2009 Vol. 2

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

With the number of layoffs on all corners of Wall Street hitting record highs, many question the judgment, character, and training of the business leaders at the helm in seeking to understand how we ended up in the calamitous financial crisis we are in today. Most CEOs of major failed institutions have one degree in common, the MBA. Several key business leaders were even star students in business school. This has led to the reevaluation of business school curriculum, and the open discussion in the popular press over the last few months serve as the inspiration of this issue of the bulletin.

Critics of what is taught in business school have suggested that "business schools have actively freed their students from any sense of moral responsibility"i, and that the MBA "prepares people to manage nothing"ii. Defenders of business schools assert that the crisis is partially due to personal greed, and that "personal greed reflects personal values, and you can't blame business schools for determining personal value systems."iii In this issue of the bulletin, we highlight two distinct views on the direction business schools should be headed.

The academic perspective is provided by UCLA Anderson's very own Dean Judy Olian. In addition to her role as Dean, Judy is the John E. Anderson Chair in Management, and has been widely published in journals on human resource management and business alignment of management systems. With her unique experience as Dean, she shares with us her broad vision of the future of management education.

Stewart Resnick, chairman and owner of Roll International Corporation, is the industry contributor. Stewart has developed and owns a number of successful companies including Paramount Agribusiness, POM Wonderful, Teleflora, FIJI Water, as well as Suterra. An accomplished businessman and entrepreneur, in a recent interview he divulges his strong views on what can and cannot be taught effectively in business schools.

i Sumantra Ghoshal, The Economist, May 29, 2009
ii Henry Mintzberg, The Economist, January 16, 2009
iii "Training Managers to Behave", Time Magazine, May 14, 2009

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Judy D. Olian (Bio)
Dean, UCLA Anderson

The Challenge
"How Business Schools have failed Business" in the Wall Street Journal, or "Is it time to retrain B-Schools?" in the New York Times, are just a few examples of some of the recent press that has greeted deans of business schools. If you listen to critics, especially after the recent financial crisis, you might wonder if management education has any future. The argument goes like this: The economic meltdown occurred because of an absence of leadership among top executives and boards. Business schools train business leaders. It follows, then, that the dismal performance of business leaders is the fault of their management education. By that logic, schools of management should also get the credit for the economic successes of the previous years. What do you think?

In other quarters, management education is simply ignored. The National Science Foundation's 2007 analysis of the future determinants of US prosperity issued an urgent call for investment in the country's human, financial and knowledge capital. The report resulted in a 592 page book, "Rising above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future". It includes a careful review of the number of current and projected graduates in various science and technology fields, and it recommends substantial national investment in STEM education - science, technology, engineering and mathematics. Not once in this lengthy report is the need mentioned for management education.

Whether management education is considered irrelevant, or responsible for the ills of the global economy, the world is changing around us and the value proposition of management education is being challenged. We, too, must change. Why, and how? That's what I'll contemplate below.


Interview with Stewart Resnick
Chairman, Roll International Corporation

The Fink Center: Do you think that business schools had a role in the current crisis?

Stewart Resnick: I think that business schools had a huge impact on the meltdown. I think that we have become a country of financial people. Finance is a support, not an end in itself and we've created an end in itself. People had high expectations of making lots of money. They went out into the market and created a whole infrastructure of nonsense that didn't do anybody any good, except the people who were involved in inventing it. There are way too many people going into law and into finance who have no reason to do it other than for the money. And they don't want to work hard for it.

The Fink Center: In your opinion, what questions should business schools be asking themselves? What should they be teaching more of?

Stewart Resnick: Business schools can teach more about long-term vision. I gave a talk during the dot-com boom about working hard and the whole class had no interest. If you can't tell me how to make $5 million in three years, I have no interest. Three years later they were much more receptive. There's the classic story about Walmart. He spent a huge amount of time on building the appropriate infrastructure - 20 years roughly - before really starting to expand. It's a good lesson. You can't do it overnight!

The Fink Center: One criticism is that schools have become too scientific with a focus on the use of complex models and not focused enough on relevant, real-world issues. What are your thoughts on this?

Stewart Resnick: Formulas and models are all about the assumptions, and the assumptions are all about understanding risk and those are judgments, those aren't RULES. So the rules work for a short period of time because everyone believes in them, but to measure risk, looking backwards doesn't work.


Del Jones
Published April 3, 2009

The Obama administration's plan to replace a majority of the General Motors board casts a light on boards of other companies that have accepted bailout money, and there is at least one similarity at GM (GM), American International Group (AIG), Citigroup (C) and others that have so veered into financial straits.

Troubled Asset Relief Program, or TARP, recipient companies were much more likely than the average company to have had independent directors on the board with social or professional ties to the CEO.

Independent directors aren't employed at the company, and shareholders rely on them to speak up if they see it heading for disaster. New research finds that many of those independent directors have connections to the CEO, including memberships at the same country clubs, attendance at a college at the same time, or volunteerism with the same charitable or non-profit organizations.

For example, among all large, publicly traded banks, 14% of independent directors have social or professional ties to the CEO, similar to the 15% at all companies. But at banks that later accepted bailout money, 39% of independent directors had such ties.

The study by finance professor Geoffrey Tate and doctoral candidate Cesare Fracassi was done at the UCLA Anderson School of Management. It examined 20,000 board members of 2,080 firms year by year from 1999 to 2007 to identify connections. It found that when connections increased, so did earnings restatements and the likelihood of mergers that hurt a company's performance.


Annual Report 2009

Purpose of Fund
Anderson Student Asset Management (ASAM) is a student-run investment fund that aims to:
  • Provide competitive risk-adjusted returns
  • Enhance the educational and professional development of the student-managers through experiential learning in strategy development and fund management

A portion of the Fund's long-term profits will be donated to the UCLA Anderson School for student scholarships and research in finance.

Investment Philosophy
ASAM's objective is to preserve capital while pursuing favorable risk-adjusted returns. The student-managers adhere to stated investment policies established by UCLA Anderson and the ASAM faculty advisor, Professor Robert Geske of the finance department.

The Fund seeks to achieve its objectives through a diversified portfolio of securities that meet the fundamental and technical specifications adopted and developed by the managers. The managers believe that security prices sometimes violate sensible risk/return boundaries. Each portfolio seeks to identify and exploit these opportunities through large-sample quantitative techniques. Fund managers leverage research and analytical capabilities within the Anderson finance faculty, other academic resources, and investment management profession.

The managers, along with the faculty advisor, determine an optimal mix of equity, fixed income and cash investments.

Overall Performance Review
The aggregate fund outperformed the S&P 500 by approximately 18% from 4/30/2008 to 4/30/2009 (See Figure 1). Student managers from both the 2009 and 2008 classes determined that it would be prudent to move two of the ASAM portfolios, TAA and EDS, primarily into cash for the entire year. These decisions were judgment calls based on the fact that the AFG View and DAA model, the precursors to EDS and TAA, respectively, were no longer reliable.

Figure 1

Relative Strategy Performance
The graph in Figure 2 shows the relative performance of all of the different ASAM portfolios. Cash portfolios outperformed equity for the past year. A brief summary of each of the four portfolios (TAA, F-Score, Parametric and EDS) follow.

Figure 2

Tactical Asset Allocation

Objective: Tactical asset allocation (TAA) attempts to maximize risk-adjusted returns by using economic indicators to forecast asset classes that will outperform in the future.

Assets: Cash, S&P 500, iShares Barclays Aggregate Bond, Power Shares DB Commodity Index, Vanguard REIT Index ETF, and SHRT S&P 500 Pro Shares.

Indicators: Yield Curve, Credit Spread, US CPI, ISM PMI, Oil, S&P P/E Ratios, FX vs. Broad Index, GDP, VIX

The FSCORE strategy is based on the academic paper: "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers" (2002) by Joseph Piotroski. In this paper, Piotroski concludes that financially healthy, small, low price-to-book "value" companies with minimal analyst coverage garner abnormally high returns in the US equity market. He evaluates the financial health of a firm using ratios to measure profitability, changes in capital structure and operating efficiency as explained below.

• Positive: return on assets (ROA), year over year change in ROA , cash flow from operations, and cash flow from operations minus net income

Changes in capital structure

· Increase in liquidity ratio

• Decrease in leverage ratio and shares outstanding


Operating efficiency
• Increase in gross profit margin and turnover ratio

Parametric Optimization Strategy
ASAM's Parametric Optimization Strategy is based on the working paper "Parametric Portfolio Policies: Exploiting Characteristics in the Cross-Section of Equity Returns" by Michael W. Brandt, Pedro Santa-Clara, and Rossen Valkanov. The strategy optimizes the weights of stocks within a portfolio on the basis of each stock's size, value, and momentum. Each characteristic is associated with a documented market anomaly. The original paper determines a long or short weight for each security in a market portfolio consisting of the top 600 largest market capitalization equities worldwide. This method contrasts with the Markowitz approach, which attempts to optimize a portfolio on the basis of an estimated joint distribution of stock returns.

Major limitations on the ASAM fund require modifications to the strategy. First, the ASAM guidelines disallow individual short positions. Since the strategy achieves its highest level of abnormal returns by taking short positions in individual securities, this is a major constraint. In addition, the supporting research assumes that the strategy buys or sells short all stocks in the market. Finally, transaction costs and the small size of the portfolio make it impractical to hold a portfolio of all securities. We back-tested the strategy using a long portfolio of 40 stocks to address these limitations and constraints on shorting individual positions.

Earnings Drift Strategy
The Earnings Drift Strategy (EDS) was selected to replace the AFG View strategy. In contrast to the other ASAM strategies, EDS is event-driven. The strategy is based on the premise that companies often release additional information with earnings announcements and that this information can be captured by excess returns around earnings announcements. Firms in the highest quintile of excess returns around earnings announcements subsequently had average returns of 4.61% over the 12 months following the announcement while those in the lowest quintile had average excess returns of -2.94% over 12 months.

Click here for the full report >>

On January 9, 2009, members of Anderson Student Asset Management (ASAM) and the Student Investment Fund (SIF) visited Omaha to meet with Warren Buffett. The day started with a tour of Nebraska Furniture Mart, one of the many Berkshire Hathaway companies. The Mart in Omaha has a sprawling facility with over 420,000 square foot of retail space and attracts customers from different states. The tour was led by Bob Batt, a member of the founding family of Nebraska Furniture Mart and included stops at the different retail departments within the store, ranging from consumer electronics to carpets. During the tour, Mr. Batt shared some of the key management principles and customer oriented values that guide the company to this day.

The next stop was the Kiewit Building, where the headquarters of Berkshire Hathaway is located. The meeting was held jointly with Anderson students and about 100 other students from universities such as Dartmouth, USC, and the University of Texas. At the front of the room was a table with Mr. Buffet's favorite Cherry Coke and a Moody's manual. Mr. Buffett entered the room and immediately started to take questions from the students on any topic the students were interested in. Over the next two hours, Mr. Buffett shared his thoughts and words of wisdom on several topics such as the economy, executive compensation, investing, career and life in general. It was a highly rewarding learning experience for the students to see one of the greatest investors in the world address questions on different topics with high levels of energy and humor. A key piece of advice he gave to the students was to identify your circle of competence, stick to it, and not make any rash decisions.



The 2009 Fink Center Research Grant recipients are: Avanidhar Subrahmanyam, Bruce Carlin, and Geoffrey Tate.

Research projects funded by the Fink Center for Finance & Investments must be related to its mission; that is, they must advance both the theory and application of finance. The selected award winners have demonstrated how their research and subsequent research will meet this standard. A summary of each recipients' proposed research follows.

Read more about the award recipients' research >>

This year's research committee at UCLA Anderson selected Bruce Carlin as the winner of the Eric and "E" Juline Faculty Excellence in Research Award recognizing excellence in research among the Anderson School's assistant professors.

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