tone of voice, style of speech and words used, can provide telling verbal cues.

When extra mental effort is being exercised to close the loop for a lie, a person’s voice is more likely to be tense, with hesitation and stuttering or utter speech errors. He is more likely to make self-contradictory speech. His speech is peppered with pauses, filled pauses, and it takes him longer to respond, on the average. He also may be more likely to repeat the question asked, answers to a different question or avoids the question.The pitch of his voice is likely to become higher, its amplitude louder and his speech becomes faster, compared to during the rest of the conversation. This can be observed in wave diagrams of digital audio players.

A person trying to convince you of a lie usually tries to ply you with as much truth as possible before sneaking in a lie. When he sneaks in the lie, he will look you in the eye for a longer time than someone telling the truth – he overplays his hand.

Emotion Thoughts / Facial Expression

Surprise

Surprise is a neutral emotion that is often fol-lowed by another emotion.

• Entire eyebrows pulled up.• Eyelids pulled up.• Mouth hangs open.

Sadness/Distress

Sadness is triggered when one experiences loss. Distress is triggered when one needs help. • Inner corners of eyebrows raised.• Upper eyelids loose.• Lip corners pulled down.• Chin raised slightly.

Fear

Fear is triggered when one feels threat of harm. One is in a situation he wants to avoid.

• Eyebrows pulled and together.• Eyelids pulled up.• Mouth stretched.If someone tried to control his expression of fear, he will control his mouth.

Joy

Joy is triggered when one’s goal is attained.

• Eyes are symmetrical.• Crow’s feet wrinkles appear.• Cheeks pulled up.

Anger

Anger is triggered when one’s goal is blocked. The person is facing an obstacle and wants to remove it.

• Eyebrows pulled down.• Upper eyelids pulled up.• Lower eyelids pulled up.• Eyes rolled in.• Sometimes lips are tight.

Disgust

Disgust is triggered when one is offended. The person wants to remove the offender.

• Eyebrows pulled down.• Nose wrinkled.• Upper lip pulled up.• Lips loose.This is different from anger, when lips are tight.Disgust deepens the naso-labial line from the corner of one’s nose to the corner of the mouth.

Speech with extra mental effort



The face is the primary communicative vehicle. When a person sneaks in a lie, his body movements tend to become significantly reduced.On the other hand, a person telling the truth tends to gesticulate relatively more animatedly to illustrate his point.

Dr Frank cautioned against a Neural Linguistic Programming myth purporting that a person’s eyes roll to his right when heis lying. This NLP theory argues that his eyes roll to his right because he is accessing the right side of his brain.Since the right brain is the engine for imagination, rolling his eye to his right is a tell-tale sign that he is making things up. However, studies have not been able validate this theory.

What a study of 75 countries and cultures with 43 languages have shown, is that they all believe that liars don’t make eye contact. This is not true, although an exception is with children who are lying.

We get inside another person’s mind by observing his facial expression, tone of voice, and comparing it with what can be observed on the outside. This can then be evaluated for consistency (telling the truth) or inconsistency (lying).

How many times has a fund manager tried to size up a CEO claiming “this investment will give us a breakthrough”?

Is he making this claim showing signs of fear: Eyebrows are pulled up and together, eyelids pulled up?

To spot a liar, you must know his baseline and hotspots.

Everyone has a baseline behavioural

pattern of how he acts when under normal, non-threatening conditions.

Hotspots are emotions that are inconsistent with what the interviewee is saying. These verbal and non-verbal signals are inconsistent with each other over time or with context.

One must bear in mind that a hotspot is not necessarily a sign of lying. Rather, it is typically an indicator of an area of concealed thought or feeling which can occur when truth is told.

Follow up on the hotspot to help guide your interview.

The best way to elicit information is to get the interviewee to feel you are similar to him, empathise withhim and get him to like you. To do so, you can mirror his bodily gestures and repeat expressions that he uses frequently.

Natural human memories for events that a person has experienced are of a different quality from invented accounts. He is aware of smells, sounds and other sensations of the event. He is able to give an account of how he felt at that point in time, and how another party present was feeling. He is able to reproduce dialogue, and provide details of a particular action.

The more information you obtain from the interview, the easier it will be to discern if there is a logical story to what he is saying.

For in-depth training by the Professor, look out for his workshop details at the Society’s Events Calendar on www.cfasingapore.org.

Dr Mark G FrankProfessor and Director

Communication Science CenterUniversity at Buffalo, State

University of New York

Manipulators and Illustrators

Dr Frank is a social psychologist, communication professor, and an internationally recognized expert on human nonverbal communication, emotion, and deception.

He has been a consultant and trainer for law enforcement agencies in the US, England, Australia, the Netherlands, Belgium and Singapore, and has trained federal agents, interrogators, and other law enforcement officials to accurately interpret the micro-expressions on a person’s face, the facial or emotional cues that indicate deception.

He is also a co-developer of an automated computer system that reads facial expressions. The technology automates deceit detection through the analysis of eye movements.

He has used his findings to consult and train virtually with US Federal law enforcement and intelligence agencies.

Dr Frank informally started his career as an expert in non-verbal behaviour as a bar room bouncer in Buffalo, New York in the mid-eighties.

Baseline and Hotspots

The rapport building interview

E

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Get the latest from FactSet.

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CASH FLOW SHENANIGANS

Here are a few examples from the discussion by Ms Latz, of how some companies make their cash flow metrics appear prettier than peers.

A fraudulent financial statement is the hardest to spot because one relies on the accuracy of numbers to draw conclusions. Satyam Computer Services was a case of fraud that unfolded in 2009 when its chairman confessed manipulating accounts by US$1.47 billion.

Investors wondered why US GAAP financials on Satyam accounts for the year ended March 2007 showed a highly unusual item: negative proceeds from sale of fixed assets. Indian Accounting Standards on the same showed positive proceeds.

It turned out that its senior management prepared materially

false bank statements from fiscal year 2003 through September 2008.During the 2008 Satyam audit, external auditors received conflicting information from two different branches of the same Indian bank – one showed the presence of cash balances of US$176 million, another showed zero.

Unfortunately, the external auditors failed to make direct contact with the banks, choosing to rely exclusively on information provided by the Satyam management.

An investor can fall back on a couple of questions when examining company accounts:• Is this really cash that is related to

customers, suppliers or employees?

• Is the increase in cash flow from operations sustainable?

CFRA is the global leader in forensic accounting research. Its Vice President, Jennifer Latz, was in Singapore in June to share her insights with CFA Singapore members on how companies may boost figures of cash flow from operations.

According to Ms Latz, there are four broad categories of cash flow manipulation – fraud, non-GAAP metrics, timing in payment of suppliers and geographical allocation.

Cash balance fraud


4

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Factoring is a big thing for Asian companies that want to improve the appearance of their cash flow metrics. A business can sell business receivables to a financial institution (a factor) at a discount to the outstanding amount stated on the invoice. The debtor would then direct his payment to the new owner of the invoice.

That are two types of factoring: The first is when the invoice ownership is transferred with recourse, giving the factor (purchaser of the receivables) the right to collect the unpaid invoice amount from the transferor (seller) in event of account debtor default. The second is when the invoice ownership is transferred without recourse, which means the factor must bear the loss if the account debtor does not pay the invoice amount.

High quality revenue is marked by predictability, profitability and diversity. The factoring of receivables without recourse can mask revenue growth that ends up with uncollectible receivables. Huge increases in factored receivables will decrease the Days Sales Outstanding (DSO), giving the appearance that the company collects quickly on its

credit sales. A low DSO can be due to the derecognition of receivables.

Factoring will also provide an early boost to Cash flow from Operations because of earlier cash inflow (from the factor), when there was actually a haircut to the receivables.

Here is an example of a company meeting a steep cash conversion target by not paying suppliers.

Elekta, the leading provider of radiotherapy equipment for treatment of cancer and brain disorders, had steep targets for revenue growth and cash conversion.

Cash conversion was 44% during 9MFY2013 versus a full-year target of 70%. During 4QFY2013, it grew revenues by 20% and raised full-year cash conversion to 76%, thereby achieving both full year targets.

However, the time it took to pay suppliers increased to an all-time high (Days Payable was close to 60 days). This was not matched by an increase in inventory. Days Sales of Inventory declined year-on-year.

Typically, when a manufacuring or distribution company is in its growth

phase and its payables increase, it is important to check the payables increase against the inventory trend.

Faking revenue quality

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑆𝑆𝐷𝐷𝑆𝑆𝑆𝑆𝐷𝐷 𝑂𝑂𝑂𝑂𝑂𝑂𝐷𝐷𝑂𝑂𝐷𝐷𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 = 𝑅𝑅𝑆𝑆𝑅𝑅𝑆𝑆𝑂𝑂𝑅𝑅𝐷𝐷𝑅𝑅𝑆𝑆𝑆𝑆𝐷𝐷 𝐶𝐶𝐶𝐶𝑆𝑆𝑂𝑂𝑂𝑂𝑂𝑂 𝑆𝑆𝐷𝐷𝑆𝑆𝑆𝑆𝐷𝐷 𝑥𝑥 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑃𝑃𝐷𝐷𝐷𝐷𝐷𝐷𝑅𝑅𝑆𝑆𝑆𝑆 = 𝐸𝐸𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐴𝐴𝑅𝑅𝑅𝑅𝐴𝐴𝑂𝑂𝑂𝑂𝑂𝑂𝐷𝐷 𝑃𝑃𝐷𝐷𝐷𝐷𝐷𝐷𝑅𝑅𝑆𝑆𝑆𝑆

𝐶𝐶𝐴𝐴𝐷𝐷𝑂𝑂 𝐴𝐴𝑜𝑜 𝑆𝑆𝐷𝐷𝑆𝑆𝑆𝑆𝐷𝐷 𝑥𝑥 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑆𝑆𝐷𝐷𝑆𝑆𝑆𝑆𝐷𝐷 𝑂𝑂𝑂𝑂 𝐼𝐼𝑂𝑂𝑅𝑅𝑆𝑆𝑂𝑂𝑂𝑂𝐴𝐴𝐶𝐶𝐷𝐷 =

𝐼𝐼𝑂𝑂𝑅𝑅𝑆𝑆𝑂𝑂𝑂𝑂𝐴𝐴𝐶𝐶𝐷𝐷 𝐶𝐶𝐴𝐴𝐷𝐷𝑂𝑂 𝐴𝐴𝑜𝑜 𝑆𝑆𝐷𝐷𝑆𝑆𝑆𝑆𝐷𝐷 𝑥𝑥 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷

𝐶𝐶𝐷𝐷𝐷𝐷ℎ 𝐶𝐶𝐴𝐴𝑂𝑂𝑅𝑅𝑆𝑆𝐶𝐶𝐷𝐷𝑂𝑂𝐴𝐴𝑂𝑂 = 𝐶𝐶𝐷𝐷𝐷𝐷ℎ 𝐹𝐹𝑆𝑆𝐴𝐴𝐹𝐹 𝑜𝑜𝐶𝐶𝐴𝐴𝑓𝑓 𝑂𝑂𝑂𝑂𝑆𝑆𝐶𝐶𝐷𝐷𝑂𝑂𝑂𝑂𝐴𝐴𝑂𝑂𝐷𝐷 − 𝐶𝐶𝐷𝐷𝑂𝑂𝑆𝑆𝑥𝑥

𝑁𝑁𝑆𝑆𝑂𝑂 𝑂𝑂𝐶𝐶𝐴𝐴𝑜𝑜𝑂𝑂𝑂𝑂

CHART: CFRA RESEARCH

If a company discloses the amount of receivables it has factored (as in the case of Alcatel Lucent above), an analyst can adjust the DSO by adding the outstanding balance of sold receivables to the receivables on the balance sheet. If the company does not disclose factored receivables, its quantum can be can be inferred by movements in finance/interest expense. When receivables are factored, a discount is effectively ‘paid’ to the buyer and this discount is recorded as a finance cost by the seller. Rising finance costs may highlight higher factoring levels.

To calculate adjusted DSO for FY2011, add outstanding balance of sold receivables to receivables on the balance sheet.

Faking cash conversion rate

Outstanding balance increased by €176m (€952-€776), boosting cash flow from operations by an equal amount.


Here is an example of how bank financing on accounts payable can boost cash flow from operations.

Sinopharm, a leading PRC pharmaceutical company had increased its FY2012 borrowings by Rmb 2.2 billion to Rmb 16.1 billion. However, this did not match its cash flow statement, which had the following anomalies.• Increased borrowings did not

increase its cash flow from financing.

• On the other hand, it reported a net use of Rmb 2.7 billion of cash from borrowing activities.

• Trade payables appeared as a Rmb 12.0 billion source of cash.

• Balance of payables increased only Rmb 7.6 billion during the year, even with M&A activity.

It turned out that Sinopharm had an accounts payable financing program with certain banks whereby the bank repaid accounts payables on behalf

of the company with an equivalent sum drawn as borrowings. Such a draw-down of borrowings is a non-cash transaction. The Group lowered its reported cash outflow from operations by not paying its supplier directly.

Only when the company repays its borrowings is there financing cash outflow.

“When the bank paid off the payables, there should have been an entry to reduce cash flow from operations that is net off against cash flow from financing,” said Ms Latz.

Sinopharm’s cash flow presentation of this payable financing program enabled it to report positive cash flow from operations in 1HFY2013 and FY2012. Adjustment to account for use of cash for payables would have resulted in negative cash flow from operations.

Acounts payable financing

Jennifer LatzLead Analyst

CFRA Asia

Ms. Jennifer Latz is a Lead Asia Analyst on the CFRA Asia research team.

Prior to joining CFRA, Jennifer worked in the New York office of Ziff Brothers Investments for 5 years. Before ZBI, Jennifer performed financial due diligence for KPMG’s Transaction Services Group.

Jennifer holds a Masters in Professional Accounting from the University of Texas at Austin, and a B.A. from the University of Michigan.

Under US GAAP, interest is classified under cash flow from operations. On the other hand, under IFRS, interest may be classified under cashflow from financing.

Since cash flow from operations is boosted if a company classifies interest paid as a financing activity, the analyst who is doing peer comparison needs to check that interest is classified in a similar manner.

In the case of food and industrial raw materials trader, Olam, interest and taxes are excluded from Net Operating Cashflow in its investor presentations.

It also presents an adjusted free cashflow figure which is bumped up by readily marketable inventories.

Exclusion of interest paid


4Hiding capex in a JV vehicle

By classifying deferred payment for capex as financing, rather than as use of cash in investing, a company can make its capital expenditure look very healthy.

Intel formed a joint venture with Micron in January 2006 to manufacture NAND flash memory products. The JV was IMFT and production began in early 2006.

As part of the initial capital contribution of US$1.2 billion to IMFT, in exchange for a 49% share stake in

IMFT, Intel paid US$615 million in cash and issued US$581 million in non-interest bearing notes.

The table below shows that Intel masked US$615 million of capital expenditure as purchases and investments in non-marketable equity securities.

During 2006, Intel paid the entire balance of US$581 million toward the non-interest bearing notes, and posted it as a financing activity on the consolidated statement of cash flows.

It is important to look at cash flow from capital contribution to JVs. This can be hidden in cash flow from operations. Ask the management:

• “Is the cashflow capital expenditure to fund infrastructure or equipment?”

• “Is it working capital for operations?“

Then, reclassify the financial metrics accordingly.

Analysis of Intel’s (INTC) cash flow by CFRA

The use of capital leases can also make cash flow from investing activities look very healthy and provide an unsustainable boost in cash flow from operations.

Capital leases increase the company’s accounts payables as it needs to make principal payments on the capital investments going forward.

Capital Leases

E

EVENT ART AS AN ALTERNATIVE INVESTMENT

DATE 22 APRIL 2015

SPEAKER SABIANA PAOLI

Ms Paoli presented the different types of strategies, risks and rewards of art investments.


EVENT SAKE TASTING AND APPRECIATION

DATE 13 MAY 2015

SPEAKER ADRIAN GOH

Certified sake sommelier, Adrian Goh, Marketing Director of InterRice Asia, shared insights to characteristics of sake, such as fragrance, sweetness or dryness and acidity level.

EVENT NETWORKING DRINKS - TRIVIA NIGHT

DATE 22 JUNE 2015

SPEAKER RANAJIT

Members and candidates participated in a trivia game conducted by quiz master Ranajit.

EVENTSQUARTER 2, 2015

Networking


EVENT TOP TEN MYTHS & TWELVE TIPS

DATE 7 APRIL 2015

SPEAKER STEPHEN HORAN, CFA

Dr Horan shared his insights on how to succeed in the CFA exams. He discussed 12 exam strategies and the top 10 myths about the CFA exam.

Candidates

EVENT INVESTING IN FRONTIER MARKETS IN SUB SAHARA AFRICA: TODAY’S REALITIES AND THE USE OF CORPORATE SOCIAL RESPONSIBILITY

DATE 23 APRIL 2015

SPEAKER AMY LEHMAN

Dr Lehman discussed the importance of corporate social responsibility as a tool that is crucial to successful management when investing in the frontier markets of sub-Saharan Africa.

Social EnterpriseInvestments

EVENT REAL ESTATE MARKETS: SINGAPORE & REGIONAL OUTLOOK & OPPORTUNITIES

DATE 24 APRIL 2015

SPEAKER CHUA YANG LIANG

Dr Chua shared his insights to the recent trends in the property markets in Southeast Asia.

EVENT THE VALUE OF INVESTING

DATE 7 APRIL 2015

SPEAKER STEPHEN HORAN, CFA


ProfessionalDevelopment

Dr Horan highlighted the many ways in which investors define value, how this varies over time, and how value investing compares to growth investing.

EVENT BUSINESS FINANCE MANDARIN WORKSHOP

DATE 18 MAY 2015

SPEAKER HENRY WANG XIN BIN

Henry Wang, CEO of Everbright Business Consultancy, covered key Mandarin banking and finance terminologies, especially in equities, fixed income and alternative investments.

EVENT TRENDS IN HEDGE FUND INVESTING

DATE 14 MAY 2015

SPEAKER FREDERIC LEBEL

Mr Lebel discussed how the hedge fund industry evolved after the 2008 global financial crisis and the Madoff scandal. He also talked about emerging trends.


EVENT MAKING SENSE OF CROWDFUNDING

DATE 19 JUNE 2015

SPEAKER ADRIAN KOH

Mr Koh discussed the major platforms that are making crowdfunding a powerful enabler for business growth.

EVENT SUCCESSION CHALLENGES FOR ASIAN FAMILY BUSINESSES

DATE 27 MAY 2015

SPEAKER DR KASPER MEISNER NIELSEN

Dr Nielsen addressed succession challenges facing Asian family businesses and provided a roadmap of how such challenges can be overcome.

CareerDevelopment

The ball was organized as an informal networking platform to allow our members to connect, share knowledge, exchange information and create relationships with the recruitment community.

EVENT HEADHUNTERS’ NETWORKING BALL

DATE 16 APRIL 2015

FIRMS ACCADENCE, BLOOMBERG, CHARTERHOUSE PARTNERSHIP, HAYS, GARTNER INTERNATIONAL, MORGAN MCKINLEY, PRINCIPLE PARTNERS, ROBERT WALTERS

Date Details Instructor Remarks

14 Aug Business Valuation• Valuation principles and methods for business• Analysis of financial statements• Applying the three approaches to valuation • Discounts and premiums studies

Mr. Ong Woon Pheng, CFA

7 CE hrs / 7 CPD hours FTS Eligible

20 to 21 Aug Treasury Risk Management• Workshop for Treasury managers and budding would-be

Treasury executives as well as those who work alongside the Treasury team

• Practical examples for implementation

Mr. Lawrence Ho 14 CE hrs / 14 CPD hours FTS Eligible

3 & 4 Sep Fixed Income Instruments• Illustrative trade deals to explore the high-lights and the

low-downs of a wide array of bond and note offerings• Covers simple to complex and hybrid securities and struc-

tured and cross-asset papers that have surfaced evolved over the last decade

• Addresses the fixed income securities realm, with less quan-toxication and more qualitative rationalisation.

Mr. Lawrence Ho 14 CE hrs / 14 CPD hours FTS Eligible

14 & 15 Sep Investment Risk Management• Practical examples of ways in which practitioners have

overcome the failings of Modern Portfolio Theory• Tools for risk management of investment portfolios under-

taken in the real world.

Dr. Frank Ashe 14 CE hrs / 14 CPD hours FTS Eligible

17 to 18 Sep Global Risk Management for Banks• Critical components of sound financial risk management• How to manage risk at enterprise level for global banks

Mr. Tan Wee Soon

14 CE hrs / 14 CPD hours

FTS Eligible

21 to 23 Sep Investment Banking (IPO, Capital Structured, M&A)• Foundation for making informed corporate assessments of

key financial decisions• Emphasis on interaction between capital markets and

value of the underlying assets.

Prof. Roy Ling, CFA


30 Sep to 2 Oct Fixed Income Portfolio Management Series (3 modules)1. Fundamentals of Bonds, Yield Curves & Interest Rate Risk2. Fixed Income Portfolio Construction and Rebalancing3. Credit Risk, Options, Yield Enhancement & other Advanced

Topics

Mr. Tariq Den-nison and Mr. Anand Batepati

7 CE hrs / 7 CPD hours per module FTS Eligible

6 to 7 Oct Psychology Behaviour & Performance• Understanding oneself• Managing people and relationships• Managing conflicts.• Influence oneself and others to greater effectiveness

Mr. Lim How

12 to 13 Oct Asia Real Estate Investment and Finance• Asia real estate capital markets• Public / private debt and equity structures• Valuation techniques• Real estate models, strategic structures and proven value

added techniques• Pros and cons of direct, private equity, fund and REIT

structures• Acquisition, allocation and disposition strategies

Prof. Roy Ling, CFA



Workshops

Date Details Instructor Remarks

19 Oct Advances in Strategic Asset Allocation• Review of traditional strategic asset management meth-

ods• Recent trends in asset allocation• Popular new methods of assigning weights to investment

products

Prof. Ralf Zur-bruegg

7 CE hrs

21 to 23 Oct Advanced Financial Modelling (3 modules)1. Core model2. Corporate Valuation Methodologies & Valuation3. M&A Deal Structuring & Merger Modelling

4 to 5 Nov Masterclass: Excellence in Mergers & Acquisitions• Key M&A tools• Navigate the M&A life-cycle successfully in Asia• Innovative ideas and techniques illustrated by studies

from Asia, emerging markets and the advanced countries.

Mr. Arvind P. Mathur


11 to 12 Nov Masterclass: Strategic Valuation & Fundamental Investing• Practical frameworks for corporate performance analysis

and valuation• Highlights on distortion in GAAP, IAS and IFRS financial

statements, including, specifically, the many problems with the statements of cash flow

• Focus on both top-down macroeconomic analysis and bottoms-up deep fundamental investing methods

Prof. Joel Litman 14 CE hrs / 14 CPD hours FTS Eligible


All workshops listed are subject to change without prior notice.Email us at [email protected] for more details or visit our website at www.cfasingapore.org to register for workshops.

The CFA Singapore Quarterly features the latest in thought leadership, best practices and investor education activities of investment professionals

in Singapore. Written by financial journalists for veterans as well as those aspiring to greater heights as an investment professional, this quarterly

newsletter commissioned by CFA Singapore is produced by NextInsight (www.nextinsight.net) and circulated to about 10,000 CFA charterholders

.and program candidates. Email or call Sim Kih ( [email protected] ) at 6438-2990 for feedback and inquiries.

Date Details Speaker(s) Venue Committee

20 Jul Networking Drinks MEDZS @ Raffles Place Clifford Centre

NW

30 Jul Endowment Asset Allocation Philosophy & Approach

Peter Newman SMU PD

3 Aug Networking Drinks - Personal Branding Eugene Seah Oosters, Capital Square 3 NW16 Aug to 25 Oct CFA Level 1 Preparatory Classes - August

IntakeCAND

19 Aug Biotech Sharing Carl Firth Capital Tower PD25 Aug Technology Companies Valuation Sachin Mittal PD1 Sep Valuation: Hot Topics for Illiquid and Hard-

to-Value InvestmentsCindy Ma PD

3 Sep Risk Management Research Alex Ineichen Capital Tower PD10 Sep Career Panel UniSIM UO27 Oct Introduction Singapore Fintech

ConsortiumPD

13 to 15 Nov Intensive Revision Classes (Level 1) Darren Degraaf, CFABenjamin Goh, CFA

SMU CAND

Calendarupcoming events

CAND Candidates PD Professional DevelopmentCD Career Development SEI Social Enterprise InvestmentMEM Membership UO University OutreachNW Networking WS Workshop

All events listed are subject to changes without prior notice. Details are correct as of date of publication.

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UP CLOSE: CFA Singapore President Jan Richards, CFA Files/CFAS... · 2015-08-17 · Jan Richards, CFA Up close with CFA Singapore President Jan was elected CFA Singapore’s President