Published quarterly by UCLA Anderson School of Management
Putting It All Into Practice
Field study, the final phase of UCLA Anderson School of Management's Executive MBA Program (EMBA), is designed to provide a rich and relevant closure experience for participating students. Complete article>
|Ariella Herman: Making a Difference in Children's Health Care
Under Ariella Herman, senior lecturer of operations and decision sciences at UCLA Anderson School of Management and lead investigator, studies show that Medicaid costs can shrink significantly when parents are trained in the treatment of minor childhood sicknesses. Complete article>
Investing For Real
When UCLA Anderson School of Management is at its best, it provides a combination of theoretical training rooted in state-of-the-art research and the practical application of that training in a real world setting. Complete article>
Active Versus Passive Investment
In the long run, can active management outperform indices? We put that question to a number of UCLA Anderson alumni experts. Complete article>
John Scott ('86) and his wife, Dr. Marya S. Laupa-Scott, had triplets - one of many remarkable accomplishments in the UCLA Anderson family ... Complete classnotes>
There is inherent value in education, and lifelong learning is routinely touted as a crucial component to a healthy and fulfilling existence. Still more satisfaction comes from the successful use of increased understanding gained from concentration on a particular subject. Field study, the final phase of UCLA Anderson School of Management's Executive MBA Program (EMBA), is designed to provide that experience in a rich and relevant closure for participating students.
"EMBA field study is an extensive consulting project conducted during the last six months of the two-year EMBA program, requiring real world application to test the cross-functional skills and knowledge acquired," says George Geis, associate dean and faculty director for EMBA. "It is the integrative finale of all their coursework."
Field study launches in January when key client company representatives give background briefings to their EMBA team members on the topics to be addressed. There are two formal student presentations, one mid-project in March and the final in late June.
Among the most competitive firms in the world, recent client companies include Amgen, THQ, WellPoint, DirecTV, Mellon and the Broad Foundation. WellPoint, one of the nation's largest publicly traded health care companies, participated in the 2003 field study and has returned with a new project for 2004. Both years' teams express similar reactions to the experience.
Frank Catalano ('03) was a member of last year's nine-person team, which did diversification analysis for WellPoint, including looking closely at two potential ventures. One was a technological device to enable consumers to be more proactive with their health through lifestyle changes, including fitness, stress reduction, supplements and Eastern medicine. Catalano noted that these would be widely distributed consumer items and therefore beyond the core of WellPoint's current business.
Catalano says he appreciated the trust placed in his team, first by WellPoint's openness about their challenges, as well as the company's willingness to commit resources necessary to support their work. The team also received a boost of confidence from the trust shown by their EMBA faculty. Geis was the team's advisor, and Catalano remembers that he was always available with exceptional counsel when needed but never intervened unless asked, allowing students the chance to test their own abilities.
"We had help that was right on point whenever we needed it," recalls Catalano. "For example, Janis Foreman gave us about a half an hour of comments on polishing our final presentation with an impact that felt like she had worked with us for three days."
In the best UCLA Anderson tradition of fostering teamwork, Catalano also had high praise for his teammates. He considered them outstanding to work with and has kept in touch with most since graduation. Part of the group continued on a project-for-pay with WellPoint after the field study was completed, and Catalano is still consulting with the company.
This year's EMBA team on the new WellPoint project demonstrates further evidence of Anderson teambuilding. They take turns as group leader and even have a name. Showing their partiality to Latin, they call themselves "Terra Viator," which they translate as "global traveler." Four members have been together for almost two years now, throughout their EMBA program, and came from a study group named "Res Ipsa Loquitur," which they translate as: "The thing speaks for itself."
Team members Rosalind Chu ('04), Urmi Dasgupta ('04), Ben Hoang ('04), Suresh Jayanthi ('04), Pedro Marcal ('04) and Ron Naves ('04) say they all put the group's welfare first by doing the team deliverables before their own individual ones. As a group, they provide a safe harbor for each other, as well a unique and valuable learning experience.
"Our team has very diverse skill sets, and we were each assigned to specific functions with another person as a backup," says Hoang. "We are all responsible to be leaders in our own areas of expertise."
The members of Terra Viator echoed Catalano's thoughts on the value of the EMBA faculty's contributions to their field study process. Naves cited a remarkable correlation between the academic coursework and the tasks required to succeed in the field.
"We were impressed to discover how easy it was to apply all that we learned in the program," he says. "It all came together nicely, because we knew what issues to look at and which tools to use to draw out opportunities."
This year's WellPoint project is the evaluation of a new product and market connected to their investment in another company. Terra Viator influenced a change in direction while discussing the strategic opportunities with senior WellPoint executives during their mid-project meeting. The group came to believe that exploring the synergies between the two companies could best be accomplished by shifting focus from external market data to internal corporate data, applying methods learned in Dominique Hanssens' class.
"Corporations often have a great deal of information that they tend to ignore, which would give them much better insight into the marketplace if combined with external input," says Marcal. "We convinced WellPoint that their existing database could be a tremendous source of competitive advantage, by viewing it as a set of answers that were simply waiting for the right questions to be asked."
Like Catalano's team in 2003, Terra found WellPoint's executives receptive to their recommendations. There is already discussion about another project for the field study of next year's EMBA class.
"WellPoint's appreciation of our work was very gratifying," says Jayanthi. "We could see the level of importance they gave the project given the attendance of about 10 executives at our March presentation, including some who flew in from across the country."
Client companies benefit from EMBA students' wealth of experience in a variety of industries. They are carefully chosen working professionals, having an average age of 37 and an average of 10 years of managerial experience. The program attracts highly accomplished individuals with records of successful work performance and clear potential for leadership.
"WellPoint's UCLA Anderson team members bring a broad array of backgrounds to their work with a very fresh approach generated by their variety of viewpoints, which we would not get from professional consultants," says Mark "Denny" Weinberg, executive vice president. "They have been trained to perform in an unknown environment and are unafraid to share their opinions, pushing us to see alternatives outside the box of our usual perspective."
There are few things with the potential to panic a parent like the illness of their child, but childhood ailments are not uncommon. What symptoms are safe to handle at home, and when should a parent make the time-consuming and expensive trip to an emergency room or clinic? How many parents are equipped with the knowledge to confidently make these decisions?
As shown by a first of its kind study from the UCLA/Johnson & Johnson Health Care Institute, the impact of the answers to these questions extends beyond the personal problems involved. In fact, it reverberates out into one of society's most intractable dilemmas: the high cost of health care. Under Ariella Herman, senior lecturer of operations and decision sciences at UCLA Anderson School of Management and lead investigator, studies show that Medicaid costs can shrink significantly when parents are trained in the treatment of minor childhood sicknesses.
"Ensuring Positive Health Outcomes in Head Start Children and Families," the research headed by Herman, was inspired by Head Start directors who had graduated from UCLA Anderson's Head Start-Johnson & Johnson Management Fellows Program. Founded in 1991, it is the only executive management program of its kind.
Specializing in research related to social issues, Herman is an expert in childcare and health care management. She is well versed in the concerns of Head Start parents and families, having taught in the fellows program for more than a decade. She received its first Outstanding Head Start Faculty Award in 2000.
"Head Start parents, like all good parents, want only the best for their children," Herman says. "Our studies showed that by raising the health literacy of Head Start parents, they could immediately apply that knowledge to become the first line of defense in taking care of their children's health. The findings could have far-reaching implications in bringing down Medicaid costs."
The studies began in 2000 with a survey of Head Start-Johnson & Johnson fellows nationwide. Initial research revealed a shared concern: Parents simply lacked time and tools to acquire the basic health care knowledge needed to effectively manage a youngster's illness. The fellows believed that if parents could become better informed about fundamental health issues, it could lead directly to healthier outcomes for their children.
Started as a pilot project in 2001, the UCLA/Johnson & Johnson Health Care Institute entered its third year in April 2004. By the end of 2005, the institute estimates it will have trained 79 agencies, 790 staff and 11,600 parents nationwide. Achieving this goal could mean savings to Medicaid of nearly $2.4 million annually from direct costs associated with unnecessary health care facility visits. Using $200 as the average cost at a hospital's emergency room and $30 for a clinic, it was found that Medicaid costs could be reduced annually by at least $198 per family when Head Start parents are provided with easy-to-understand health care guidance.
Researchers estimate that the savings could reach many millions per year if funds were available to provide health literacy training for the nearly one million families served by Head Start. Most Head Start parents depend on Medicaid for their healthcare needs. The UCLA/Johnson & Johnson Health Care Institute's 10-year goal is to serve 400,000 Head Start families, reaching approximately half the Head Start agencies in the United States.
In the pilot and follow-up studies, involving 1,600 parents at 14 Head Start agencies, Johnson & Johnson gave parents a medical reference guide, What To Do When Your Child Gets Sick, by Gloria Mayer, R.N., and Ann Kuklierus, R.N. Designed for readers with low health literacy, the guide offers basic information on more than 50 common childhood medical issues, from fevers and minor scrapes to chicken pox and head lice.
Head Start parents were surveyed about their family's health care habits three months prior to the training and six months afterward. At the outset, 80 percent said that they did not have a single childcare book at home to reference for help when a child fell ill. However, parents said they were "very confident" about taking care of their sick children. Yet the study found that 49 percent said they would take their child to a clinic for a runny nose and cough rather than provide care at home. Over 50 percent of parents did not know what to do with a child who had a temperature of 99.5 degrees Fahrenheit.
Parents surveyed post-training were, in practice, more confident, with 90 percent reporting that they used the book, some as often as four times in six months. By becoming better informed, participating parents reduced unnecessary trips for routine illnesses by 48 percent to emergency rooms and by 37.5 percent to clinics. This also translated to a dramatic drop in the number of "lost days," by 43 percent from work and by 41 percent from school. Further, the studies documented a profound improvement in parents' confidence in trusting their own good judgment. Parents reported universally that, for the first time in their lives, they had the know-how to take charge of their own children's health care needs.
From the start, an objective of the UCLA/Johnson & Johnson Health Care Institute training was 100 percent parent participation. Historically, Herman says, Head Start parents have faced significant barriers - from working multiple jobs to lacking childcare or transportation - to take advantage of training offered by Head Start agencies. Head Start agencies participating in this study were allocated funds to facilitate parental involvement, offering transportation, on-site childcare and meals, and copies of the book.
According to Mernell King, former director of the Head Start program in Hannibal, Mo., which participated in the pilot and follow-up study, "personal empowerment" has been the greatest impact for the families. "The program is a miracle for Head Start families, saving lives and money in our community and giving parents the knowledge to act as primary teachers and nurturers of their children," King says.
When UCLA Anderson School of Management is at its best, it provides a combination of theoretical training rooted in state-of-the-art research and the practical application of that training in a real world setting. While examples are numerous, two excellent illustrations of UCLA Anderson at its best come from the area of finance...It looks just about like any other meeting.
Staffers drag themselves in in ones and twos and threes. They pull back chairs, swigging chain-store coffee, taking their places around the boardroom table. They make small talk while one member passes around the latest data in a series of tables and graphs. Some fiddle with their palm pilots, a few type on their laptops or whisper excitedly into their cell phones, careful not to let their private conversation impose on the matter at hand.
When the CEO enters, the room grows quickly quiet, and then waits while he settles in - briefcase over here, papers over there. During the course of the weekly meeting, the group discusses past performance, future strategy and long-term career decisions. The CEO's own cell phone rings, and he'll have to take that call, resting his glasses on his forehead while he schedules another meeting for later in the week.
But this assembly does not take place in a boardroom with an ocean view. Rather it takes place in a UCLA Anderson seminar room with a view of parking lot number five. And the CEO isn't the head of the corporation; he is popular Anderson professor Bill Cockrum, who meets each week not with his board of directors, but with the student managers of the Student Investment Fund (SIF).
The Student Investment Fund provides an arena in which UCLA Anderson students can apply academic investment theory in a practical forum. The SIF is a perfect example of what Anderson does best: build a bridge between theory and practice - in this case the practical workings of financial markets. It was created in 1987 with a pledge from Provident Investment Council, as a result of the generosity and initiative of Mr. Bernard Johnson, president of Provident Investment Counsel. Provident pledged $50,000 per year over five years to start the fund, and in 1989, Kayne Anderson Investment Management Co. contributed an additional $250,000. The "Friends of the Student Investment Fund" program was launched in 1993 and has brought in over $250,000 in additional capital to date.
That's just the investment side.
Each year a small group of students are selected to manage a portfolio of capital that now totals in excess of $2 million. The Student Investment Fund is structured to expose students to situations that they would experience if they worked in a typical investment management firm. During an 18-month period, the Fellows (participants) execute a demanding agenda as they tackle investment strategy, asset allocation, security analysis, and organizational and group dynamic issues. For the first six months, the Fellows manage the Student Investment Fund in two groups, one with a value approach and the other as a growth fund. The equity portion is then divided equally among the Fellows and managed individually for the remaining six months. The fixed income portfolio is managed as a group for the entire period. During the year, class members meet weekly, if not more often, and meet with a Faculty Oversight Committee on a monthly basis. The students also visit over 30 investment managers to learn first hand about different philosophies and styles.
The SIF is a prestigious element of the Anderson experience and interest has been strong throughout the fund's history. Successful applicants must submit a written essay and pass through two rounds of panel interviews before being selected as one of 10 to 12 members of the fund. Criteria used in the selection process include: academic achievement and involvement at UCLA Anderson School of Management, a demonstrated interest in investment management and proven ability to work effectively in a demanding team environment.
The Student Investment Fund is not the only project on the campus that immerses UCLA Anderson students in a milieu of real world investing. The Anderson Student Asset Management (ASAM) is an investment fund represents a similar experience with somewhat different goals and objectives.
According to its official literature, "The objective of ASAM is the preservation of capital and the pursuit of favorable risk-adjusted returns. The student managers will work as a team to adhere to the stated investment policies and within these limits to strive for superior long-term performance to the extent feasible and prudent. The fund seeks to achieve its objectives through a diversified portfolio of securities that meet the fundamental and technical specifications adopted by its managers."
Officialese aside, professor Pedro Santa-Clara who supervises the course describes it like this: "The class does two things. First, it manages a portfolio of stocks, using quantitative portfolio techniques," Santa Clara said. "Second, it functions as a small money management company through portfolio management, execution, reporting, the maintenance of its Web site, raising money, complying with the goals of its client and visits to local fund management companies." The client in this case is the UCLA Foundation, which reaps the financial rewards of the course's investments.
Each year, the students perform a detailed study of the state-of-the-art in finance theory. Each strategy is critically analyzed for theoretical soundness, implement ability, and performance history. This study results in new candidate strategies that are evaluated against previously implemented strategies. The new strategies are then carefully executed in parallel with surviving existing strategies.
Santa Clara says that the course is as much a study in organizational behavior as it is in finance. With a small class of 15 students, little hierarchy and no clear seniority, students are forced to work together to analyze past performance and strategy and devise the next year's course of action. Santa Clara says, "Management is a tricky problem. They typically elect a class manager who controls the agenda and allocates the work." Students also engage in self-evaluation and peer evaluation as part of the class.
One near-unique feature of the ASAM project is its approach to investing. The investors eschew company-by-company analysis and instead focus on the latest investment research, then base their strategy on what they have uncovered. According to Santa Clara, "They are trying to find the variables associated with good risk/return strategies."
In 2004, the strategies included Tactical Asset Allocation (based on the difference in return between bond and stock markets); Analyst Recommendations (focused on changing levels of recommendations, not overall levels); Parametric Portfolio Weighting (based on Santa-Clara's "Equity Portfolios with Parametric Weights: Exploiting Size, Book to Market, and Momentum" working paper); Corporate Policy Strategy (CPS) (with an objective to purchase companies with capital usage policies that have added value to shareholders through excess market returns); and Economic Margin Strategy - AFG (the link between economic performance and market value). The overall philosophy reads like this: Markets are (fairly) efficient. The class seeks to exploit small inefficiencies. "We ask ourselves this," Santa Clara said. "What can we do better than others." The big advantage, he says, is that the class has access to research that others don't; the students are closer to what is going on in academia.
The strategy is working. At press time, the fund is beating the benchmark by about 16 percent, which is by any measure an extraordinary accomplishment.
Though the fund is working with real dollars, Santa Clara exerts no personal control over the course strategy. "I very much allow mistakes to be made. I start by saying that my role is as an advisor, a resource. I may give ideas, discuss and argue with presenters, but I stay out of the final decisions."
When the course first started, it was exclusively for FEMBA students, now it is open to FEMBA and full-time MBA students. It's deliberately diverse, not in any census-like way, but diverse in the sense that not all of the students are finance experts. Santa Clara estimates that half the class are finance students. Cut another way, he says that half the class would fall into the "technical" category while the rest are more "people persons." It's interesting to observe how people find their niche.
The Student Investment Fund, as opposed to ASAM, is made up of students with a serious investment background. Also unlike ASAM, SIF employs more traditional investment strategies, not necessarily the latest forays into academic research.
According to Cockrum, "Every security is analyzed by one of the students, who then issues a report to the class." After the submissions are in, a majority must reach consensus. Cockrum reviews the write-ups and approves each security - generally making sure that it has adequate liquidity. His decisions are then reaffirmed by the committee. The process almost makes one wonder if Cockrum has control over what securities are purchased, but he puts any thoughts of that nature to rest. "I've probably turned down two in 19 years."
There are two objectives that the students are looking for: The first is that they are looking for well-managed, well-run companies. The second is a judgment about the relative pricing of the security relative to the market and market sectors.
As the spring quarter ran down, the SIF students met as they did every Monday. The room has a convivial feel to it - like The Apprentice without the acrimony (and Donald Trump). One line item on their spreadsheets causes some concern, one security was not performing as they had expected. The discussion veered from the practical to the theoretical, with much talk about "oil inflation" and its impact on the numbers that week. Real world events like "trouble in Asia" are bantered about, as news from India and China ("impacting all of Asia") is discussed.
The session also was part of the passing of the torch, as part of the work involved the soon-to-be-graduating second-years prepared to depart and the first-years got ready to lead the project into the future. The class became a microcosm of the best of business school. Those in the Student Investment Fund and the Anderson Student Asset Management course practice leadership, do the research, make their cases to peers and take real risks with real money. With the monies helping other Anderson students attend school, they also produce real, life-changing results.
There is a school of thought that suggests active investors can outperform the overall market by picking the stocks they believe will perform well. More passive investors choose to invest in a market index fund, which may produce potentially higher returns over the long haul.
Index investors believe that market efficiency, based on what's known about a company at any given time, is reflected in current stock prices and that it is difficult - if not close to impossible - to forecast and profit on future stock prices. Active investors counter that managed funds don't necessarily perform worse than the overall stock market and, in fact, there are any number of funds that have earned significantly higher returns.
So, which investing style is better in the long run? We put the question to a number of UCLA Anderson alumni experts and what follows are some of the responses we received:
In the long run, can active management outperform indices?
"Both academic theory and empirical data indicate the answer is no, on average, with some caveats. That being said, the more important question is asset allocation, i.e., what percentage of assets should be allocated to equity vs. fixed income vs. cash vs. real estate vs. alternative asset classes, and how that asset allocation should be adjusted over time. Here there is no active management vs. index debate, since active management is the only available option. Furthermore, the vast majority of variability of returns and volatility will be determined by asset allocation. If an investor would rather not actively manage his asset allocation, he should hire an expert he trusts to advise him." - Erik D. Ridgley (CFA '96), President and Portfolio Manager, Private Family Capital Inc.
"Absolutely; yes. But the probability of outperforming consistently in large-caps is not very high. The statistics prove that it can be done, but not by the majority of active managers. However, in other, more inefficient asset classes, the odds of outperforming are much better. For example, in the small-cap area, most active managers outperform the indexes. There is more opportunity to provide value. The same is true in emerging markets; it is a more fertile ground where research expertise can produce excess returns. In large-caps, stocks are more efficiently priced, it is hard to get an edge and new information is quickly reflected in the stock price. I believe that talented, active managers who ‘dare to be different' (live with tracking error) can do very well relative to the passive indices. Those whose portfolios attempt to ‘act' like the market and outperform, however, have a real challenge overall performing better." - Ric Kayne ('68), Chief Executive Officer, Kayne Anderson Rudnick Investment Management LLC
"Yes, actively managed portfolios can outperform their respective indices over the long run, but the probability for outperformance is dependent on the asset class and obviously the manager. Over the past 10 years, the median return for active growth managers in each of the three major asset classes (large-, mid-, and small-cap) did outperform its respective index. The margin of outperformance was greatest for small-cap and least for large. The top quartile, small-cap manager outperformed the Russell 2000 Growth Index by an astounding 118% over those 10 years. Conclusion: In choosing a highquality manager in the area of the market with the greatest inefficiencies (i.e., small-cap), the probability of outperforming the market is high." - John J. Yoon (CFA '95), Senior Vice President and Portfolio Manager/Analyst, Provident Investment Counsel
"Indexing is un-American!" - John Hotchkis ('58), Chairman and Chief Executive Officer, Ramajal LLC
"Active investors who have the ability and discipline to stay focused on the ‘long run' - when capital markets are behaving emotionally in the short-run' -can and do outperform indices. Think Warren Buffett. However, most institutional investors, unlike Mr. Buffett, are subject to their clients' quarterly investment committee scrutiny. Often such dynamics lead such parties to inadvertently react to their portfolios' short-term performance behavior at the expense of their portfolios' long-term performance well-being." - Chris Scibelli ('90), Director of Marketing, Metropolitan West Asset Management
"While indexing does provide a relatively efficient exposure to a desired index, it still constitutes a naive allocation to all index holdings based simply on relative market capitalization. There is no ability to avoid objectionable companies within a portfolio and no opportunity to conviction-weight security selection. As a result, there is no hope for generating any alpha. Not all active managers have outperformed their benchmarks over time, but the most skillful managers, those consistently above the median of their peer group and generally in the top quartile, have managed to produce positive alpha consistently over long periods of time, even after fees." - Bob Beyer ('83), President, Trust Company of the West
Anderson Assets welcomes input from alumni and the UCLA Anderson community for letters to the editor, articles, or ideas on themes.