ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER Issue 1

IN THIS ISSUE

The Association of Financial Analysts has seen amazing growth over the last two years with well over 23,000 members now part of our LinkedIn group.

We are pleased to launch this first newsletter and keen to hear your feedback on what you want to read and hear about in 2015.. And also keen to hear from any analysts interested in contributing an article in their field of expertise.

We are also pleased to have partnered with The Economist ahead of this year’s Buttonwood Gathering and to be able to offer three members free pasees to the event.

To be eligible simply submit an article for the next newsletter along with a short bio.

Contents In 2015, Boost your Career by Building a Strong Professional Network

2

Buttonwood Gathering 5

Investment Strategies in 2015 6

An overview of project finance

8

CPA vs CMA Infographic 11

Innovation and Idea Generation

14

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 2

by Nicolas Doumenc

Every year on January 1st, hordes of finance

professionals swear that they will « network more »

and stop contacting people ONLY when they need

something from them.

Obviously, networking helps if you want to land a

new job, but more importantly it can get you

promoted faster. As hierarchies in banks and finance

departments got « flatter », your job title became less

and less relevant. 20 years ago, being a manager

meant that people in other departments answered

your phone calls and actually worked on what you

asked.

In 2015, in order to get ANYTHING done, you need a

solid internal network whether you are an analyst or

the CFO of the company. You use your network to

convince your colleagues to support your project, put

your deal on a fast track or even get someone from

legal to answer your emails.

Now that you know why networking important, let’s

talk about how to create your networking strategy.

1. Define your Objective

Networking can do wonders for you: help you find a

new job, get you promoted faster, generate more

deals, improve your skills… All those possibilities

create the illusion that you should be doing it all at

the same time. This is a recipe for DISASTER. Focus

on one objective exclusively and work on it for three

months before you even think about adding more to

your plate.

If you want to get promoted faster for instance, you

need to focus ONLY on building your network at your

current company. Are you going to miss out on

growing your network at other banks? Sure and

that’s the whole point! Better miss out on something

than trying to do it all, getting overwhelmed and

dropping the whole «I’ll network more» idea after 10

days.

2. Create « Buckets » for your Network

Now that you know you can’t « do it all », don’t fall

into the trap of thinking you can treat everyone the

same.

If you know 200 people at other banks and want to

follow-up monthly, phone calls would be a very bad

idea because even if you only chat for 10 minutes, it’d

take you eight hours a week. On the other hand, if

you just publish a link to an article on LinkedIn once a

month you are not improving any relationship.

In 2015, Boost your Career by Building a Strong Professional Network

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 3

Creating different buckets within your network will

allow you to have a strong impact without spending

five hours a day on the phone or sending emails.

Let’s have a look at a potential split for our those 200

bankers you want to keep in touch with:

Bucket 1: 3 very close friends you have lunch

or dinner with every week

Bucket 2: 20 people you worked with directly

in the past whom you call at least once a

month

Bucket 3: 30 guys you send individual emails

to monthly to update them on what’s going

on and exchange ideas

Bucket 4: 150 people you met at conferences

and stay in touch with via a « newsletter »,

more on that in the next step

3. Start Writing Newsletters

Newsletters are an undervalued tool for « personal »

networking because we are used to receiving

newsletters from brands but not from individuals.

They are great for the « Bucket 4 » we described

earlier. For those 150 interesting people we met but

don’t know that much, staying in touch individually

would be too time-consuming.

If you want to stay in touch with a “bucket” of former

colleagues at a company you left you could send a

newsletter where you talk about:

A conference you went to last month and the

main highlights

Your upcoming trip to San Francisco where

you’d be happy to have coffee with anyone

based there

One or two interesting articles to share

The power of newsletters is that they “eliminate” the

awkwardness. If people you haven’t spoken to in the

last 3 years want to contact you, they’d feel weird

about it. BUT if you’ve sent them newsletters

regularly then contacting you would be much more

natural.

On a side note, newsletters will also make you more

interesting because every three months you’ll have to

sit down and write about cool things you did or are

about to do. Nothing is worse than a newsletter

where you have nothing interesting to share so in

your daily life you’ll start doing more things which are

« newsletter -worthy ».

4. Cultivate the Habit of Networking

What differentiates successful networkers and

people who give up after a month is “the habit” of

networking. You need to create this habit by

dedicating a specific time in the day to networking.

For example, every weekday I contact three people

by email or with a quick phone call right before I leave

the office in the evening.

Instead of relying on willpower alone, networking can

become second nature if you create your habit the

right way.

Another enemy when it comes to networking is the

awkwardness. “Should I send this email? Is it the right

title? I feel silly contacting this guy after 2 years”. The

best way to destroy awkwardness is to think about

what you feel when you receive an email from an old

friend or someone you met a while back. You feel

GOOD. Someone thought about you and wants to

reconnect, that’s great. You even tell your spouse

about it when you come home! Thinking about the

difference between your feelings as a sender vs. a

receiver of emails will help you kill the awkwardness.

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 4

Conclusion

Networking is the best resolution you can make for

your career in 2015. So don’t get caught up in the

tools and the tactics and instead follow the strategy

outlined here to boost your network!

Nicolas Doumenc is the Founder of 300 Finance

Gurus a website where he grills 300 Managing

Directors, CFOs, Vice-Presidents, Associates and

Headhunters on their best networking and

interviewing techniques.

Nicolas has also advised 100+ Investment Banking,

Corporate Finance and Private Equity professionals

on their networking strategy, LinkedIn profile,

resume and Interview Preparation.

If you want to know more about his coaching

services, please visit 300 Finance Gurus.

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 5

The Association of Financial Analysts is pleased to

partner with The Economist to offer three free passes

to this year’s exciting 2015 Buttonwood Gathering in

New York City.

The Buttonwood Gathering is an internationally

renowned conference focused on the future of finance

and global economic growth. The annual event

features The Economist magazine's unmatched insight

and analysis alongside the diverse perspectives of many

of the investment world's most sought after opinion

leaders.

As investors and business leaders begin to bridge the

divide from economic uncertainty to determined growth,

this conference will arm delegates with critical

information to innovate, lead and drive profits for the

year ahead.

To be in with a chance of winning a free pass to the

event AoFA is looking for the sharp contributors to

submit articles for the newsletter.

Simply propose an article and submit it to

info@alltheanalysts.com for inclusion in the next

newsletter.

Win a place at the Buttonwood Gathering

in partnership with the Association of Financial Analysts and The Economist

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 6

Recent years have been tumultuous for global

markets but several macro-trends look to be shaping

2015 into a year for either big wins or big losses

depending on the investment strategy you follow.

Recent wild swings in the stock market have been

driven by multiple global factors, ranging from

political uncertainty in Syria and the rise of the

Islamic-caliphate to stuttering attempts to return to

growth in Europe and ongoing bond worries.

Despite several shock waves that have reverberated

around global markets the last few years have been

undeniably good for investors with the right strategy.

The Standard & Poor’s 500 stock index has returned

more than 200% since the March 2009 market

bottom, while bonds have posted a respectable 34%

gain.

1) Strategy-based ETFs Exchange-Traded Fund or ETFs have grown in

acceptance in recent years and with new types of

funds coming available to investors. ETFs attempt to

replicate investment strategies of "guru" investors,

hedge funds and "smart money."

Find the best ETF to balance the rest of your portfolio

and take advantage of the investment of strategies

This is accomplished in various ways, based on the

ETF's trading methodology. Some strategy-based

ETFs have researched the strategies of successful

investors, such as Warren Buffett, and incorporated

his practices into their trading approach. Other ETFs

track publicly disclosed stock purchases by major

hedge funds, attempting to replicate the return of

the funds. Another strategy-based ETF group is

managed futures. These ETFs invest in futures

products in an effort to profit in up, down or sideways

markets.

2) U.S. stocks remain growth driver While returns from stocks are likely to be lower over

the next 10 years than they have been in the previous

decade the long-term trend is still for double digit

growth in core U.S. stocks.

The U.S. economy still faces structural difficulties

that are likely to dog performance in the near term

but U.S. stocks are still set to outperform most other

markets over the medium term as insourcing and

greater manufacturing output provide strong

fundmanetlas for U.S. industry.

Current high valuations are unlikely to rise as

meteorically as they have in the past. The average

Investment Strategies in 2015

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 7

stock in the S&P 500 is trading at a price of 16 times

this year’s estimated earnings, about 30% higher

than the long-run average.

The U.S. economy still faces structural difficulties

that are likely to dog performance in the near term

but U.S. stocks are still set to outperform most other

markets over the medium term as insourcing and

greater manufacturing output provide strong

fundamentals for U.S. industry.

3) Social investing to expand A major change in investment technology in recent

years has been the rise of social investing. Similar to

social networks such as Facebook or Google+ social

investment networks allow users to connect with

each other and share information.

The key difference between Facebook and social

investing networks however is that these networks

allow users to view and follow others investment

strategies. A number of these networks also allow

users to invest in real time via their interface.

Though many social investing sites trade the foreign

exchange market, or forex, some sites do offer the

ability to buy stocks and other investments, and they

let investors follow and automatically copy the trades

of stock, futures and options traders.

While there are undeniable risks in following

investment strategies of strangers via the internet

the wealth of data becoming available on investors

performance is set to change how people think about

and structure investment decisions.

Site such as e-Toro, Ayondo, Zulutrade and Tradency

all look set to gain further acceptance in 2015.

4) Bonds to offer safety at a price Fixed-income investors have few options right now.

Today’s

Rock-bottom interest rates today are expected to

move a bit higher but Bonds look a weak prospect for

any investors seeking income. What they do offer is

safety in a year that is set to see political tensions in

several key region of the globe rise further before

resolving (if they resolve at all)

After years of relative calm, volatility is expected to

return to the stock market—and higher-quality bonds

offer a hedge against stock losses. Over the long run,

intermediate-term rates are likely to remain below

their historical average of 5%. If you want higher

income, your only alternative is to venture into riskier

investments.

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 8

Everybody concerned with investment banking knows

about areas like sales and trading, mergers and

acquisitions and equity capital management. But have

you ever heard of Project Finance? If not, no worries, we

can change this today.

Project Finance is a rather small area of investment

banking. The main purpose is to help companies

to finance long-term projects that require a huge

amount of external financing. Constructing a new

office building can usually be done with a single credit

facility. But if a company wants to build a nuclear power

plant or an offshore wind park, there is a need for much

more money than one bank is willing to provide.

Financing is provided off-balance sheet

The biggest difference between an ordinary bank credit

and Project Finance is that an ordinary bank credit goes

directly to the client. In Project Finance the money is

given toa separate legal entity – the so-called special

purpose entity (SPE). This SPE is created just for one

specific project.

Let’s take a look at an energy producer who wants to

build a nuclear power plant. He would found a new

company – the SPE – having the power plant and other

project related assets as its only assets. The other side

of the balance sheet would consist of the debt provided

by the banks and the sponsor’s equity. The sponsors are

in most cases the company who initiated the project

itself and private equity investors.

There are several reasons for the creation of the SPE:

1. Risk allocation: The risk for the sponsor is

reduced. If the power plant will not generate

enough cash-flow to pay off debt and interest

rates, the SPE will get into financial distress.

However, the sponsor’s assets will be protected.

2. Credit standing: The bank’s decision to provide

debt is mostly dependent on the future cash

flows of the SPE, not on the credit standing of

the sponsor. Therefore, it is possible for a

company with a bad credit standing to get

access to external financing.

3. Debt-to-equity ratio: These projects usually

require a huge amount of debt financing.

Therefore, taking the project on to their own

balance sheet would significantly increase the

sponsor’s debt-to-equity ratio. Instead,

maintaining the assets and debt related to the

project on the SPE’s balance sheet will mean

that the sponsor will only show his equity stake

in the project.

Several banks form a syndicate

As no bank wants to finance a nuclear power plant

alone, a syndicate of banks is formed to bring in the

required money. The sponsor mandates one bank to be

the leader of the syndicate, the so-called Mandated

Lead Arranger (MLA).

An Overview of Project Finance

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 9

The MLA’s role is to handle the communication

between all participating banks and the sponsor. He

has a lead role in underwriting the project and usually he

also provides a portion of the debt. The other

participants just provide their tranche. A banker once

explained it to me with the following words: ‘As a

participant you get offered a piece of the cake but as an

arranger you make the cake.’

A project includes more parties than just the sponsors

and the banks. There are also technical advisers, legal

advisers, public agencies, and sometimes even more,

depending on the project. While the participants handle

all their communication with the MLA, the MLA itself has

to talk to all parties.

This is especially important because the MLA has to

collect all the information for the financial model for the

underwriting process. Generally speaking, financial

models in Project Finance are more complex than other

models in corporate finance. The projects have a long

time horizon and therefore quite a lot of different risk

scenarios have to be covered. Hence sensitivity

analysis is one of the most important concerns in this

kind of financial modeling. Examples for different

scenarios could be a change in revenue after a certain

number of years, the construction will take longer than

expected, increasing costs, etc.

The market is growing

Projects have mainly three things in common: They are

long term, the required amount of money is huge and the

financing is off the sponsor’s balance sheet. Most of

these projects are in the areas energy, mining,

transportation, public institutions (for example

universities) and telecommunications.

According to the European Investment Bank (EIB), the

market volume in Project Finance is around 450 Billion

USD per year. The market is growing at an annual rate

of 15%. The main reasons for this growth are the

growing population, industrialization in emerging markets

and the aging infrastructure in developed countries. The

EIB estimates that until 2030, there will be cumulative

investments over 50 Trillion USD for roads, energy,

water, airports, telecommunication and rail in OECD

countries alone.

Banks can earn money in different ways

Obviously, banks can earn money from the

loan’s interest rate. However, after providing the loans,

some banks sell them on the secondary market, often

as part of a bigger package. Various entities have the

appetite to purchase these loans as investments. For

example insurance companies have an interest in such

long living cash flows, because they can use it for

duration matching. And finally, the MLA can gain profit

from the advisory fee.

Daily work is not always easy, but it creates a good

feeling

Especially now, in the wake of the financial crisis,

many banks hesitate to take over such projects. They

know it would involve a substantial amount of money

and involvement in the project for many years, so there

is a significant risk. Moreover, theBasel II

regulations do not favor long-term investments. In fact,

banks are reducing their risk-weighted assets.

This makes the actual work in Project Finance

sometimes difficult. Whenever you want to take over a

new project, at first you have to fight a troublesome war

against various internal authorities to get the credit

approval.

Those internal restrictions can sometimes be a bit

depressing. However, from my personal point of view,

Project Finance is still one of the most interesting

areas in investment banking. You actually create

something real, something you can touch and something

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 10

that helps people. If the project is completed you can

say: ‘I helped to build this power plant’. That is indeed

rewarding.

Lukas Hofer studied business and economics in

Germany and started his career in investment banking

and management consulting. He currently works as

freelance writer and translator focusing on business &

finance, economics and conflict & security. For more

information on him, you can visit his site

at www.LJHofer.com

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER Issue 1

by

Traditional understanding of innovation associates it with

idea generation. Organizations find themselves creating

think tanks or brain trusts that sit in a room and think

about how to disrupt their business. The fundamental

thought behind this approach is that the magic of

innovation lies with a new idea. Most think it is the

companies that develop better ideas that gain the

advantage in the marketplace.

Similarly, conventional thought associates the risks of

innovation with the quality of the ideas generated by the

organization. This type of thinking reinforces the need to

focus on good idea generation. When ideas fail, the

approach becomes to gather the smartest people and

have them come up with better ways to overcome

challenges in the business.

These conventional thoughts about innovation are

wrong. Innovation is not idea generation and the risks of

innovation do not lie in idea quality. Innovation is rapid

execution, and rapid execution mitigates the risk of

failure.

An idea without action is only an idea. As connected as

today’s world is, ideas are no longer special. Everyone

has ideas and so many of them are great. The idea you

think is special is far more prevalent than you think. You

and can no longer differentiate based on idea

generation. You will only be known by your execution.

The difference, the only difference, is that solid

execution and action toward a common goal is still a

rarity.

Create Culture with a Bias Toward Action

Successful innovation starts with creating a culture that

has a bias toward action and rewards execution. There

shouldn’t be one small team or department tasked with

innovation. It should be part of your culture. Remember

that action begets more action, and that idea generation

only begets more ideas. Sometimes careful planning and

thought about execution is important, but at some point it

is important to stop the creativity process and focus on

execution, even when an idea is not perfect. Executing

on that idea and moving it forward with action will

naturally help the idea evolve. It will also bring you more

ideas naturally as you face real problems and challenges

in your business.

In the book “Making Ideas Happen” Scott Belsky offers

some great advice on how to create a culture based on

action. He makes the point that creativity and

productivity are linked. Often truly game-changing ideas

come from trial and error, because innovation is a

numbers game. Here are just some of the thoughts I’ve

noted from reading the book:

Energy is fixed, you must prioritize

Innovation and Idea Generation

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 12

Think about how you usually allocate your

energy

Keep lists

Make a daily focus area

Don’t dwell on or worry about negative outcomes

Don’t hoard urgent items (delegate)

Create a responsibility grid

Create windows of non-stimulation to get

projects done

Listen to what others start nagging about

Make the most of meetings, don’t meet just

because it’s Monday

Always leave meetings with action items

Keep shipping

Recognize failure is OK

Remember constraints increase productivity

Recognize you need a community to make big

things happen, you can’t do it on your own

Act While Ideas are Fresh

Time is the one resource that you cannot buy. You

cannot create more of it or accumulate any surplus.

When you have an idea, you must act on it quickly.

Realize that the energy people have to give to an idea is

greatest when the idea is born. Without action, this

energy will decay over time. You must capitalize on the

excitement that comes from the creative process to

launch your team into action. Once people act, their

energy will be sustained by the progress they see

around them and the natural energy that comes from

working together.

Just as time deflates the team’s energy to rally behind

an idea, it will also deteriorate the quality of the idea.

The longer you let an idea sit on a piece of paper or on a

white board in a conference room without actively

engaging the team on that subject, the foggier the idea

becomes in each individual’s mind. Details and context

are forgotten. Remember that even if some are actively

executing aspects of the project, others will need to

remain engaged. Find ways to keep them engaged and

communicate often.

If enough time passes and the organization habitually

develops new ideas and experiences excessive delay

before their execution, resentment towards future new

ideas and projects can creep in. When this happens

individuals feel that any energy they give towards a new

idea will ultimately be wasted energy. They know

execution will not happen and preemptively withdraw

from the process. This is clearly a dangerous

atmosphere you do not want to create. Remember that

your action helps inspire commitment by others.

Embrace Failure

If you are going to fail, fail quickly and cheaply.

Remember that part of innovation means change. Any

new territory embarked upon will heighten the probability

of failure. That is not a bad thing. In fact, if you can learn

how to fail quickly and cheaply, learn from that

experience, modify actions or plans and maintain

velocity, then you have a huge advantage over others.

There are many benefits to acting early on ideas, but

one of the costs is that details will not get fully vetted.

You will experience missteps. You will find that certain

opinions were not considered. Be ready to address

these things quickly. Try and build a culture that can

react in a constructive way to pivots in direction or

adjustments in the plan. Acknowledge those that

experience additional pressure or stress due to these

challenges. Reallocate resources to areas of struggle

and be supportive.

The faster you take action and execute on your ideas,

the faster you will discover real challenges that either

warrant a change in strategy, or will require a testing of

commitment. Breaking through these challenges is

critical. If you fail to overcome these things or wait to

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 13

overcome them, they start to own you. At the same time,

breaking through these challenges can be inspiring.

When you get behind your idea, and reach a point of

commitment, others in the organization follow. The

change in your mindset permeates everything. Those

who must rise to the challenge are inspired to stretch

themselves for the benefit of seeing all to succeed.

Conclusions

Innovation is more about action that it is about ideas.

Good ideas are far too common. Before you worry about

what the next great idea is, think of how you can work

with a bias toward action. Action consumes energy, but

often yields more energy than it takes. If you are not

failing some of the time, you are not pushing yourself

enough. Embrace failure and learn from it. You can only

do your best and constantly try to do better.

Patrick Tam is author of The Constant Analyst website

(theconstantanalyst.com)

ASSOCIATION OF FINANCIAL ANALYSTS NEWLETTER | Issue 1 14

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