2008 Vol. 3

Pansy Yang, Ph.D. (Bio)
Executive Director of the Fink Center for Finance & Investments

With the CBOE Volatility Index (VIX) at a recent all-time high of 90 just a few weeks ago, a morning upswing of 300 points in the Dow followed by a 500 point drop in the afternoon now just seems like an average day in the market. Extreme volatility, tumbling markets, global contagion of the economic downturn, and a $700 billion emergency bailout package all lead to many questions and few answers.

This issue contains a medley of viewpoints from both the academic and industry side. In a recent Town Hall meeting held at Anderson, Professors Francis Longstaff, Ed Leamer, and Richard Roll discussed how we got into the current economic situation, why this time is not the Great Depression, and ideas on what will it take to revive the economy.

On the industry front, we have two prominent practitioners contributing to this issue. Joel P. Fried, Executive Vice President of PRIMECAP Management Company, talks about the importance of long-term investing and why it makes sense. An exclusive interview with Ric Kayne, Chairman and CEO of Kayne Anderson Capital Advisors, reveals his investing philosophy, thoughts on the traditional versus alternative investment space, and general advice.

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Interview with Professors Francis Longstaff, Ed Leamer and Richard Roll.

An Anderson Town Hall meeting was called on October 1st, 2008. The Senate was to vote on the bailout plan that evening. Prior events included the following: AIG, Freddie and Fannie, Bear and Lehman had collapsed; two major financial institutions, Merrill and WAMU, had disappeared and a possible firesale with Wachovia was very close. Two global financial giants, Goldman and Morgan Stanley were on the brink of failing were it not for the change in their charter and an infusion of outside cash. The credit markets had seized up, there was very little lending and inordinately expensive if it could be obtained at all. Professors Francis Longstaff, Ed Leamer, and Richard Roll shared their views of how we got here and what we should do.


Joel P. Fried, Executive Vice President
PRIMECAP Management Company

Adapted from remarks delivered October 24, 2008 during UCLA Anderson Alumni Weekend.

Some people say that timing is everything. Well, two weeks ago, we all suffered through the worst week in the history of the stock market, and today I stand before you to discuss the virtues of long-term investing. How's that for timing? We have all been saturated over the past couple of months with media reports detailing the crisis facing our financial system. It's arguably the most severe crisis since the great depression, and accordingly, we are witnessing the greatest government intervention in our financial system since that period.

Ironically, I think this presents an ideal opportunity to take a step back from the crisis that has preoccupied and paralyzed the financial markets, and talk about the notion of long-term investing. Irrespective of the current turmoil, it is an idea that many consider archaic. In contrast to my opening remark that timing is everything, one of the points I hope to leave with you today is that timing is not all that important in long term investing. In fact, as I will show, trying to time the market is a hazardous endeavor. The most important element of long-term investing is to simply stay invested.

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Adapted from an interview on October 24, 2008 during UCLA Anderson Alumni Weekend. Ric shares with us his background, views on active versus passive management, investment philosophy, and advice for the future.

Pansy Yang: Ric, thank you so much for joining us today. As a successful veteran of the fund management industry, can you share a little about your background with us?

Ric Kayne: I started my investment career trading (and losing money) while I was a sophomore in college. I went to business school at Columbia for a year, where I had the phenomenal opportunity to work in a research department with a Wall Street firm that's no longer here. After service in the United States Coast Guard, I completed my MBA at UCLA GSM in 1968.

Yang: Today Kayne Anderson is a successful $9 billion investment management firm. How did it all
get started?

Kayne: John Anderson and I formed Kayne Anderson in 1984 to create a favorable environment to invest our funds and those of people who are comfortable with our style. The philosophy and style were developed over my prior fifteen years in the business. The founding of the firm gave us an opportunity to build deeper and stronger capabilities in the types of alternative investment activities that were the bedrock of my approach. We have always been willing to trade off big upside for more protection of principal on the downside. Our prime strategies have been 1) to attempt to develop a knowledge advantage through fundamental research (value laden investment niches); 2) to focus on free cash flow generating investment opportunities (cows vs. pigs); 3) to eschew leverage; and, 4) to attract great talent (field professional teams in high school games).

While our roots have been in alternative investing, we took a stab at traditional investing, In 1990 we sensed that there was 1) a good time ahead for equity investors and investment managers, and, that 2) our research process could add enough value to high quality stock portfolios to make a difference. We were right about the first and wrong about the second. Kayne Anderson Rudnick grew from $40 million in Assets under Management (AUM) to $11 billion a decade later when we sold the company. At our core, we are investors, and we recognized that business as a marketing business. Kayne Anderson Capital Advisors, LP has approximately $9 billion in AUM today in a variety of alternative strategies in marketable securities and private equity.

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October 25 |The Fink Center Dedication

Leading Donors are Honored

Laurence D. Fink (BA '74, MBA '76), chairman and chief executive officer BlackRock, has provided real vision leadership to the Center for Finance Investments as chairman of its board advisors since its inception in 2006. Recently, Fink matched his intense dedication with an equally powerful of $10 million from him and his wife, Lori. In recognition of their generosity, the school will rename the center the Laurence and Lori Fink Center for Finance & Investments (Fink CFI).

"I am deeply grateful for Larry and Lori's extraordinary support for the school," says UCLA Anderson Dean Judy D. Olian. "With their vision and commitment, we will further enhance the reputation of the center throughout the finance, academic and professional communities, having an impact on national and global financial markets." The Finks' $10 million endowment is the largest individual gift to UCLA Anderson since John Anderson's naming gift in 1987. Portions of the investment will be used to create the Laurence and Lori Endowed Chair in Finance to support research in finance and to establish Ph.D. and MBA fellowships for students. Students will also gain greater access to financial market tools and networks, enhancing their career preparation. The center will partner with the newly launched Master of Financial Engineering (MFE), a one-year program that provides an in-depth study in finance that is more quantitatively oriented than traditional MBA curriculums.

The Finks' gift and all lead gifts to the Fink Center for Finance & Investments were celebrated at an unveiling ceremony to reveal the Fink CFI Patrons Wall located in Entrepreneur's Hall. Donors of $500,000 or more to the center are acknowledged on the wall with a plaque and biography. The Fink CFI Patrons Wall ensures their legacy of philanthropy and leadership are commemorated in perpetuity in the Anderson learning community.

A prominent leader on Wall Street, Fink is chairman and chief executive officer of BlackRock, the largest publicly traded investment manager in the United States. He is also a trustee of the BlackRock Equity and Bond Fund Complex within the firm's open-end fund family. In addition to his accomplishments in the world of finance, Fink and his wife have been extremely generous philanthropists to the academic and medical communities. Currently, he serves on the board of trustees at New York University (NYU) and also as co-chairman of the NYU Hospitals Center Board of Trustees. Last year, Fink was the recipient of the John E. Anderson Distinguished Alumnus Award, the highest recognition that UCLA Anderson bestows upon alumni.
Tracy Mlakar, Senior Writer for Assets Magazine

October 17 |The Fink Center Global Finance Conference

80 faculty, practitioners, doctoral and MBA students attended the Fink Center Global Finance conference held at UCLA Anderson on October 17th. Professor Roberto Rigobon (MIT) discussed the global contagion from the subprime crisis -- defining financial contagion to be the transmission of a shock from one country to another, above and beyond what fundamentals can explain, and sharing various theories of contagion as well as different forms of measuring it. Sith Chaisurote, doctoral candidate at Stanford and winner of this year's CIBER student award on global research, presented his work on the impact of privatization in Brazil on the equity markets throughout Latin America in terms of liquidity and price effects.

Professor Luigi Zingales (Chicago GSB) gave a keynote presentation on trust and finance. Luigi motivated his talk by explaining that the word "credit" comes from the Latin word "credere", which means to trust; hence, finance is intrinsically related to trust. He discussed objective versus subjective trust, measures of trust, recent research, including his own on the effect of trust in financial markets and stock market participation in particular, and the role of government intervention in attempting to restore trust.

Dr. Michel Crouhy (NATIXIS) discussed causes and remedies of the credit market turmoil. Specifically, Michel talked about what went wrong in risk management and risk modeling, lessons to be learned, and the need for a second generation of pricing models for credit derivatives. Dr. John Rutledge (Rutledge Capital) wrapped up the conference by presenting a framework to better understand China -- U.S. economic relations with a discussion on thermodynamics, network/ system theory, and China's role in global growth and their capital markets.

October 24 | Alumni Weekend

Finance faculty and Fink Center board members partnered together for a successful Alumni Weekend! The morning finance breakout session featured Professor Avanidhar Subrahmanyam, a renowned expert in behavioral finance, and Joel P. Fried, Executive Vice President of PRIMECAP, who spoke on long-term investing. In the afternoon, alumni gathered to hear Professor Mark Grinblatt and Ric Kayne, CEO and co-founder of Kayne Anderson Capital Advisors, engage in a lively discussion and share their views on active versus passive management. Professor Stuart Gabriel, Arden Realty Chair in Finance and Director of the Ziman Center of Real Estate, delivered the faculty keynote presentation and explained real estate's role in the nation's economic trends.

Faculty Highlights

Congratulations to Professors Bhagwan Chowdhry and Tony Bernardo (UCLA Anderson) and Amit Goyal (graduate of the UCLA Anderson finance doctoral program and now a Senior Chair at the Swiss Finance Institute) on their award-winning paper, "Growth options, beta, and the cost of capital". This paper was awarded second prize at the annual meeting of the Financial Management Association (FMA) in Dallas at the Friday luncheon on October 10th. This prize is awarded once every two years and reflects the opinions of the Associate Editors who voted on the most important contribution to Financial Management over that two year period.

The Fink Center for Finance & Investments
UCLA Anderson School of Management
110 Westwood Plaza, Los Angeles, CA 90095