Page 1

14th Volume August 2012 issue #5

Investment Strategy Interview Cees Smit

Column J. G. Groeneveld

XVth FSR Board




CEO Today’s Groep



Ondernemers helpen groeien met jouw cijfermatig inzicht?

Financieel talent Sta jij aan het begin van een carrière als accountant of fiscalist? Dan is het goed om jezelf af te vragen waar jouw financieel inzicht het best tot zijn recht komt. Bij Baker Tilly Berk controleer je niet alleen het verleden, maar adviseer je ook over de toekomst van een bedrijf. Baker Tilly Berk combineert een landelijke aanwezigheid en een internationaal netwerk met kleinschalige kantoren dichtbij onze klanten. Die jij al snel persoonlijk kunt adviseren. Je werkt bijvoorbeeld mee aan de uitbreiding van een transportonderneming, de fusie van twee bedrijven of een audit in de publieke sector. Om ondernemers te helpen groeien zoeken we medewerkers die zelf ook ondernemend zijn en zich continu willen ontwikkelen. Denk jij dat de rol van adviseur bij jou past? Dan hebben we voor jou ook een goed advies:


fsrforum • volume 14 • issue #5

Investment Strategy


Dear readers, In front of you lies the fifth and final edition of the FSR Forum of this year. The theme of this edition is Investment Strategy, which is a broad theme compared to former editions. So don’t expect to find an overview of all the different investment strategies that can be applied, but the more striking or successful ones will be discussed in this edition. Every day investors determine or revise their investment strategy. This process all comes down to a tradeoff between the risk and return their portfolio generates. Lately you can see that partly because of the financial crisis certain products or strategies are being under attack, because of the high risk involved with these investments. It of course all started with the financial crisis, but also due to more recent cases such as Vestia the discussion arises whether certain high-risk products should be forbidden. In this edition we will further discuss the trade-off between risk and return and how to make this trade-off in a responsible manner. The articles in this edition also cover a wide range of investment strategies: from the influence of social media on financial markets to investments in hedge funds. The first article by Harry M. Kat discusses the different approaches to hedge fund replication. As explained by mister Kat hedge fund replication ‘is about generating hedge fund-like returns by mechanically trading traditional asset classes’. Besides the reduction in costs and the improvement of investment returns, hedge fund replication would also improve transparency and other flaws that come with investments in hedge funds. The second article is based on research done by Xue Zhang, Hauke Fuehres and Peter A. Gloor, who have investigated if the movement of the financial market can be predicted by analyzing Twitter posts. In this case Twitter posts are a measurement for the sentiment in the market. Personally I find this article one of the most refreshing ones, because normally sentiment is measured by for instance volatility or trading volume. This research could be a very good design for future research. The last article by Geetesh Bhardwaj is all about investment in commodities. It explains the different features of commodities and it discusses the attractiveness of a well diversified portfolio of commodity futures. To be able to analyse the attractiveness of investments in commodity futures, mister Bhardwaj has constructed commodities return series extending back in history to August 31, 1959. As for every edition we have interviewed an expert on the related theme. This time we have interviewed Cees Smit CEO from Today’s Groep, a brokerage and asset management firm founded in 2003. In 1986 mister Smith started as a stockbroker at ABN AMRO bank and hasn’t stopped trading ever since. In this interview he shares his extensive knowledge and explains more about his own strategy: the Fallen Angels Strategy. Fallen Angels are former market leaders, such as Nokia. Besides more information about recent developments and new strategies, the interview has made me look differently at so-called high-risk investments and the role of speculators on the financial market.

2 • Preface

As I have mentioned before risk and return are crucial when an investor determines its strategy. Professor Van der Sar from the Erasmus School of Economics has this time written the ‘Professors Column’ in which he discusses why it is important to diversify your portfolio and thus to spread your risk. Later on he explains what the optimal amount of stocks in a portfolio should be. This explanation is based on his working paper from 2012. Since this is the final edition of the 14th volume it is time to review our portfolio from the News Update in the first edition. The funds in this portfolio have been selected at random and the goal of this portfolio was to see if randomness could outperform the market. For the results see page 41. Besides the other usual columns such as this News Update and the column of mister Groeneveld, you can also find the introduction of the 15th FSR Board and a letter from the Alumni Association in this edition. The introduction of the new FSR Board means that our year has come to an end. Looking back at last year I think we can be very proud on what we as the FSR and as editorial committee have accomplished. At the start of this academic year you don’t know what to expect, but now I can truly say that the knowledge you gain during a year at the FSR is a very valuable asset. I would like to thank everyone who has contributed to the realisation of the 14th volume of the FSR Forum, but of course a special thanks goes to editor Jeroen van Oerle who’s contribution has been very valuable. For now I hope you will enjoy reading this last edition and I wish you all the best in the development of your future career!

Sincerely, Anne van Driesum Editor in Chief FSR Forum FSR board 2011-2012

Preface • 3

fsrforum • volume 14 • issue #5

Investment Strategy

Table of contents

Alternative Routes to Hedge Fund Return Replication: Extended version Harry M. Kat (2007)

Driven by a desire to reduce costs, improve investor return and to avoid the many other drawbacks surrounding hedge fund investment, the market has recently seen several attempts to “replicate” hedge fund index returns. This paper discusses its attractiveness and the different approaches to hedge fund replication. 6

Predicting Asset Value Through Twitter Buzz Xue Zhang, Hauke Fuehres, Peter A. Gloor (2012)

This paper describes the fundamental properties of commodities to help institutional investors evaluate the case of investing in them. Our aim here is to describe the basic properties of commodities, and not to provide an investable alternative to existing commodity indexes 14

Investment case for commodities? Myths and reality Geetesh Bhardwaj, Vanguard Research (2010)

Commodities are one of the least understood asset classes. This paper describes the fundamental properties of commodities to help institutional investors evaluate the case for investing in them. 22

Colofon FSR FORUM appears five times a year and is an edition of the Financial Study Association Rotterdam KvK Rotterdam no: V 40346422 VAT no: NL 805159125 B01 ISSN no: 1389-0913 14th volume, number 5, circulation 1680 copies

4 • Table of contents

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With the cooperation of G. Bhardwaj H. Fuehres P.A. Gloor H.M. Kat X. Zhang Drs. J.G. Groeneveld RA RV C. Smit N. L. van der Sar

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Interview Cees smit



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N.L. van der Sar

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News update


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Activity reports


Introduction XVth board


FSR Alumni Association


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Table of contents • 5

fsrforum • volume 14 • issue #5

Alternative routes to hedge fund return replication Harry M. Kat (2007)

Introduction Driven by a desire to reduce costs and improve investor returns, as well as to avoid the many other drawbacks surrounding hedge fund investment, such as illiquidity and lack of transparency, the market has recently seen several attempts to “replicate” hedge fund index returns. The latter have received quite some attention in the media and among practitioners, but without detailing the workings of the various approaches and their shortcomings. In this paper we highlight the differences and similarities between the different approaches and comment on the attraction of the resulting investment products as portfolio diversifiers. Judging from the various comments made at conferences and on the internet, there seems to be some confusion among practitioners about what drives hedge fund return replication and what it is meant to achieve. Put simply, hedge fund return replication is about generating hedge fund-like returns by mechanically trading traditional asset classes. The idea is not, as some commentators seem to think, to replicate the performance of the best hedge funds in the business. More modestly, the goal is to replicate the average. The driving force behind hedge fund replication is the realisation that the majority of hedge fund (of funds) managers do not have enough skill to make up for the fees that they charge. If this is true, investors basically allow hedge fund managers to make an extremely good living using their money, while ending up with deflated after-fee performance themselves. This makes it worthwhile to replace the managers

6 • Alternative routes to hedge fund return replication

in question with a synthetic hedge fund. Synthetic hedge funds produce no pre-fee alpha, but they don’t cost a fortune to run either and may therefore very well produce significant after-fee alpha. In addition, synthetic hedge ­ funds come with great improvements in liquidity, transparency, capacity, etc. Who should invest in synthetic hedge funds? In the end, it all depends on how confident an investor is of his ability to find those truly skilled hedge fund (of funds) managers (and talk them into allowing him invest with them). Investors who are confident they have enough skill to successfully identify those managers that will more than make up for the fees that they charge, should do so. Synthetic hedge funds are not for them. However, for those who realise how good one’s manager selection skills will need to be, to be successful, synthetic hedge funds are an alternative well worth considering. Hedge fund replication products will help investors focus on the facts. Investors will become more critical and require more substantial “proof” of superior skills before agreeing to pay “2 plus 20”. Managers that are unable to substantiate their claim of superior skills will be forced to lower their fees, while managers that can, will prosper. When investors start to distinguish more clearly between managers with and without (the ability to claim) skill, this will make money flow towards the ones that can. If these funds want to maintain their status, however, they will have to close for new money quite quickly,2 which will allow low-cost replication products to absorb a substantial part of investors’ diversification demand.

Although on a smaller scale, this process is not dissimilar to the spectacular rise of index funds over the past 20 years.

In what follows we investigate how factor model-based replication scores in terms of the above evaluation criteria.

Roughly speaking, we can distinguish between three different approaches to hedge fund return replication:

1) Model Fit.

A. Factor models B. Mechanical trading rules C. FundCreator All three approaches aim to generate hedge fund-like returns. However, they do so in significantly different ways.

A The Factor Model Approach The factor model approach dates back to the early 1990s.3 The idea is straightforward. The return on a particular fund or index is attributed to a number of risk factors, such as the return on some large cap or small cap stock index, the return on some government bond index, the return on some commodity index, changes in credit spreads, etc. Once the relevant risk factors have been identified, the fund’s sensitivity to these factors is estimated from historical return data. Given these sensitivities, we can construct a portfolio of stocks, bonds, and other securities, with the same set of factor sensitivities as the fund. Although the above sounds straightforward enough, which explains part of its popularity, in practice the factor model approach encounters a number of problems. Here are some of them: 1. Missing Factors. In practice we often have little or no idea how a hedge fund’s returns are actually generated. As a result, it is not at all clear which risk factors to use. 2. Lack of dynamic trading. One of the most striking differences between hedge funds and traditional investment managers is that, instead of following largely static investment strategies, hedge funds dynamically trade in and out of markets, either explicitly or implicitly through the use of derivatives. In a standard factor model it is extremely difficult to capture this important element of hedge fund behaviour, as factor sensitivities are typically estimated from 2 or 3 years of historical data. 3. Assumption of normality. Stripped down to the basics the typical factor model is nothing more than a multiple regression. 4. Costs of Execution. The effort and costs associated with putting the factor-replicating portfolio together and maintaining its sensitivities over time may be far from trivial. Do the above problems stand in the way of accurate replication? Of course, one can speculate about this forever, but, as always, the proof of the pudding is in the eating. Factor modelbased replication can be evaluated in three different ways: 1) Model fit - how much of the variation in fund or index returns is explained by the model, i.e. what is the models R-squared? ‘ 2) Out-of-sample prediction - given next month’s risk factors, how well does the model predict next month’s fund or index return? 3) Backtest on historical data - when executing the replication strategy, starting at some point in the past, do the returns on the replicating portfolio actually match up with the actual fund or index returns?

From table 2 it is clear that, despite the much higher systematic component in the index returns, the factor model used is unable to accurately replicate the returns on the above indices. As to judge from the correlation between the index return and the replicating return, the best results are obtained for long/short equity and event driven. Given the straightforward nature of these strategies, this is not really surprising. More complex strategies, like fixed income and convertible arbitrage for example, do a lot worse, however. Table 1: Average percentage of individual hedge fund return variation explained. Source: Hasanhodzic and Lo (2006, Table 5). Strategy Group

Average Variation Explained

Convertible Arbitrage


Emerging Markets


Equity Market Neutral


Event Driven


Fixed Income Arbitrage


Global Macro


Long/Short Equity


Table 2: European hedge fund index return replication. Source: Schneeweis et al. (2003, Exhibit 2a-2f). Index Strategy











Corr. index and replica 43%

Fixed Income












Event Driven






Convertible Arb






Note that a high correlation between index return and replicating return does not guarantee that the replicating and index returns exhibit similar statistical properties. Looking at the standard deviations for event driven in table 2, we see that, despite the 90% correlation, the standard deviation of the replicating returns is 46% higher than that of the index return. Obviously, this could cause major problems in portfolio risk management where the replica will typically be assumed to have properties similar to the target. Table 3: Percentage of HFRI return variation explained. Source: Jaeger and Wagner (2005, Table 1). HFRI Index Variation


Managed Futures


Equity Market Neutral


Fixed Income Arbitrage


Global Macro


Merger Arbitrage


Convertible Arbitrage




Long/Short Equity


The Schneeweis et al. (2003) results are not unique. Table 3 shows to what extent the factor model used in Jaeger and Wagner (2005) was able to explain the variation in the wellknown HFRI indices over the period Jan 1994 - Dec 2004. The message we get from table 3 is not different from what we saw before in table 2. Relatively straightforward strategies, like long/short equity, score quite well, but more complex strategies, like managed futures and equity market neutral, come out a lot worse.

2) Out-Of-Sample-Prediction Figure 1 shows to what extent the factor model used in Jaeger and Wagner (2005) was able to predict the returns on the HFR Equity Market Neutral indices over the period


Alternative routes to hedge fund return replication • 7

fsrforum • volume 14 • issue #5

The majority of hedge fund managers do not have enough skill to make up for the fees that they charge.

March 2003 - August 2005. The graphs show the replicated return (RFS) and the HFRI (non-investable) and HFRX (investable) equity market neutral index returns. Figure 1: Monthly returns HFRI (non-investable) and HFRX (investable) Equity Market Neutral indices versus predicted replica return (RFS). Source: Jaeger and Wagner (2005, Figure 8).

clear that, despite the different ways in which these products are being advertised, there is not much difference between them. Both appear to have serious difficulty tracking the HFRI Composite, but track the HFRI Fund of Funds index quite accurately. Figure 3: Evolution HFRI Composite and Fund of Funds indices and Merrill Lynch Factor Index, Jan 2003 – Mar 2007.

From figure 1 it is clear that in both cases the replication is not very accurate and the difference between the predicted and the actual index return can be quite large at times. Also note that figure 1 clearly shows that investable and noninvestable indices, even from the same index provider, can produce completely different returns at times. We discuss this phenomenon in more detail in Kat and Palaro (2006b).

Figure 4: Evolution HFRI Composite and Fund of Funds indices and GoldmanSachs ART Index, Jan 1997 – Mar 2007.

3) Backtests on Historical Data A number of investment banks have recently launched hedge fund replication products. In September 2006 Merrill Lynch launched its Factor Index (Bloomberg MLEIFCTR). In December 2006 Goldman Sachs announced its Absolute Return Tracker (ART) Index (Bloomberg ARTIUSD), while in February 2007 JP Morgan announced the upcoming launch of its Alternative Beta Index (ABI). Although the marketing gimmicks differ, both the Factor Index and the ART Index are essentially factor model-based and aim to replicate a highly diversified hedge fund index. Merrill’s Factor Index aims to replicate the HFRI Fund Weighted Composite index, which contains over 2000 funds. Goldman’s ART Index aims to replicate an unnamed “Fund Universe” said to consist of over 1000 funds. In terms of fees both products are similar as well. Merrill and Goldman both charge a flat 100bps/annum. Figure 3 shows the evolution of the HFRI Composite, the HFRI Fund of Funds index and Merrill’s Factor Index. Figure 4 shows the same for Goldman’s ART Index. At the time of writing JP Morgan’s ABI had not been finalized yet and performance details are therefore lacking.4 Both graphs make it

8 • Alternative routes to hedge fund return replication

It is sometimes suggested that the period over which the above replication products have been backtested is too short and that in a different environment replication accuracy could be much lower. This argument is flawed, however, as the main reason why replication accuracy is so high does not depend on the market environment at all. It is technical. Mix up enough different strategies and most alternative risk will diversify away. Why don’t these replication products outperform the HFRI Fund of Funds index? Funds of funds charge fees that are a multiple of the 100bps charged by the providers of these products. If the majority of fund of funds managers indeed had little or no skill, one would therefore expect them to underperform by quite a wide margin. The solution to this

conundrum lies in the upward biases present in the index. As a result, the HFRI Fund of Funds index significantly over­ estimates the return on the average fund of funds. A similar reasoning, together with the loss of the one layer of fees, explains why the HFRI Composite does so well.

Figure 5: Evolution HFRI Composite and Fund of Funds indices, Partners Group ABS fund, and 40% deleveraged ABS fund, Jan 2000 – Jan 2007.

Conclusion Factor Model Replication Overall, it seems safe to conclude that the factor model approach has serious difficulty producing accurate replicas for individual hedge funds and most hedge fund indices. To obtain accurate replication, the factor model approach needs to be applied to an extremely well diversified index, where essentially everything that makes hedge funds interesting, and thereby causes factor models to fail, has been diversified away.

B The Mechanical Trading Rule Approach The above replication products all concentrate on one particular market or type of risk: FX, volatility, etc. One could, however, also combine a number of mechanical rules covering different markets or risks into one single product. This is the approach taken by Partners Group in their Alternative Beta Strategies (ABS) fund, which was launched in October 2004.7 Unlike the Merrill Lynch and Deutsche Bank products, ABS is a collection of 18 different mechanical rule-based strategies, similar to a multi-strategy hedge fund. The Partners Group website explains it as follows: “Our Alternative Beta Strategies fund invests in a diversified, liquid portfolio of financial instruments, based on our proprietary quantitative investment models. Different sub-strategies of the funds seek to replicate several hedge funds strategies, including equity market neutral, equity hedged, managed futures, fixed income arbitrage, volatility arbitrage and event driven.” The similarity with multi-strategy hedge funds doesn’t end here. Unlike other hedge fund replication products, which charge a flat fee, the ABS fund charges a management fee of 1.25% plus a 15% incentive fee. From figure 5 we see that the ABS fund behaves in a similar way as both HFRI indices, but exhibits a stronger upward drift and significantly higher volatility. To correct for this, we deleveraged the ABS fund by 40% to obtain a sample return volatility of around 5%.8 The result is also shown in figure 5. The graph shows that, corrected for leverage, the deleveraged ABS fund has more or less tracked the HFRI Composite.

Figure 5 also shows that over the past few years the performance of the ABS fund has been lagging the HFRI Composite and Fund of Funds indices quite significantly. Since these are exactly the years during which the fund has been live, this strongly suggests the presence of a significant data-mining element in the fund’s strategy. Conclusion ABS fund From an intellectual perspective, the ABS fund makes for a more appealing story than factor model-based products. Unfortunately, this does not appear to translate in more appealing returns. In a way this makes sense. The ABS fund mechanically replicates a number of hedge fund trades and then combines these into one single portfolio. Because it mixes a variety of strategies, however, the ABS portfolio will be quite similar to the hedge fund portfolios that factor model-based products aim to replicate.

C The Fund Creator Approach Similar to factor models, FundCreator-based replication strategies concentrate on replicating a target’s risk profile. The basic philosophy is the same therefore: match the risk profile and you will match the return. Unlike factor models, however, FundCreator concentrates on the risk characteristics of the bottom-line return and skips over the individual risk factors operating in the background. The replication horizon is different as well. Factor models aim for strict ­replication of month-to-month returns. FundCreator on the other hand may generate significantly different month-tomonth returns as the fund or index to be replicated, as it completely ignores the actual return generating process. In this sense the replication goal of FundCreator is substantially less strict than that of the factor model approach.


Alternative routes to hedge fund return replication • 9

fsrforum • volume 14 • issue #5

The basic observation underlying the FundCreator approach is that in most applications, strict replication of month-tomonth returns is not required. Investors invest in hedge funds for their return properties, i.e. their low volatility, low correlation with stocks and bonds, etc. It is therefore sufficient to produce returns with these particular properties. As long as the returns generated exhibit the desired characteristics, the sequence in which they arrive is of no real importance. Of course, implicitly the factor model approach also aims to generate returns with the same statistical properties as the target fund or index. However, methodologically this is not an explicit goal, as it is in the FundCreator approach. With factor models it therefore fully depends on the quality of the replication whether the statistical properties of the target and the replica indeed match up. With FundCreator on the other hand that match is exactly what it is all about. The FundCreator approach, as a hedge fund replication technique as well as a synthetic fund creation technique, has been extensively backtested out-of-sample in Kat and Palaro (2005) and Kat and Palaro (2006a, 2006b). All three studies strongly confirm the practical viability of the approach. Table 7 shows the sample properties of the monthly returns of a number of HFRI indices as well as the FundCreator-based synthetic funds designed to replicate their statistical properties over the period March 1999 ñ October 2006.9 Correlation refers to the correlation between the index or synthetic fund returns and a portfolio consisting of 50% S&P 500 and 50% T-bonds. From table 7 we see that, over the period studied, FundCreator has been able to replicate the statistical properties of the various indices quite accurately. All risk parameters match up very well and in 7 out of 10 cases the average return on the synthetic fund is even higher than that on the index to be replicated. The average correlation between index and synthetic fund is only 0.44, however, which underlines that although the statistical properties were replicated accurately, the month-to-month returns were not. It is interesting to see that, over the period studied, synthetic funds beat both the HFRI Composite and Fund of Funds indices. This reflects not only the low license fee, but also the highly efficient nature of the FundCreator trading strategies.

10 • Alternative routes to hedge fund return replication

Table 7: Sample properties HFRI index and synthetic fund returns, March 1999 - October 2006. Source: Kat and Palaro (2006b, table 3). HFRI Index Fund Index

Creator synthetic fund


















Funds of Funds









Convertible Arbitrage









Distressed Securities









Emerging Markets









Long/Short Equity









Equity Market Neutral









Global Macro









Merger Arbitrage









Short Selling









Product Evaluation Having discussed the details of the various approaches to hedge fund replication, it is time to make some comparisons. One criterion that is typically put forward by the main product providers is replication accuracy. It is, however, difficult to see why replication accuracy would be of any importance to investors. From an investment perspective it is not particularly relevant whether a product accurately replicates some fund or index or not. What matters for an investor is whether the product in question makes a valuable addition to his existing portfolio, irrespective whether it provides an accurate replica or not. The emphasis that product providers place on replication accuracy is therefore misplaced. Some product providers have pointed at the involvement of well-known academics as a reason why their product is to be preferred over that of their competitors. Typically, these academics’ involvement is quite limited, however, and might well consist of nothing more than a position on a mysterious “Index Oversight Committee”. Obviously, this is a marketing gimmick with little practical relevance. LTCM had two Nobel Laureates on board and we all know how that story ended. To arrive at a rational conclusion as to the attraction of the various hedge fund replication products we have to ignore the alternative beta and hedge fund replication wrapper that the providers of these products are so fond of and evaluate them in the exact same way as we would evaluate any other new diversifier.10 This means we need to look at their marginal return properties and their dependence with other asset classes. The estimated marginal properties of the various multi-strategy replication products can be found in tables 4-6. Apart from some negative skewness, none of these appear to be unusual. Table 8 shows the sample correlations between the S&P 500 and the HFRI Composite and Fund of

FundCreator is not a fixed product but a risk management tool.

Funds indices, as well as the various multi strategy replication products. From table 8 it is clear that the various multi-strategy replication products tend to be quite heavily correlated with the stock market. With correlations with the S&P 500 of 0.8 and even higher, none of them is therefore likely to make a particularly good diversifier. In fact, as discussed before, this is exactly the reason why these multi-strategy products are able to replicate the HFRI indices with such high accuracy. If the index contained more “alternative risks”, factor model-based replication would almost surely fail. Table 8: Sample correlations S&P 500 with HFRI Composite and Fund of Funds indices and multi-strategy replication products. HFRI Indices

Replication Products












































































What about FundCreator? FundCreator is not a fixed product but a risk management tool, which allows investors to design trading strategies that generate returns with predefined statistical properties. Doing so, investors create their own ideal diversifier, not necessarily available anywhere else in the market. Kat and Palaro (2006a) provide a number of examples of such synthetic tailor-made diversifiers. The performance of three of them over the period March 1995 - April 2006, together with the performance of a portfolio of 50% S&P 500 and 50% T-bonds, is summarized in table 10. Fund 1 is a synthetic fund aiming for 12% volatility, zero skewness and zero correlation with a portfolio of 50% S&P 500 and 50% T-bonds. Fund 2 is similar, except that it aims for substantial positive skewness of +2. Fund 3 is also similar to fund 1, but aims for a correlation of -0.5, instead of zero. From table 10 we see that in all three cases the sample properties match up quite well with the chosen target values. From the Sharpe ratios it appears that on a stand-alone basis the synthetic funds may not be too interesting. However, this skips over the positive skewness in fund 2 and all three funds’ low correlation with stocks and bonds, which in a portfolio context is a highly attractive feature.

Table 10: Summary examples Kat and Palaro (2006a), Mar 1995 - Apr 2006. 50/50

Fund 1

Fund 2





Fund 3 6.81%











Corr 50/50





Sharpe ratio





Conclusion With average hedge fund performance steadily deteriorating and equity markets picking up again, interest in hedge fund return replication as a cheaper means of obtaining hedge fund-like returns is growing steadily. Currently, there are various products on offer. Compared to real hedge funds (of funds), all of them offer improved liquidity, transparency, capacity, etc. and thereby solve a range of problems surrounding hedge fund investment. There are, however, substantial differences in terms of their attraction as portfolio diversifiers. The multi-strategy replication products offered by Merrill Lynch (Factor Index), Goldman Sachs (ART Index) and Partners Group (ABS fund) exhibit a strong correlation with the stock market. This severely limits these products’ attraction as portfolio diversifiers. FundCreator does not necessarily replicate any specific fund or index, but allows investors to design their own diversifier from scratch. This gives investors a unique opportunity to create new tailor-made diversifiers with characteristics that are optimal given their existing portfolios. Clearly, this makes FundCreator-based synthetic funds much more attractive than the various multi-strategy hedge fund replication and alternative beta products currently on offer.

Alternative routes to hedge fund return replication • 11


vo or de agenda van je klant?

Onze klanten zijn zonder uitzondering ondernemende mensen. Harde werkers met veel energie en stevige verantwoordelijkheden. Dat vraagt om een flinke dosis inlevingsvermogen. Je moet hun wensen, zorgen en plannen begrijpen. En soms moet je je aanpassen aan hun werkritme. Ook al kost het wat slaap. Iets voor jou? Ga naar

dichtbij kom je verder

fsrforum • volume 14 • issue #5

accon■avm biedt mij de ruimte om te ontwikkelen, dichtbij mijzelf én dichtbij de klant Company presentation

je klanten, kan je de klanten bij vraagstukken ook snel helpen. Met de diverse soorten dienstverlening binnen de organisatie is er altijd een collega die de klant verder kan helpen. Hierdoor wordt de klant ontzorgt en het geeft mij een prettig en fijn gevoel om net dat beetje meer te kunnen betekenen voor een klant.

Carrière bij accon■avm

Norma Bonten, werkzaam als assistent-accountant in de controlepraktijk bij accon■avm Norma Bonten (26) startte na haar diploma Accountancy aan de HEAO, met de Master of Science in Accountancy aan de Nyenrode Universiteit. Tevens ging zij aan het werk bij een groot accountantskantoor. Na één jaar werken bij dit kantoor kwam ze tot de conclusie dat ze het ‘persoonlijke klantcontact’ en het ‘net dat beetje meer kunnen betekenen voor de klant’ miste. “Ik ging op zoek naar een bedrijf wat de kansen en mogelijkheden biedt van een groot kantoor, maar waar je ook net dat beetje meer klantcontact kunt hebben. Dit alles vond ik bij accon■avm adviseurs en accountants. Hier werk ik nu ruim een jaar met veel plezier als assistent-accountant in de controlepraktijk.”

Verantwoordelijkheden Binnen accon■avm adviseurs en accountants kent men verschillende functieniveaus, tevens allemaal doorgroeifuncties! Ik startte als assistent-accountant en ondanks mijn weinige ervaring was ik gelijk een volwaardig teamlid. Ik ging gelijk mee naar de klant en het mooiste is dat niet alleen de controleleider gesprekken voert met de klant, maar dat ikzelf ook gesprekken mag voeren. Mijn ervaring is dat je hierdoor de klant sneller leert kennen en een duidelijker beeld van de klant en zijn omgeving krijgt

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Companypresentation • 13

fsrforum • volume 14 • issue #5

Predicting Asset Value Through Twitter Buzz

Xue Zhang, Hauke Fuehres, Peter A. Gloor (2012)

14 • Predicting Asset Value Through Twitter Buzz

Twitter is drawing more and more attention from researchers from different disciplines.

1 Introduction Recently, a lot of research has been done on prediction with data from social networks and web searches. Gayo-Avello et al. [1] clearly pointed out that follow-ing what people are blogging about or what they are searching about can give us some intuition on the collective psyche and lead us to understand what is currently happening in society before it is actually happening. Sometimes people refer to this phenomenon as the “wisdom of the crowd”, that is, taking into account the opinion of the society as a whole, instead of the opinion of the expert. A group of researchers is applying this novel methodology to stock market pre-diction. Antweiler and Frank [2] determined correlation between activity in Inter-net message boards and stock volatility. Gilbert and Karahalios [3] used over 20 million posts from the LiveJournal website to create an index of the US national mood, which they call the Anxiety Index. They found that when this index rose sharply, the S&P 500 ended the day marginally lower than is expected. Choud-hury et al. [4] modeled contextual properties of posts in SVMs (support vector machines) and trained it with stock movement. The result shows about 87% accu-racy in predicting the direction of the movement. As one of the most popular social networking websites, Twitter is drawing more and more attention from researchers from different disciplines. There are several streams of research investigating the role of Twitter. One stream of re-search focuses on understanding its usage and community structure [5,6,7,8]. Other researchers are more interested in its prediction power and potential applica-tion in other areas. It has been demonstrated that by tracking tweet numbers re-lated to certain topics, both box-office revenues of movies and political elections could be successfully forecasted [9,10]. Also, Twitter has been used in tracking the spread of epidemic disease [11]. Twitter buzz was also employed in predicting the stock market movement. By analyzing the sentiment of a random sample of tweets, Bollen et al. [12] found that public mood can be used to predict the stock market. Furthermore, stockrelated tweets with a specific hashtag “$” were collected and studied in detail in [13], where it was found that these tweets contain valuable information that is not fully incorporated in current market indicators. In previous work [14], we also pre-sented very preliminary results that the number of emo-

tional tweets, which contain words such as “hope”, “fear” or “worry” correlated with stock market indicators. In this paper, further tests and analysis to predict valuation of tradable assets will be described.

2 Data 2.1 Twitter Data Collection We collected a large set of tweets submitted to Twitter in the period from Novem-ber 15, 2010 to April 20, 2011. In order to get a better picture of the opinion and emotional state of the US investors, we only filter for emotional retweets that come from the United States. In other words, all the data we collected meets the following conditions: Retweets only. Structurally, retweeting is the Twitter-equivalent of email for-warding where users post messages originally posted by others. As an integral part of the Twitter experience, the retweeting phenomenon has been explicitly studied in prior research [7]. It is generally believed that the more a topic is being picked up and retweeted by others, the more it is relevant and widely recognized. Al-though there is no universally agreed-upon syntax for retweeting, “RT @user mes-sage” is the prototypical formulation where the referenced user is the original author and message is the original tweet’s content, therefore we choose “RT @” as our indicator of retweets. Containing the emotion words “hope”, “fear” or “worry”. Emotional state greatly influences human decisions, which obviously include the appropriate choice of an investment strategy [15,16,17,18,19]. When people are pessimistic or uncertain about their future, they will be more cautious to invest and trade. There-fore capturing the collective mind – especially people’s mood – becomes one pos-sible way to predict the future. To be consistent with and further test previous work, we only take into account the retweets that contain the words “hope”, “fear” or “worry”, because we had found in earlier work [14] that these words are excellent indicators of emotion-laden tweets. Originating from the US. The goal of this paper is to analyze whether Twitter buzz can be helpful in forecasting selected economic indicators of the US econ-omy. For the purpose of better capturing the opinion and emotional state of the US population, we intentionally limit the targeted tweets to the

Predicting Asset Value Through Twitter Buzz • 15

fsrforum • volume 14 • issue #5

ones originating from within the continental United States without Alaska. Tweets were collected within four 2000-kilometers circles with centers in Pittsburg, Atlanta, Las Vegas and Boise respectively. As Figure 1 shows, these circles cover the contiguous United States and parts of Canada and Mexico. Over the duration of five months, 3,809,437 retweets posted by approximately 961,000 users were collected and each tweet has a unique identifier, time of sub-mission and the textual content. Table 1 summarizes the daily number of retweets related to each emotional word. As we can see, the daily retweet rate of each emo-tion word is highly variable, for example, the hope-retweets range from 6453 to 34805 per day. Even more interestingly, the number of hope-retweets is much higher than the fear or worry ones, almost six times on average, which might sug-gest that people prefer using optimistic words when they express their feelings, even when they are worrying or in fear.

Then we measured collective opinion on each day by counting how many retweets contain these words. As the total number of retweets varies highly from day to day, a normalized number was chosen as a measurement of public opinion on day t. For example, we counted the number of retweets ­containing the word “dollar” and normalized it by the total retweet num-ber on the same day t, this normalized retweet number is listed as “dollar%t ”. Figure 2 below illustrates all 6 public opinion time series. Fig. 2 Public opinion time series

Fig. 1 Geographical origin of Twitter data: A is Pittsburg, B is Atlanta, C is Las Vegas and D is Boise

2.3 Market Data

Table 1 Daily number of emotional retweets Average per day

Min per day

Max per day

















2.2 Generating public opinion time series In this section, we further discuss how to extract posts in regard to economic top-ics from our emotional retweets dataset. As twitter users can share only short tex-tual messages with no more than 140 characters per post, there is always only one topic in one tweet. Inspired by this property, a list of words related to economy was selected as a clue for economic tweets. This list of keywords includes “dollar”, “$”, “gold” “oil”, “job” and “economy”.

16 • Predicting Asset Value Through Twitter Buzz

In this section, we look at different categories of assets including the gold price, crude oil price, currency exchange rates and stock market indicators. For our anal-ysis we have taken the daily price of gold (dollars per ounce), WTI Cushing crude oil price (dollars per barrel), currency exchange rates (USD/CHF), Dow Jones In-dustrial Average (DJIA), NASDAQ and S&P 500 all collected during the same period as the Twitter data. Obviously, all these market time series are non-stationary. To meet the re-quirement of stationarity in time series analysis, data are processed in the follow-ing way. Taking DJIA as an example, the stock movement at a day t is defined as the normalized change in stock close price from the past day, which can be ex-pressed as

An increase in economic topic retweeting seems to indicate an increase in the value of the corresponding asset on the next market day.

Dt = DJAIt-DJAIt-1 (1) DJAIt-1

Table 2 Correlation coefficient between market movement and Twitter buzz 1 day before

where DJAItis the close price of day t. Similarly, we determine the other inde-pendent variables. Using these new relative variables, we not only can tell the change direction of the market which is indicated by the sign of the number, but also measure how much it changed compared to the previous day. Nt = NASDAQt-NASDAQt-1 (2) NASDAQt-1 Ot = Oilt-Oilt-1 Oilt-1

St = S&Pt-S&Pt-1 (3) S&Pt-1

Gt = Goldt-Goldt-1 (4) (5) Goldt-1

Ut = USDt-USDt-1 (6) USDt-1

3 Methods and Results 3.1 Correlation between public opinion and market time series To obtain a first indication whether the Twitter information might help forecast the asset value, we analyzed the correlation between the two time series. Tables 2 to 4 illustrate correlation coefficients between market movement on day t and Twitter buzz of day t-i (i=1,2,3) separately. In Table 2, we observe a relatively strong correlation between stock market re-turn and “dollar%t-1” (r = 0.308**, 0.203 and 0.259*, p-value = 0.004, 0.058 and 0.015). In addition, not only “oil%t-1” but also “economy%t-1” is strongly correlated with oil price changes of day t (r = 0.295** and 0.214*, p-value = 0.006 and 0.046). Even more interestingly, we found that the correlation between “gold%t-1” and Gt is weak, but “gold%t-1” is significantly correlated with Ut (r = 0.213*, p-value = 0.016), indicating a relationship between the gold price and the strength of the US dollar. Furthermore, it is worth noticing that all the correla-tion coefficients mentioned above are positive, which implies that an increase in economic topic retweeting seems to indicate an increase in the value of the corre-sponding asset on the next market day. In contrast, the relationships between market movement and time series “$%” and “job%” are not that significant in this period. Additionally, the Twitter buzz of two or three days before seems to have less influence on the market movement of day t (see Tables 3 and 4).

















































Table 3 Correlation coefficient between market movement and Twitter buzz 2 day before Dt
















































Table 4 Correlation coefficient between market movement and Twitter buzz 3 day before Dt
















































3.2 Granger-causality Analysis In this section we apply Granger causality analysis to the daily time series of public opinion vs. financial market movement. Granger causality is a statistical con-cept of causality that is based on prediction. According to Granger causality, if a signal X “Granger-causes” (or “G-causes”) a signal Y, then past values of X should contain information that helps predict Y above and beyond the information contained in past values of Y alone. Its mathematical formulation is based on lin-ear regression modeling of stochastic processes (Granger 1969). It is noteworthy that in spite of its name, Granger causality is not sufficient to imply true causality. If both X and Y are driven by a common third process with different lags, X might erroneously be believed to “Granger-cause” Y. However, in our project, we are not testing the actual causation but simply whether one variable provides predictive information about the other one or not. Granger causality requires that the time series have to be covariance stationary, so an Augmented Dickey-Fuller test has been done first, in which the null hy-pothesis H0 of non-


Predicting Asset Value Through Twitter Buzz • 17

fsrforum • volume 14 • issue #5

Twitter buzz indeed has

some information that can be used in predicting financial market movement.

stationarity was rejected at the 0.05 confidence level. Again, all Twitter buzz and market movement time series were verified to be stationary.

rency fluctuation, and the underlying lack in confidence in the national economy influence the eagerness of buyers to invest into the “safe haven” gold.

To test whether public opinion time series “Granger-cause” the changes in fi-nancial market valuation, two linear regression models were applied as shown in equations 7 and 8. The first model (M1) uses only n lagged values of market data to predict Yt, while the second model (M2) also includes the lagged value of pub-lic opinion time series, which are denoted by Xt-1, ... , Xt-n. In order to find an appropriate number of lags, we set the lag parameter n equal to 1, 2 and 3 sepa-rately.

Table 5 Statistical significance (p-value) of bivariate Granger causality correlation between Twitter buzz and financial market movement (p-value < 0.05: *, p-value < 0.01: **)


M1 : Yt-α+ΣβiYt-i+εt i=1 n





M2 : Yt-α+ΣβiYt-i+ΣγjXt-j+εt


After establishing the linear regression equations, a statistics f is defined as ƒ=

SSR1-SSR2 n SSR2 m-2n-1










































































































































4 Discussions (9)

where SSR1 and SSR2 are the two sum of squares residuals of equations 7 and 8; m is the number of observations. Theoretically, ƒ ∼ F(n,m-2n-1). Thus, the ques-tion whether X “Granger-causes” Y could be solved by simply checking the p-values. From Table 5 we can easily draw the conclusion that Twitter buzz indeed has some information that can be used in predicting financial market movement. We observe that “dollar%t” has the highest Granger causality relation with stock market return, especially with the DJIA return (p-value < 0.01 when n=1 and remains significant when n=2 and 3). Also, the “oil%t” time series “Granger-causes” the changes in oil price (p-value is always less than 0.05 when lag varies from 1 to 3 days). The other two predictive variables are “gold%t” and “job%t”, which have Granger causality relation with Ut and Gt separately. However, the most interesting aspect is that the “goldt” time series failed in explaining the price change in the gold market, but could help predict the currency exchange rates (USD/CHF). We speculate that cur-

18 • Predicting Asset Value Through Twitter Buzz



In this paper, we investigated the relationship between Twitter buzz and financial market movement. Our results statistically show that public opinion measured from large-scale collection of emotional retweets is correlated to and even predic-tive of the financial market movement. Except “$%t”, all other five public opin-ion time series are identified in a Granger-causal relationship with selected asset valuation movements. The changes in the volume of economic topic retweeting seems to match the value shift occurring in corresponding next market day. However, there are still a number of important factors not acknowledged in our analysis to be studied in future work. First, unlike the prior work of [12] and [13], when we extracted the public opinion from Twitter, we neither constrained our da-ta to those stock-related tweets which have a specific hashtag nor use sentiment analysis tools to measure the public mood from a random sample of tweets. We chose a few keywords to identify the emotional retweets talking about economic activity, then use volume change to track the public opinion. This method is sim-ple and useful. It however does not linguistically analyze the content of tweets, which might offer additional valuable information. Advanced

sentiment analysis could be employed in future work to improve our results. Second, the analyzing methods we used in this paper, both the correlation and Granger causality analysis, are based on the assumption that the relation between variables is linear, which is hardly satisfied for financial market movement. More advanced tools that can bet-ter characterize the non-linear relationship between variables, such as Neural Networks and Support Vector Machines, should also be explored in future work.

Predicting Asset Value Through Twitter Buzz â&#x20AC;˘ 19

omdat mensen tellen.

dat telt.

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Omdat mensen tellen.

fsrforum • volume 14 • issue #5

Investment case for commodities? Myths and reality Geetesh Bhardwaj, Ph. D., Vanguard Research (march 2010)

Basics of commodity investment Determining the futures price How can long-only investors consistently earn a risk premium in the market of commodity futures? The only way this is likely to happen is if the futures price, on average, is set below the expected spot price that obtains at maturity. We would expect this to occur if there are sellers of commodity futures in the market that are willing to systematically accept a lower-than- expected price for the underlying commodity, in exchange for the futures buyers’ assurance of a certain price at maturity. These sellers are willing to pay a premium to insure against the price risk. This premium can be thought of as equaling the difference between the futures price at which they sell in the futures market, and the future spot price they would otherwise expect to be paid. Much academic work has been done on this concept since the 1930s, when both Keynes (1930) and Hicks (1939) developed the theory of “normal backwardation,” which holds that futures prices are set below expected future spot prices. The “normal backwardation” theory implicitly assumes that the number of producers requiring hedging outweighs the number of consumers requiring similar hedging in the market. Confusion about terminology. Backwardation and another term, contango, have often been used to characterize the current state of the futures market. Yet, use of these terms has resulted in some confusion. Contango commonly refers to a market in which futures prices are higher than the current spot price—that is, the term structure of the futures curve is

22 • Investment case for commodities? Myths and reality

“upward sloping.” In backwardation, futures prices are lower than the current spot, and the term structure of the futures curve is “downward sloping.” Further, given the preceding definitions of contango and backwardation as relative to the current spot price, the natural state of virtually all (historically, this has actually occurred close to 70% of the time) commodity futures markets is reasonably expected to be in contango. This is implied by the existence of a “cost of carry,” according to which those holding a physical commodity must pay for storage and other expenses, coupled with a simple arbitrage.

Historical data and construction of commodities return series Unfortunately, a long historical data series on the performance of commodity futures as an asset class is not available. Yet, we believe that to fully understand an asset class’s fundamental properties, longer-term historical data are necessary. Therefore we have constructed a commodities return series extending back in history to August 31 1959, as can be seen in Figure 1. Our commodities return series is an equally weighted average of these 30 commodities; the series is well-diversified and represents the broad commodity market. Given the return series’ diversified nature, no single commodity or sector can drive the results. To derive the total returns that would result from holding a fully collateralized commodity futures position (we ruled out use of leveraging), we incorporated the 3-month U.S. Treasury bill return into the price return.

The theory of “normal backwardation”: futures prices are set below expected future spot prices.

Figure 1. Commodity futures and coverage data for our commodities return series Name

Contracts start date


Cumulative annualized excess returns (inception through April 30, 2009 )



6 /1/1987



Industrial metals


– 0.02


– 6.1%


– 0.18



– 0.4%



8 /16 /1972




Figure 2. Cumulative returns of long crude oil futures versus long crude oil (log scale): April 30, 1983, through April 30, 2009



Industrial metals






– 5.4%

– 0.89



Industrial materials



Crude oil

3 / 30 /1983



1.78 1.08

Feeder cattle

11/ 30 /1971

Animal products



12/ 31/1974

Precious metals



Heating oil





Lean hogs

2/28 /1966

Animal products



Live cattle

11/ 30 /1964

Animal products




10 /1/1969

Industrial materials


– 0.81


– 0.08

Natural gas




4/23 /1979

Industrial metals



Orange juice Palladium

(net of inflation) of commodities and equities for August 31, 1959, through April 30, 2009.




– 6.3%

– 0.58



– 0.4%


1/ 3 /1977

Precious metals




3 /4/1968

Precious metals




8 /21/1987




Rough rice

8 /20 /1986



– 0.89


6 /12/1963

Precious metals



Soybean meal





Soybean oil















Unleaded gasoline 12/ 3 /1984







– 4.4%

– 0.52


1/ 3 /1977

Industrial metals

– 0.5%


Notes: The second column provides the date when price quotes were first available for various commodities. The fourth column reports cumulative annualized excess returns (over the 3-month Treasury bill return). The last column reports t-statistics for testing the statistical significance of the ­average excess return (the five commodities found to have significant ­excess returns are denoted by an asterisk).

Identifying historical subperiods for the commodities return series To isolate historical episodes for commodity returns, we divided the 51-year period covered by our commodities return series into five subperiods, to capture the different cycles experienced by the commodity futures markets. Figure 3 plots these subperiods and the corresponding annual returns for investors. You can see that in the periods January 31, 1972, through December 31, 1973 and January 31, 2004, through June 30, 2008 and July 31, 2008, through April 30, 2009 the return of the commodities is largely different from the return on equity. Figure 3. Cumulative real returns of historical commodity futures and equities (inflation-adjusted): August 31, 1959, through April 30, 2009

Bursting the commodities bubbles? Some investors hold that commodities’ high historical returns can be attributed primarily to two commodity bubbles, and that, outside of those periods, returns are unattractive. This section’s discussion reveals that this argument is false, based on an analysis of the historical record. For the period August 31, 1959, through April 30, 2009, commodity futures (i.e., our commodities return series) have produced an average annual return of 9.8%, which is comparable to the 9.0% average annual return for U.S. equities for the same period. Figure2 plots the cumulative real returns

Note: Equity returns for this and subsequent figures in this paper are based on the following equity series: pre-1971: Standard & Poor’s 500 Index; 1971 through April 22, 2005, Dow Jones Wilshire 5000 Index; April 23, 2005, through April 30, 2009, MSCI US Broad Market Index.

The ’bubble’ of the early 1970s As stated, it has been argued that two of the five subperiods —1972–1973 and 2004–2008 — are commodity bubbles.


Investment case for commodities? Myths and reality • 23

fsrforum • volume 14 • issue #5

Figure 4. High historical real returns for commodities: A result of two commodity bubbles? (August 31, 1959, through April 30, 2009)

The first period, January 31, 1972, through December 31, 1973, can be associated with two major events in the history of finance. The first event was the fall of the Bretton Woods monetary the equally weighted commodities return series in 1972–1973. The other major historical event of 1972–1973 was the first oil shock: In October 1973, members of the Organization of Arab Petroleum Exporting Countries (OAPEC, consisting of the Arab members of OPEC plus Egypt and Syria) proclaimed an oil embargo. Again, as in the case of gold, no energy futures were traded in the 1970s; as indicated in Figure 1, crude oil contracts were not available until 1983. Thus, to claim that the high prices of gold and energy were responsible for commodity futures returns in the period is incorrect.

19.5%. Figure 5 reports selected commodity-level average annual returns for this period. Clearly, the returns were dominated by the energy sector; however, copper, oats, soybean oil, silver, and platinum also had impressive returns. In contrast to the 1970s, commodity futures returns underwent a dramatic correction during the period July 2008 through April 2009, which strongly suggests that there was a significant bubble component to the 2004–2008 returns. Nevertheless, if we ignore the period of the first “bubble” (January 31, 1972–December 31, 1973), commodity futures produced a solid average annual return of 8.7% for the period August 31, 1959 –December 31, 2003. If we further ignore both “bubbles” from the sample (while retaining the recent 2008 –2009 correction), commodity futures have produced an average annual return of 7.1% for the period August 31, 1959, through April 30, 2009 (taking out 1972–1973 and January 31, 2004, through June 30, 2008). These data support the view that high historical returns for commodities cannot just be attributed primarily to two commodity bubbles, and that, outside of those periods, long-only investors still have earned significant positive returns. Figure 4. High historical real returns for commodities: A result of two commodity bubbles? (August 31, 1959, through April 30, 2009) Commodity

Average annual returns (January 31, 1972, through December 31, 1973)


To better understand the period, we looked at the average annual returns of individual commodities for the two years (see Figure 4). As the figure shows, no single commodity caused the high returns. Wheat garnered the best return, but other grains also experienced unusually high results. Gorton, Hayashi, and Rouwenhorst (2008) postulated that these high returns were generated by broad inventory shortages in a number of commodities, which led to higher uncertainty in the market, greater risk for long investors to insure, and temporarily higher risk premiums for long investors. Thus, according to this theory, these exceptional returns were the result of fundamental factors, and were not speculative in nature. Supporting the view that this isolated period of rocketing returns was not a “bubble” is that there was no corresponding correction, no subsequent crash in returns to support the notion of a “bubble” to begin with.

The bubble of the early 2000s Over the second historical period (January 31, 2004, through June 30, 2008), commodities experienced annual returns of

24 • Investment case for commodities? Myths and reality




Live cattle


Lean hogs


Feeder cattle






Soybean oil Wheat

82% 113%

Soybean meal










Orange juice








Commodity futures versus equities: Comparing returns and volatility As the preceding analysis suggests, there is little validity to the claim that a few historical periods have determined returns for commodities futures. In fact, investors can point to a long period of substantial returns from commodities futures. Clearly, the early 1970s was a unique time for

c­ ommodities. Although we have refuted the notion that 1972 and 1973 represented a bubble, one still has to question whether that kind of return can happen again. If we ignore the high returns of the 1970s, the period January 31, 1980, through April 30, 2009, provided average annual commodity returns of 6.2%, as opposed to 10.3% for U.S. equities; however, during this period, our analysis shows that commodities had 25% lower volatility than equities (sources: calculations based on Commodity Research Bureau; Datastream, Thomson Reuters). This brings us to a more in-depth look at returns and volatility for commodity futures versus equities. As reported in the previous section, average annual historical returns for commodity futures (9.8%) and U.S. equities (9.0%) are comparable. To compare the performance of the two asset classes more closely, Figure 6 plots their historical 12-month returns from May through April. The figure reveals that both commodities and equities have had multiple years of returns in the 20% – 40% range. These multiyear runs contradict the view that one has to endure zero returns for decades before experiencing any positive returns in commodities. This graph is also important to address the myth that “commodities have returns only once in 20 years, and then only poor returns for the next 20 years. Figure 6. Twelve-month returns for commodity futures versus equities: May 31, 1960, through April 30, 2009

During negative shocks for equities This section first addresses the potential diversification benefits of commodities during negative shocks for equities, when the diversification benefits really matter. Figure 9 reports the average monthly returns for domestic equities, commodities, and international equities for months when these securities experienced extreme negative and /or positive shocks. The analysis covers two time periods: the full historical sample from August 31, 1959, through April 30, 2009 (the figure doesn’t include international equity returns for this period), and the final decade starting January 31, 1999. For the longer historical period, while the average monthly return for the worst 12 domestic-equity months was –12.6%, commodities futures declined at a much smaller average monthly rate of –1.1%. The relative picture is not as clear over the final decade: The worst 12-month average monthly return for domestic equities was –9.6% (international equities, –9.7%), while for the same 12 months, commodities lost an average of –2.7% per month. Figure 9. Average monthly returns for domestic equities, commodity futures, and international equities during their 12-worst and 12-best months (selected periods) Period

Worst 12 equity months

Best 12 equity months

Domestic Commodity Inter­ equity futures national returns returns equity returns

Domestic Commodity Inter­ equity futures national returns returns equity returns

August 31, 1959– April 30, 2009





January 31, 1999– April 30, 2009







Worst 12 commodity futures months Best 12 commodity futures months Period

Figure 7 plots a histogram of monthly returns for commodities and equities, and Figure 8 shows summary statistics of the monthly data. Figure 7. Twelve-month returns for commodity futures versus equities: May 31, 1960, through April 30, 2009

Potential diversification benefits of commodity futures Advocates of commodity futures have argued that commodities provide diversification because of their low correlation with equities and bonds, while critics point out that the historical diversification argument is no longer valid, since the correlations have increased significantly; further, they claim there are no diversification benefits during deep recessions. Figure 8. Comparing commodity futures andequity monthly returns: Summary statistics (August 1959 through April 2009) Commodity futures


Monthly average returns



Standard deviation




– 0.66


Domestic Commodity Inter­ equity futures national returns returns equity returns

Domestic Commodity Inter­ equity futures national returns returns equity returns

August 31, 1959– April 30, 2009





January 31, 1999– April 30, 2009







Notes: International equities are represented by the MSCI EAFE + EM Index. As this index does not go back to the 1950s, the international equity returns are reported only for the more recent sample.

Correlation of U.S. equities with commodities versus international stocks The results of our analysis— in Figure 10 —show that the historical correlation of U.S. equity and commodity futures returns has been very low; for the period August 31, 1959, through April 30, 2009, the correlation was only 0.13. However, the correlation has risen steadily over time. For January 31, 2001, through April 30, 2009, the correlation was much higher, at 0.37. Many investors confidently include exposure to international equities for diversification purposes; however, the correlation of international equity returns with U.S. equities has also increased over time. From January 31, 2001, through April 30, 2009, the correlation of international equity returns with U.S. equities was 0.90, far higher than the 0.37 for commodity futures. The purpose of this analysis is not to suggest that investors should abandon international stocks as potential diversifiers in favor of commodities; after all, commodities have been experiencing increasing correlation with equities over time.

Commodity futures can lessen volatility of all-equity and stock/bond portfolios Another way to characterize the diversification benefits of commodity futures is to analyze the impact of including commodities futures on the historical volatility of a diversified


Investment case for commodities? Myths and reality • 25

fsrforum • volume 14 • issue #5

Commodities have been experiencing increasing correlation with equities over time.

portfolio. Figure 11 reports the average annualized change in portfolio volatility as commodity futures are added to the asset mix. We considered two hypothetical base portfolios, one all equities and the other 60% equities/40% bonds (in the second example, as we added commodities to the portfolio, we assumed the mix of stocks and bonds in the rest of the portfolio was left constant, at 60%/40%). Figure 11 is based on data from January 31, 1974, through April 30, 2009 (however, results are similar for the full historical period beginning in 1959). For this exercise, we excluded the market conditions of the early 1970s to show that, as with returns, diversification benefits are not dependent on a few historical periods. In our hypothetical example, adding commodities to the portfolio clearly had the potential to reduce the portfolio’s volatility. Even for the 60% stocks/40% bonds portfolio, which has much lower volatility than the all-equity portfolio, significant diversification gains could have resulted from adding commodities. For example, adding 10% –20% commodities would potentially have reduced volatility in the 60%/40% portfolio by about 1 percentage point and almost twice that for the all-equity portfolio (see Figure 11). Figure 10. Comparing correlation of domestic equities with commodities, international equities (selected periods)

Corporate bond returns for this and subsequent figures in this paper are based on the following series: before 1968, Standard & Poor’s High Grade Corporate Index; 1969–1972, Citigroup High Grade Index; and January 1, 1973, through April 30, 2009, Barclays Capital U.S. Credit Bond Index.

Figure 12reports the hypothetical impact of a 20% exposure to commodities on portfolio returns and volatility. In this hypothetical example, the effect on performance of adding commodities to the portfolio was marginal; average returns improved by roughly 50 basis points. However, the potential impact on volatility was highly significant. Adding commodities to the all-equity portfolio increased the Sharpe ratio from 0.29 to 0.35. Another interesting comparison is 100% equity exposure versus 80% exposure to the 60% equity/40% bond portfolio and 20% commodity exposure. The returns of the two portfolios are comparable (equity portfolio returns are potentially higher by 11 basis points), while the diversified portfolio potentially has 41% less volatility. Figure 12. Effects on portfolio returns and Sharpe ratios of adding commodities to portfolio: August 31, 1959, through April 30, 2009 60% equities/ 100% equities Total return Standard deviation Sharpe ratio

80% equities/

80% (60% equities 40% bonds)

40% bonds 20% commodities 20% commodities













To further understand the fundamental source of diversification benefits of commodity futures, we compared the equity and commodity futures returns during different stages of the business cycle.

Adding commodity futures can benefit during different stages of business cycle

Figure 11. Average annualized change in portfolio volatility as a result of adding commodities: January 31, 1974, through April 30, 2009

It is also instructive to look at the relationship of commodity futures’ returns and equities over a typical business cycle. As identified by the National Bureau of Economic Research (NBER), the business cycle can be divided into four stages: late expansion, early recession, late recession, and early expansion. Figure 13 illustrates these patterns using the historical record. Figure 13. Potential diversification benefits of integrating commodities with equities during different stages of business cycle

26 • Investment case for commodities? Myths and reality

As shown in Figure 13, during late expansion and before the onset of recession, the equity market has tended to experience low returns, which continue during the early part of the recession. Further, because equities are a leading indicator of the business cycle, equity markets tend to recover before a recession is over; also, during the late-recession period, equities have typically experienced higher returns. Commodities futures, however, have behaved very differently from equities over the course of the business cycle. Commodity futures returns are plausibly linked to the state of inventories in the economy, and their returns can therefore be expected to be a lagging indicator of recession. Thus, during the late-expansion period (anticipating a recession), while equity markets tend to experience relatively poor returns, low inventory levels would imply that commodity futures are experiencing higher-than-normal returns. Further, because of inertia in inventories, it is not until a recession sets in that commodities experience low returns. As stated, coming out of a recession, equities have tended to revive before the recession ends, while commodities futures returns have tended to improve only after the early expansion period has begun.

To define early and late recession, we divided each of the eight recessions from 1959 through 2009 into two equal halves. For example, for the 2001 recession that lasted from April to November, we defined the period of April 2001 through July 2001 as early recession, and August 2001 through November 2001 as late recession. For the current recession, we defined the first 12 months (January 2008 through December 2008) as early recession, and January 2009 through April 2009 as late recession. For the expansionary period, the 12 months before a recession were defined as late expansion, and the 12 months after a recession as early expansion. Figure 14 reports equity and commodity futures returns during the different stages of the business cycle: We analyzed the eight recessions since 1959, and we also segregated the last three recessions (all three occurring after 1990 ). During the late-recession period, the average annual return for equities was 32.39%, while commodities declined –1.14%. During the late-expansion period, although equities had started their decline and experienced average annual returns

of –1.72%, commodity futures markets were actually booming, with average annual returns of 22.67%. These results were robust, and the pattern persisted for the shorter period of three recessions since 1990, including the current recession. In the current recession, equities peaked in October 2007, before the start of the recession, and commodities peaked in June 2008, six months after the economy was in recession. For the period November 2007 to June 2008, the average monthly return for equities was –1.98%, while that for commodities was 3.11%. Figure 14. Business cycle and diversification benefits of commodities Eight recessions since 1959

Last three recessions, since 1990






Late expansion




– 5.40%


Commodities 10.74%

Early recession



– 4.48% –27.88%



Late recession







Early expansion




– 0.09%



The results of this section suggest that commodities can have diversification benefits because commodities behave fundamentally differently than equities at different stages of the business cycle. Note, however, that this analysis can only become clear in hindsight. Predicting periods of outperformance or underperformance for any asset class can be extremely difficult, if not impossible.

Conclusion This paper has addressed the attractiveness of a broadly diversified portfolio of commodity futures as an asset class. A historical analysis of commodities futures’ return patterns suggests there is little merit in the argument that relatively high long-term average commodities futures returns are solely a result of a few brief “abnormal” periods of high returns. Commodities futures have experienced long periods of significant returns for investors, as well as sequences of booms and busts similar to equities.Future correlations between equities and commodity futures could remain relatively low, offering potential diversification benefits to investors who are willing to accept the unique risks and opportunities of this asset class.

Investment case for commodities? Myths and reality • 27

w w w.g A A A n . n u

A n d e r h A l f u u r v o o r d e e i n d b e s p r e k i n g vA n d e j A A r r e k e n i n g vA n e e n g r o o t r e c l A m e b u r e A u

Š 2011 KPMG N.V., alle rechten voorbehouden.

Tjebbel Maris


Studie: Bachelor Economie en master Accounting

Studie: Master International Business aan de

en Control aan de

Universiteit Maastricht

VU in Amsterdam ©2012 KPMG N.V., alle rechten voorbehouden.

Margit van Opstal



Junior adviseur

Trainee KPMG Audit

KPMG Advisory

sinds 2010

sinds 2011

Lees verder op

Lees verder op

TJEBBEL In de laatste fase van je studie begint de zoektocht naar een werkgever die bij je past. Tjebbel en Margit vertellen over de kennismaking en waarom hun keuze op KPMG is gevallen. De cultuur, uitdaging in het werk en ontwikkelingsmogelijkheden waren doorslaggevend. En ze zijn nog steeds erg blij met hun keuze! Scan de QR-codes voor de volledige interviews.

Kennismaking Tjebbel: “Ik heb getwijfeld over de richting die ik na mijn studie op zou gaan. Binnen accountancy leer je veel en de carrièremogelijkheden zijn groot. Vanuit mijn bestuursfunctie bij de Financiële Studievereniging Amsterdam kwam ik met veel werkgevers in contact, waaronder KPMG.” Margit: “Ik wist dat ik wilde werken in de consultancy, maar had KPMG niet direct overwogen. Naast de auditpraktijk is er ook een grote en ambitieuze adviespraktijk. Hiermee heb ik kennisgemaakt tijdens het wervingsevenement Fast Forward Friday.”

Collegialiteit Tjebbel: “Onderlinge collegialiteit en de snelle doorgroeimogelijkheden zijn doorslaggevend geweest in mijn keuze voor KPMG. Daarbij kan ik mijn werk goed combineren met mijn activiteiten voor de lokale gemeentepolitiek.”

Margit: “De ondernemende cultuur en de mensen hebben mij getriggerd. Samen gaan we voor het beste resultaat.”

Snel leren Tjebbel: “Als trainee bij KPMG zie en doe je veel. Je krijgt een ‘kijkje in de keuken’ van veel organisaties en krijgt inzicht in hoe bepaalde financiële transacties gemonitord en bestuurd worden.” Margit: “Je kunt zelf richting geven aan je loopbaan. Door de diversiteit aan opdrachten en teams is je leercurve steil en krijg je al snel meer verantwoordelijkheid.”

Internationale teams Tjebbel: “Ik werk in teams met jonge en met meer ervaren collega’s. Het zijn allemaal ambitieuze professionals en dat vind ik prettig samenwerken.” Margit: “Omdat je onderdeel bent van het grote internationale netwerk van KPMG, werk je ook samen met collega’s uit andere units en landen. Het zijn allemaal gedreven mensen met passie voor het vak.”

Ontwikkeling Tjebbel: “Je performance manager is nauw betrokken bij je ontwikkelingsdoelen en je carrièrepad. Naast de postdoctorale opleiding tot registeraccountant

zijn er talloze opleidingsmogelijkheden.” Margit: “Je kunt rekenen op goede coaching en begeleiding. Jouw groei staat centraal. Naast ‘training on the job’ volg je opleidingen en cursussen die aansluiten op je ontwikkelbehoeften.”

Toekomst Tjebbel: “Ik wil zo snel mogelijk doorgroeien. Als je iets wilt en je blijft jezelf continu ontwikkelen, is bijna alles mogelijk.” Margit: “Ik wil het maximale uit mezelf blijven halen en meer van de wereld zien. Op termijn hoop ik aan een project in het buitenland te kunnen werken.”

fsrforum • volume 14 • issue #5

Interview with Cees Smit Founder/CEO Today's groep

By: Jeroen van Oerle and Anne van Driesum

This interview is about investments and strategies. How would you define the concept investments and is each investment based on a certain strategy? In my opinion every investment should be based on a strategy. There should be an idea behind every investment, because spending your money on a product without having a specific strategy in mind is merely a gamble than an investment. Going to a casino and gambling on high or low outcomes is not an investment, but spending that same amount on, for instance, an index product for the long term can be called an investment. So the amount that you spend and the type of product on which you spend it is irrelevant. It is about having a long term idea about how you are going to spend your money. Retaining your cash deposits for the long term can also be called an investment. A strategy then does not only consist of an entry, but it also consists of an exit. If it appears that your idea doesn’t work anymore then you should decide to get out. That is also why this exit could be both positive and negative.

What is your main investment strategy?

In 1986 Cees Smit started as a stockbroker at ABN AMRO Bank after which he continued his career in Options and Futures at Bank Mees & Hope , which later became MeesPierson. Between 1996 and 2002 he had worked on structured Product for several banks: Wesselius, Rabo Securities and Dexia. After this period he decided to start day-trading at home in which he became very successful. So his acquaintances started to ask him to trade for them. This success has led him to start up his own company. In 2003 he founded Today’s Groep, an asset ­management and brokerage firm that nowadays has 33 employees. Mr. Smit is one of the first asset managers with a transparent portfolio. Furthermore, he was able to predict the CDO crisis and he made money out of the financial crisis while others went bankrupt. 30 • Interview

I am known to be a big bear, but I am also a bear who dares to take a long position. That means I am not purely negative about the market. I would describe my strategy as an active asset manager who specifically applies a core-satellite-strategy. This strategy consists of a fixed part, the core, and a flexible part, the satellite. My core strategy is that of the Fallen Angels. With the Fallen Angels strategy you invest in former market leaders, such as Nokia. Everyone nowadays expects Nokia to go out of business. The fund has declined 97 percent since its peak. It could go further down to zero, but I expect such brands to make a recovery. For instance Apple used to be a market leader before Microsoft took over. So Apple almost went down, but now they are fully back on track. Besides the investments in Fallen Angels I also invest in a couple of good investment ideas which together form the core strategy. As a satellite above the core strategy I alternate upward and downward investments.

How do you determine your strategy? To determine my strategy I use both technical and fundamental analysis. I used to also use quantitative analysis, but this analysis proved not to work. I don’t believe that markets are efficient. I rather believe that like people in general, markets move in trends. At first, a certain stock is popular among

The investors who dare to go against the mass, are the brightest ones.

traders who know the product very well and later on its popularity starts to gain until the stock is being traded on a regular basis. The best time to get in is when you notice that the stock starts to gain popularity within the mass, you are already too late when the mass is investing in the stock. Good examples of these trend movements and moments to get out are the investments in World Online and KPN-UMTS. It proves that the mass is not rich and in my opinion the mass is to a certain extend foolish. The investors who dare to go against the mass, are the brightest ones.

Which strategy is according to you not successful in practice? Always investing in the same product does not work. You should always adapt your strategy to the conditions of the market. For example, the last years it has been profitable to invest in dividend paying shares. On the other hand, in the period between 1999 and 2003 it was profitable to invest in IT shares who don’t pay dividend but who had a large growth potential. However, I do believe that you should not always perform a long only strategy. But within that strategy you should also rotate between investments in different types of sectors. So, in other words, your strategy should be flexible, because markets have proven to have both upward and downward movements. The only alternative to a flexible strategy is to invest in an Index tracker, but only for a long term investment of at least five years. Since the funds in an Index change regularly, you automatically have variation in your investment. Yet I do believe that a strategy based on a simple technical analysis would already generate higher profits, also in case of a Japan scenario.

Do you notice a certain trend concerning strategies or products among your clients? At Today’s Groep we have two types of clients: the asset management clients and the brokerage clients. Of those two types the brokers are more sensitive to trends. They tend to follow the trends and invest in products that are popular among the mass. As I have mentioned before the best time to step out is when a product is very popular among the mass. We try to teach those clients by providing them with, for instance, trading courses when to enter or exit a certain strategy or product. Looking at the market as a whole you can see that investors start to become more risk averse. More investments are being made in bonds than in stocks and the ratings related to those bonds are starting to become more important. Investors distinguish between bonds from for instance Spain, France or Germany.

Ratings could play an important role in making a difference between bonds from different countries or companies. Do you consider ratings to be important in making investment decisions? The idea behind these ratings is good, but the problem with ratings is that they contain information from the past instead of information about the current or future situation. In other words the ratings are being adapted too late. And since the ratings are being followed by many investors, a sudden warning leads to the situation of a self fulfilling prophecy. After a rating agency has downgraded a certain country or fund, investors start to sell these ‘more risky’ assets. Sometimes it can be difficult to predict how the market is going to develop in the future, but in other cases it is very clear. I could for instance predict the Collateralized Debt Obligation (CDO) crisis, which the rating agencies failed to do. If you would have looked at the statistics back then it was very easy to see that for example about 5% of the people in America could not

» Interview • 31

fsrforum • volume 14 • issue #5

pay their houses anymore, but the bonds that were related to this housing or mortgage market kept their triple A status. The reason for this is that these bonds had a certain guarantee, because they were hedged by CDOs. But if you took a closer look, the market of these CDOs was larger than the original mortgage market, because products were built on other products. At the end a decline in the prices of a benchmark of houses had a huge impact on the market. This is something the rating agencies could have seen coming. However, there are analysts who I do follow. These analysts do not only look at numbers or balance sheets, but they actually visit companies and thus deliver a more accurate report. The problem with only looking at numbers is that the pricing of assets, for instance real estate, can be very subjective when based on solely a balance sheet.

It is often said that the aggressive investment strategy of speculators has aggravated the financial crisis leading to socially undesirable outcomes on several markets. What is your opinion on this? I completely disagree, because speculators just like investors play an important role in the economic environment. A speculator is the counterpart of the mass and has a different opinion from the rest. You can’t blame speculators of aggravating the financial crisis, because it is the society as a whole who have done that. People started to borrow and spend more money until the risk of not being able to pay back those loans became too high. Speculators have had no influence at all on this process. Speculators seek for opportunities to make money by going against the market. Greece for example joined the Euro unfairly. It was very clear that the Greeks have used swaps to improve their balance sheet, but no one had checked sufficiently if Greece was credit worthy. So Greece entered the Euro zone on a debt level that was too high and that is when speculators started to speculate against Greek bonds. These speculators are again not to blame and just found an opportunity. However I do think that the level of speculations should be restricted to some extend to prevent situations of self fulfilling prophecies. The ECB could for instance implement bandwidths, such as a maximum Greek interest rate of 10 % and a minimum German interest rate of 1%. Every speculator who subsequently tries to increase the interest rate above the margins set should be punished. So I don’t think speculators are to blame, because you can easily solve these issues with regulations. Though situations in which speculations are 100 percent of the market or when the market becomes larger than the product itself are dangerous.

Alternative products such as options, turbo’s and trackers are often seen as high-risk products. Are those products becoming less popular since people are becoming more risk averse? You can still use those products to hedge your risk. I also use those products for my own portfolio. The nice thing about an option, turbo or a speeder is that you can make large profits because of the leverage but you can never lose more than your original investment. A nice example is the investment I made in a put options on the AEX when the AEX stood around 600 points. I bought the option with an exercise price of 300 for a dime. The put option had a maturity of 5 years and within those 5 years the stock market (AEX Index) went from 600 to 180. This means that the intrinsic value of the option for which I paid a dime was already 120 Euros.

32 • Interview

Speculators just like investors play an important role in the economic environment.

Additionally I also don’t agree with these alternative products being seen as very risky. Just because some investors don’t know how to use these products in a responsible manner, does not mean that those products are too risky. Vestia for example has managed its portfolio very irresponsible. They had a housing portfolio of approximately one billion which they hedged against 10 billion to protect themselves against the risk of increasing interest rates. However since the difference is 9 billion this is not hedging but it is simply speculation. It would have been hedging when the amount that was being hedged against would have been proportional to the size of the portfolio. Moreover, these housing associations should not be 100 percent hedged. Their core business is not making money on the interest rate market, but the renting of houses. It is a shame and very unnecessary that because of this misbehavior of a few investors the trust in the financial markets is being undermined.

able to earn a lot because they are going to make a great recovery. Furthermore it could be wise to stay out of some sectors. For example, you should not invest in real estate at the moment because of the expected decline in prices.

Do you think that every client can perform its own strategy or do you think that this should be restricted to a certain level of risk or capital that the client owns? Almost every investment fund has implemented certain margins. An investment fund calculates these margins for clients who want to take on new risk. When this risk exceeds the calculated margin, a divestment will take place or the client can’t make the investment. Besides these margin calculations I am also a proponent of a so-called investment license that focuses on the experience and knowledge an investor has. By doing so it determines if the investor is allowed to take on a certain risk. Such licenses avoid situations such as in ‘98 when many investors bought call and put options at the same time. This was thought of as a risk averse strategy, but firstly the market went up so they lost a lot on their calls and secondly the market went down and they lost a lot on their puts. These investors made investments without having the right knowledge about how much risk they were taking. The government and its supervisors such as the AFM have already improved regulation in this area, but still improvements can be made. For instance wealthy investors are less protected than other investors. In the Netherlands you are, regardless of your knowledge or experience, free to invest in any product when your investment is above e100.000. In my opinion everyone deserves and needs the same protection.

What has been the best investment strategy the past 10 years and what is it going to be the next 10 years? You would have earned the most in downward markets with shorts. For example in 2008 my portfolio stood at +235 percent. If you would have bought put options at the beginning of that year when the volatility was still low, you would have been able to earn a hundred times your investment. For the future I still believe that the financial crisis is going to get worse. Especially the real estate market is still overpriced. I expect this market to decrease by half, which will cause severe troubles at several banks. It is also going to get worse in the rest of Europe. Sometimes you need to support the market when things tend to go wrong. For example in the banking industry, since the bankruptcy of one bank can easily cause other banks to go bankrupt as well. But in case of the current situation I think we should have let the market collapse a long time ago. Countries such as Greece, but also investors in general have become spoiled by institutions such as the ECB. For now the right strategy would not be to go short but to make a portfolio of fallen angels, such as SNS Reaal. Some of those funds will go bankrupt and on others you probably will be

Interview • 33


areerCoffee? in retailKaffee? Kรกva? Ready for an international career in retail 12-03-12 17:37



About Ahold Europe Ahold represents more than 200,000 colleagues and 2,900 stores in the world. In 2011 we had a net turnover of e 30.3 billion worldwide. We are the largest retailer in The Netherlands and are one of the largest on the east coast of the United States. Our goal is to be the worldâ&#x20AC;&#x2122;s best food provider while maintaining a solid focus on our customers. We are represented in several countries throughout Europe under the name Ahold Europe. In The Netherlands we hold the retail organizations Albert Heijn, Etos , Gall & Gall, and we provide the Albert online delivery service. In The Czech Republic and Slovakia we hold the Albert supermarket chain and the Hypernova superstore format. Our retail organization ICA is one of the most important in Northern Europe with stores in Sweden, Norway and the Baltic States. The largest supermarket chain in Portugal is our Pingo Doce and in 2011 we opened the first Albert Heijn stores in Belgium. We also enter the German market in 2012 with our AH-to-go formula.

International Graduate Traineeship Would you like to have an impact on the daily lives of our customers and employees and become one of Ahold Europe's future leaders? You are bursting with talent and ambition? Innovation is second nature to you and you will do whatever you can to achieve your personal ambitions? You can prove yourself at our company. We will assist in making sure you gather the knowledge and skills required to achieve your objectives. In our International Graduate Traineeship you will develop important skills, gain valuable experience and receive beneficial coaching that will contribute towards your accelerated professional development and your future leadership roles. It offers the opportunity to fully come to know our organization due to the different roles and disciplines you will experience during your traineeship. You can choose from four different disciplines during your two year traineeship at Ahold Europe: Commerce, Finance, HR or Operations. Are you interested in another discipline? You are also welcome to apply. Please elaborate on that in your motivation letter. You can find more information about other disciplines within this organization on our website. As a trainee you will be given responsibility for your own job as from the very first day. This will be in line with your skills and ambition and throughout this period you will receive intensive supervision. In the second year you will be given the opportunity to learn about our store operations as you will become one of our Assistant Store Managers. The idea is that you start working in the discipline of your choice after your two year traineeship. This will ensure that you can continue developing in this discipline in practical terms and with your training. We believe in working with people from different backgrounds and nationalities and as a retailer with international ambitions, we also give you the opportunity to work on international assignments. The International Graduate Traineeship is open to talented and driven people from all University disciplines. The most important aspects are your personality, your passion for retail and your motivation for the discipline in which you are interested.

What we offer Our business revolves around people: the millions of customers who put their confidence in us for their daily shopping, our stockholders and our employees. People are the key to our success. Therefore they take a central position within our vision. At Ahold Europe we look after our employees. In addition to a good salary, we offer excellent employment conditions such as profit-sharing, many vacation days, a good work-life balance, a good pension plan, salary and life-course savings plans, an attractive bonus plan and a discount on your shopping! We even have a Fit & Fun program that helps to maintain a healthy lifestyle. We also implement new working formats whenever possible and, therefore, you can perform your tasks location-independently. We actively stimulate your development with innumerable opportunities to expand your professional knowledge by offering programs at every level, for every discipline. We also offer many opportunities for personal development, such as coaching, courses, tests and seminars.

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fsrforum • volume 14 • issue #5

IAS 19R; een plank in een boekhoudvloer

K(r)anttekening | Drs. Joost Groeneveld RA RV1

Vanouds is de accountant degene die derden min of meer zal verzekeren (“assurance”) dat uw financiële verantwoordingen in orde zijn, althans dat hij geen aanwijzingen heeft gevonden voor het tegendeel. Hij heeft daarvoor onderzoek gedaan. Niet altijd specifiek naar zulke aanwijzingen, maar toch. De doelstelling van een dergelijke controle zal zijn te kunnen vaststellen dat de jaarrekening van de directie met een redelijke mate van zekerheid een getrouw, duidelijk en stelselmatig beeld geeft. Ja, maar een beeld waarvan? En hoe redelijk is die mate van zekerheid? Hoe luiden de onderliggende conclusies, en waarop hebben zij betrekking? Nog belangrijker: wanneer is er sprake van een getrouw beeld? De normen daarvoor veranderen bijna van dag tot dag. Wat vorig jaar nog getrouw was, hoeft – op grond alleen al daarvan - nu niet meer te voldoen. Zo lees ik letterlijk dat de “Invoering van een nieuwe boekhoudregel over pensioenverplichtingen - bedoeld wordt IAS 19R - het mes (zet) in het eigen vermogen van ondernemingen”. Sterker nog, dat “Nederlandse AEX-fondsen miljarden verliezen door invoering nieuwe pensioenregels voor de jaarrekening” (zie http:// Ja, op papier wel ja.

Drs. Joost G. Groeneveld RA RV is directeur van Wingman Business Valuators B.V. te Breda en voorzitter van de Stichting WBO (register van business valuators). Hij was hoofddocent aan de Economische Faculteit van de Erasmus Universiteit te Rotterdam.

Vanzelfsprekend kunnen normen in het maatschappelijk verkeer niet echt ‘overnight’ veranderen. Je zou zeggen dat dit een min of meer geleidelijk proces is. Ik zie dat proces als volgt voor me: accountants moeten in de gecertificeerde jaarrekeningen steeds vaker afwijken van de specificaties die de wetgever voorschrijft (zie BW2 titel 9, Art.362) omdat het gevraagde inzicht dit vereist, waarna de standaards daaraan worden aangepast. Maar ik heb zulke afwijkingen vorig jaar niet gezien. Worden we dan voor de gek gehouden? In IAS 19R wordt correctie gemaakt voor actuariële mee- en tegenvallers. Hierbij kan worden gedacht aan wisselingen in de rentevoet en een zich wijzigende verwachte levensduur. Op beide fronten is op dit moment de invloed daarvan voor gewone ondernemingen nadelig. En dan gaat het hard. Wat u heeft te maken met die gedaalde rentevoet? Hetzelfde vrees ik als de pensioenfondsen. U mag namelijk niet uitgaan van het werkelijke verwachte rendement van de voorziening, maar u moet daarvoor het percentage rekenen dat geldt voor kredietwaardige obligaties. AAA-staatsobligaties geven op dit moment niet zoveel rente. Dus u moet nogal wat in de voorziening stoppen. Je moet rekenen dat op dit moment de jaarlijkse

36 • IAS 19R; een plank in een boekhoudvloer

rente-aangroei nog maar rond 2% bedraagt. Om dan toch de overeengekomen eindwaarde te bereiken, moet je met een hogere voorziening beginnen. Doordat het balanstotaal is bepaald door de opgetelde boekwaarden van de activa, zal een hogere voorziening dus gaan ten koste van het eigen vermogen. Maakt dat iets uit? Ja, door dit tweesnijdend zwaard daalt boekhoudkundig de solvabiliteit. Dat kan knap vervelend zijn wanneer ergens staat dat het eigen vermogen ten minste bijvoorbeeld 30% van het balanstotaal vormt. Dan kan bedreigend zijn voor de financiering en mogelijk zelfs voor de continuïteit van de onderneming. Zodra je door zo’n boekhoudvloer zakt, krijg je de neiging om nog eens goed naar je activa te kijken. Nog ruimte voor wat herwaardering? Of kan iets nieuws worden geactiveerd? Kan het onderhanden werk worden opgeschroefd? En kun je anders misschien andere voorzieningen laten vrijvallen? Voor het overige verandert er niet veel. De verhoging van de voorziening brengt geen extra geld in het laatje. De betalingsmogelijkheid van het uit te keren pensioen verbetert niet. De te verwachten rentabiliteit zal wèl stijgen. Want deze pensioen-tegenvallers mogen buiten de winst blijven. Bij gelijke winst wordt die gedeeld door een kleiner eigen vermogen. Dus mag volgend jaar wereldwijd een herstel van de rentabiliteit worden verwacht. Hoe zou de effectenbeurs hierop reageren? Met koersdalingen? Dat zou me verbazen. Economie is niet erg afhankelijk van het edele boekhouden. Economie is gebaseerd op verwachte geldstromen en risico. Daarin wordt per onderneming rekening gehouden met pensioenverplichtingen en de risico’s daar omheen. Het boekhouden kan de economische waarde van de onderneming niet beïnvloeden. En dat is maar goed ook. Wel zou het interessant kunnen zijn om nog eens te bedenken waarvan de jaarrekening dat getrouwe beeld geeft. Dat is (naar mijn mening) niet de economische waarde van de onderneming en/of van het daarin geïnvesteerde eigen en vreemd vermogen. Die waarde is zelfs niet uit de jaarrekening af te leiden. Wat is dan wèl getrouw, duidelijk en stelselmatig? De wet (titel 9 BW 2) is daar niet zo duidelijk over. Daarin wordt veronderstelling op veronderstelling gestapeld. Lees Art. 362: "De jaarrekening geeft volgens normen die in het maatschappelijk verkeer als aanvaardbaar worden beschouwd

een zodanig inzicht dat een verantwoord oordeel kan worden gevormd omtrent het vermogen en het resultaat, alsmede voor zover de aard van een jaarrekening dat toelaat, omtrent de solvabiliteit en de liquiditeit van de rechtspersoon....". Al die onderstreepte punten moeten worden ingevuld. Overal zit rek. Alles staat ter discussie. Sinds de introductie van deze wetgeving is het een komen en gaan van normen. Telkens (b)lijkt mede daardoor nodig dat de informatie in de jaarrekening moet veranderen. Een andere oorzaak is natuurlijk ook dat het maatschappelijk verkeer niet meer de maatschappij van toen betreft, en dat we anders met elkaar zijn gaan verkeren.

De economie is niet erg afhankelijk van het edele boekhouden.

Zelfs iemand die een formule gebruikt als ‘factor * winst’ weet dat de waarde niet in de balans wordt gevonden. En met enig geluk weet hij ook dat de getoonde winst niet de winst is die hij moet vermenigvuldigen. Boekwaarde en resultaat zijn naar de aard van de jaarrekening misleidend en stellen niet in staat tot een verantwoord oordeel over de waarde van het eigen vermogen. Waarover wel? Bij de pogingen van instanties om regelmatig door vernieuwing van standaards, regels en richtlijnen tot iets relevants te komen, trekken de regelgevers zich onvoldoende aan van de aard van de jaarrekening waarnaar de Nederlandse wetgeving verwijst en van de beperkingen die daaruit voortvloeien. De uitkomsten zijn ten hoogste ordinaal bruikbaar (vergelijkbaarheid met andere ondernemingen) maar hun toepassing is desondanks vaak kardinaal. Zeker als daaraan ook nog economische waarde wordt toegekend, is dat een kardinale vergissing.

Hoe het ook zij, de informatie in de jaarrekening is dus alleen bedoeld om ‘gebruikers’ tot een verantwoord oordeel in staat te stellen. En dat oordeel heeft kort gezegd betrekking op het vermogen en het resultaat, en de capaciteit van de onderneming om haar schulden op korte en lange termijn te voldoen. Als je deze opzet tot je laat doordringen, staat er niet eens zoveel. De kernvraag is natuurlijk wanneer een oordeel als verantwoord kan worden aangemerkt. Welke criteria gelden daarvoor? Die vraag wordt niet beantwoord. De enige aanwijzing is dat we daarbij niet op het verkeerde been mogen worden gezet. Althans ook te lezen in Art. 362: “De balans met de toelichting geeft getrouw, duidelijk en stelselmatig de grootte van het ­vermogen en zijn samenstelling in actief- en passiefposten op het einde van het boekjaar weer”. (Voor het resultaat geldt een vergelijkbare tekst.) Met andere woorden: De cijfers zijn getrouw als de boekhouding aan gestelde eisen voldoet en de accountingregels in acht zijn genomen; en als aan deze twee voorwaarden is voldaan, stelt de jaarrekening in staat tot een verantwoord oordeel over resultaat en vermogen. Dat is een omkering van wat de wet voorschrijft. Misschien daarom in Art. 362 de volgende toevoeging: “… Indien dit noodzakelijk is voor het verschaffen van dat inzicht, wijkt de rechtspersoon van die voorschriften af …” Houdt dit in dat zonder de voorwaardelijke afwijking de wel verstrekte boekhoud-informatie niet meer getrouw, duidelijk en/of stelselmatig is? Stel dat als criterium voor een verantwoord oordeel zou gelden dat de waarde van het vermogen moet kunnen worden beoordeeld, met als beperkende voorwaarden op ‘going concern’- en ‘stand alone’-basis. Met de huidige jaarrekening kan dat niet. De waarde van het vermogen is nu eenmaal niet gelijk aan de boekhoudkundige uitkomst die daarvan de grootte weergeeft.

IAS 19R; een plank in een boekhoudvloer • 37

“Groeien tot het hoogste niveau dat voor mij haalbaar is. Dat is mijn toekomstvisie.” Marc Buijs, gevorderd assistent accountant

Onze ruimte, jouw groei Meer weten over de carrière van Marc en zijn collega’s? Of benieuwd naar onze mogelijkheden? Scan de QR of surf naar onze website.

fsrforum â&#x20AC;˘ volume 14 â&#x20AC;˘ issue #5

Diversification requires at least 50 stocks Professor N.L. van der Sar

It is common knowledge that you need to spread risk. Yet, most investors hold only a small number of different stocks. In short, I explain why this is irrational. Then I describe an unconventional application of portfolio theory and show how many stocks are optimal.

use of historical data in consequence of which the results apply with hindsight. Together with Gerrit Antonides Wageningen University and Research Centre, I employed a less conventional approach (2012, Erasmus School of Economics working paper). We used individual response data from a survey of over 700 private investors in late 2001. This


approach has the advantage of expectations being measured, which may vary over investors. Based on the responses of each investor to specific survey questions on the expected return and the associated probability of a loss for his stock portfolio, for the stock market, and on the relation between these two, we determined his portfolio risk and the marketrelated part of this. The difference, that is, the residual portion, represents the non-common part of his portfolio risk. The dependence of this non-common risk on the number of stocks was then estimated by means of a regression analysis in the cross-section.

Harry Markowitz received the Nobel Prize in 1990 for his work in portfolio theory. The technique of mean-variance optimization devised by him has developed into one of the building blocks for structuring investment decisions. The essence is that portfolio risk can be reduced by increasing the number of different stocks without the expected return depreciating. This can be demonstrated by dividing the portfolio risk in a market-related part and a residual part. The underlying idea is that the market is the only source of risk stocks have in common and, therefore, is the only reason for stock returns co-varying. Since a position in stocks inevitably involves common risk, which thus is systematic, a corresponding return may be expected as a reward. This does not apply to the residual part comprised of the non-common individual risks of the stocks. For, by further diversifying the stock portfolio, which practically costs nothing, the residual portion becomes smaller and eventually goes to zero.

Empirical results Our results show that the non-common risk is significantly positive. In other words, there is under-diversification. The more than 700 investors appeared to hold an average of 17.7 different stocks in portfolio. This suggests that an adequate degree of diversification is not achieved with 12 to 18 shares, as earlier studies indicated.

Implications A first lesson to be learned here is that an investor should not set narrow limits to his investment world. In case an investor suffers from a home bias - an excessive revealed preference for holding stocks from his home country - part of the risk incurred will be non-common from an international perspective and, thus, be avoidable through international diversification. A second lesson is that the diversification benefit grows with each new stock added to the portfolio, but that the growth rate becomes smaller and smaller.

Research method What is the actual number of stocks to be chosen? In other words, at what number is the (additional) benefit of diversification reaped from including a new stock in the portfolio negligible? This is an empirical matter that requires a lot of data but can be solved statistically. With time series of all realized stock returns, at every return it is possible to estimate the residual non-common part of the portfolio risk in dependence on the number of stocks. A disadvantage is the

The regression results show a significant negative relation between the degree of non-common risk and the number of stocks in portfolio. This is a great result. For, there is no evidence that investors indeed used the Markowitz mean-variance optimization technique when constructing their portfolios for different numbers of stocks. Therefore, it was not a foregone conclusion all along that the number of stocks would be decisive for the degree of diversification. On the basis of the regression results we also estimated how many stocks make an adequately diversified portfolio. In order to have a sufficiently low degree of non-common risk, given the (marginal) transaction costs, the different number of stocks should be at least 50. In view of the increased risks of individual stocks observed in recent decades, this seems a plausible result.

Diversification requires at least 50 stocks â&#x20AC;˘ 39

fsrforum • volume 14 • issue #5

Word of the chairman

Wessel Ploegmakers

Dear members, This is already the last edition of the FSR Forum of the academic year 2011-2012. Therefore, it will also be the last edition of the XIVth FSR board. At the time of writing, some of you are still struggling with their last re-sits, while others try hard to deliver a solid bachelor- or master thesis and some lucky ones enjoy their vacations. At the FSR office it is a very busy period as the preparations for the upcoming academic year are made. After the last period we can look back at another three successful events. The Coporate Finance Competition was held at luxurious hotel Saverin during three consecutive days. At the university we held the Finance Day in cooperation with the ESE faculty association and the Bachelor Accountancy Day with both the ESE and the RSM faculty association. Both events provided bachelor students with a good overview of what they might expect of starting in the world of Finance or Accounting after completing their master studies. After a though selection with many interviews we were proud to present to you the new board on the 7th of June. The new board members for the XVth FSR board will be Sep Vermeulen, Maaike Lanphen, Taco Smit, Laurent Schmidt, Margriet van der Lubbe and Joost Vlot. On Thursday the 6th of September the XVth FSR board will officially be installed at the General Members Assembly. I would like to invite you all for this special moment and an official invitation will be sent to you soon. Further in this FSR Forum the new board members will introduce themselves to you. The XVth board is working hard to make the upcoming year even better than the previous. The International Banking Cycle is being improved with a grand opening in the form of the Erasmus Banking Congress. In the last edition of the FSR Forum you could already find some of the many interesting speakers that will be present during the Congress with the theme “Shifting Powers’. It will take place on the 12th of September and make sure not to miss it if you are interested in banking. Furthermore, the destinations of the International Research Project and the European Finance Tour are being determined and some new developments take place. As you can see the association is continuously moving forward and I can truly say that we, as the XIVth board, can be satisfied with the forward progression of the previous twelve months. Three of the ten FSR committees are already complete to start the preparations for the upcoming academic year. These are the International Banking Cycle, the International Research Project and the Accountancy committees. For the other seven committees the new board is still on the lookout for new members. A year as committee includes a wide range of new experiences, from the first contact with the corporate world to improving your organization skills. However there are many more benefits to enjoy like the active members day, the active members weekend and numerous drinks and dinners. Make sure you are aware of the deadline on the 7th of September for applying for the remaining committees. It will prove to be a very strong asset to you, for the experience in your field of interest, by building a strong network and on your C.V. As mentioned above the year of our board is coming to an end. On behalf of the whole XIVth FSR board I would like to thank all our members, active members, partners and teachers who have made this year into an unforgettable and successful one. A board year we consider being essential in the academic development of every student. I hope to see you next year and wish the new board all the success!

40 • FSR news

FSR News

Column Geert van Roon

Column Tim Odenkirchen

Corporate Finance Competition

International Research Project

42 43 45 47

fsrforum • volume 14 • issue #5

News Update Review portfolio

In this final news update we will publish market data on developments in stocks (indices), commodities and currencies. In the first issue of this academic year (behavioural finance), we created a portfolio. A short recap on the methodology we used might be handy. On September 19th 2011 We build a portfolio consisting of 15 stocks traded on the AEX, AMX or ASCX index in Amsterdam. This portfolio was created at random. We have taken random funds out of a fund pool consisting of traded stocks on the AEX, AMX and ASCX for 15 times where overlap was allowed. What we did throughout the year is to see how our portfolio has developed when compared to the AEX,AMX and ASCX. Since this issue is about investment strategy, one could argue that we are interested to see if randomness can outperform supposingly efficient markets.

Table 1: our randomly selected final portfolio (July 21st 2012)

What we did on every first day of the month is to sell three stocks from our portfolio and add three others. Again, this is all based on randomness. Next to following our stock portfolio, we also kept track of commodities and currencies. Since we only distribute the forum magazine 5 times per year, you will not find up-to-date values here, but rather you will get an insight in movements and prices of commodities and currencies. As financialists it is important to know at least this much.

Table 2: investments in indices relative to investments of stocks from those indices (July 21st, 2012)

From table 1 we can clearly see that randomness could have provided us with a profit. In reality, we would have probably sold stocks with great gains and losses, so we would not have seen numbers as severe as these presented in table 1. What’s more important to look at is not the profitability of this random portfolio, but the profitability in comparison to the index. Table 2 shows the results for the index. It can be seen that over the same period of time, the index has gained more than the random portfolio. Although we made a profit, randomness could not beat the market portfolio.

Long/Short Instruments


Buy price €

Value €

Current price € 08/10/11

Current value €

Profit €


















Arcelor Mittal






744 (+11,88%)
















































-2.149 (-34,17%)


SBM Offshore








TNT Express
























Wolters Kluwer








95.796 4.204

103.85 3 16.016


100.00 0

119.86 9

Long/Short Instruments


Buy price €

Value €

Current price € 08/10/11

Current value €


Profit €


AEX Index








AMX Index








ASCX Index










Table 3: commodity and currency prices (July 21st 2012) and their profits Long/Short Instruments


Buy price €

Value €

Current price € 08/10/11

Current value €

Profit €




20.18 4



-1.248 (-6,18%)

Gold (spot)


Copper (spot)



17.36 7



1.450 (+8,35%)


Silver (spot)



20.01 0



-890 (-4,45%)


Zinc (spot)



20.62 0


78.18 1


-3.282 (-16,40%)







-9,63 %






The tables shown here are just for comparison. We do not judge on the effectiveness of portfolio strategies, but merely show the outcome of our investment project. All portfolios are sensitive to the investment period, the entry prices and the investment strategy throughout the year.

Table 3 is interesting to see because there was a real hype on commodities at the start of 2012. The table shows this hype did not set through during 2012 because the total portfolio shows a negative investment return of 3,05%. The euro has also lost a large amount of value in comparison to the USD and the GPB.

FSR news • 41

fsrforum • volume 14 • issue #5

FSR Former board member

Geert C. van Roon

Is has almost been eight years now, since I joined the FSR as board member of the VIIIth board. After so many years, I still remember this year as one of the best periods in my life. Not only due to unawareness about financial crisis including toxic subprime mortgages in the US, a potential meltdown of Southern-European countries or any Libor-gates, but also because we spend our days careless and unconcerned in the H-tower of the Erasmus University, organizing major FSR events for our active members as well as an overkill of social activities. It all started in May 2005 during a coffee drink at the ´DE coffee corner´ with some board members at that time. I became inspired about their passion for audit, finance, and control (especially finance) and moreover, the unique position of the FSR as an unique link between students and the corporate world as potential employer. Furthermore, the FSR gave me the opportunity to develop professional, commercial, and social skills and the challenge to work with a group of highly motivated students. Taken together, this convinced me to apply for a position as board member of the FSR. Besides my role as secretary and vice chairman, I was also responsible for the Corporate Finance Competition, a threeday business course with five leading players in the Dutch Corporate Finance market. Organizing this event was very interesting and inspiring for me: it gave me the opportunity to develop my leadership skills and guide, support and motivate my committee resulting in a very successful event with companies as well as students being fully satisfied. In addition to my professional development, I also experienced these years as a period in which I was given the opportunity to strongly develop myself, to work together with different individuals and to build strong friendships. For each board, there is the question whether six or seven individuals will fit within one group and are able to work as a dedicated team having the motto ‘Work hard, play hard.’ After my years as FSR board member, I honestly think that we have succeeded regarding this motto and I am proud off the fact that we still have a very strong friendship resulting in monthly dinners, drinks on a regular basis and (semi)-annual city-trips, remembering the good old days. It is hard to mention one unforgettable moment during all these years, since we have experienced a lot of exciting moments. I will never forget our Christmas gala at the Euromast including polonaise with cigar-smoking ladies through the rest of the restaurant, our active members weekend in Paris, the endless social drinks always ending at some of the

42 • FSR news

worst (but at the same time priceless) bars in Rotterdam and of course my ‘very professional’ first meeting with Ernst & Young, falling in love with someone of the company on the Piet Hein boat during a walking dinner, being staggered and totally unable to literally eat or say something (she will probably still remember)! On top of your professional as well as personal development, being active at the FSR this membership also gives you the opportunity to join the FSR Alumni Association to keep in contact between other former active members. Nowadays the FSR Alumni Association has 150 members which results in a highly interesting network of people having an affection for Finance, all having a strong connection with the FSR, and all enjoying several drinks and events being organized. Having finished my years as board member of the FSR, I have had plenty of time to pick up new and existing challenges such as finishing my bachelors degree, made a trip around the world, doing a Corporate Finance internship, studied at Harvard University, and ultimately spend my final year on the University finishing my masters degree (including endless cups of coffee, again at the DE coffee corner). After graduating, I started working at KPMG Corporate Finance. Being part of a small group of highly motivated and inspired colleagues within a global firm is the best of both worlds. On one hand, we are able to serve a wide range of clients from our local network of both audit as well as advisory, on the other hand we are able to act globally having an unlimited network and knowledge database through our international network of more than 2,100 Corporate Finance professionals in 82 countries. To some extent, working at KPMG Corporate Finance is in line with my years as board member of the FRS: we service our clients (members), striving for excellence, and celebrate successes with our colleagues. To all the passionate and eager members of the FSR, I can sincerely strongly recommend you to join the FSR as active member. Not only because I guarantee you the added value I have experienced during my years, but also because having a masters in Economics or Business Administration, especially during these years of economic downturn, is not a guarantee but only a first step towards a great career!

Passport Name Geert C. van Roon Age 28 years Residence Amsterdam Employed at KPMG Corporate Finance Current position Associate Which FSR Board VIIIth board Board function Secretary, Vice Chairman Study Financial Economics, Erasmus University, Rotterdam Year of graduation December 2008 Which car do you drive Audi A5 What do you drink on a Friday night Beer followed by obscure liqueurs and shooters Life Motto “Work hard, play hard”

fsrforum • volume 14 • issue #5

FSR Member

Tim Odenkirchen

Passport Name Tim Odenkirchen Age 23 years Residence Rotterdam Study MSc Finance & Investments FSR event International Banking Cycle Internship at/job at Bank of America Merrill Lynch Department of Internship M&A Benelux Coverage Team

Last summer I joined the FSR as a committee member of the International Banking Cycle. Due to their focus on finance, joining the FSR had always been at the back of my mind. When I started with a master in Finance, one of the board members asked me to apply for the IBC committee. Obviously I didn’t have to think very long to make the decision. What I didn’t know in advance, was the wide range of experiences that the active membership would offer me. The International Banking Cycle is a big recruitment event for students that are interested in the fascinating world of M&A. Through ten workshops, housed by ten globally renowned Investment Banks, students get the opportunity to arrange an internship at one of these banks. The workshop days provided a good opportunity for both the participants and the committee member to connect with the several bankers and to obtain insights into their world. Actually, this way I managed to arrange an internship at one of the banks myself. After passing the screening I could start working for Bank of America Merrill Lynch at February 2012 in Amsterdam. Looking back, it is funny to consider how a beer at the bar with a Director can be the start of something great. During the first week of the internship I started noticing that nearly all stereotypes are true, especially for the London colleagues. The Benelux Coverage Team of Merrill Lynch was great to work for. One of the stereotypes that did not fit with my experience was the fact that I worked in a very fun team. From what I understand from others, this is actually quite typical for the Dutch enclave in I-banking. The relatively small size of the team also made it interesting to work for since it allowed me to be part of many different processes. I had the luckk that moet worden I was fortunate to start at Merrill while the team was working on the execution of a deal. This way I immediately got to experience some piece of the action. Here I realized why it is the execution side of M&A that makes the work addictive. Being part of large deals, even though your relative personal contribution is tiny, and seeing your work back in the end result is simply very satisfying.

the newspaper about the transactions your team is working on felt great. After a few months, you’re fully operational and of most use for the team. This phase of the internship I assisted on several projects and learned how it feels to make long hours. These months are the real test if you’re willing to make the sacrifices for a career at an investments bank or if you rather pursuit other dreams. Because of the demanding working environment, an internship at an Investment Bank offers a very valuable learning experience, even for those who do not aspire a career in M&A. You’ll barely experience a more demanding working environment in any other industry. Compared to the romantic view I had about Investment Banking at the beginning of my internship, I had had quite a reality check after a few months. I started to realize that you have to wonder what it is in the job that attracts you so much. Do you really have a true passion for financial modeling and quantitative problem solving or are you just conforming to a romanticized picture? The truth is, the first three till six years of your career, you’re devoting your entire life to Excel and Powerpoint assignments and you’re not living the ‘Gordon Gekko lifestyle’ you might be dreaming of. The industry is fascinating, but you got to be really passionate about it. For me it was an easy conclusion not to strive for a career in M&A. The internship has been tremendously inspiring thanks to the interesting people I have met and the experiences en insights I have gained. Apart from the hard work there was plenty of opportunity for a good laugh. I would advise every student to gain as much experience as possible before you start your career. Through internships, study related side jobs or interesting committees you’ll be able to form a much clearer picture of the career and life you’re actually striving for. Experience is the teacher of all things.

The first part of the internship you’re mostly learning how the operations of the organization are being run. I fell in love with the industry as I liked the dynamics of the job and its attached lifestyle. Being brought home by cab and reading in

FSR news • 43

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fsrforum • volume 14 • issue #5

Corporate Finance Competition 2012

On Monday the 21st of May the Corporate Finance Competition (CFC) took off. 20 students were welcomed in 5-star hotel Savarin to compete against each other for 3 days during 5 different business cases. All striving for the ultimate goal: Being the winner of the CFC 2012. The first day began early in the morning to start with Ernst & Young with the first business case. Beginning with a small introduction of Ernst & Young in general, all students were eager to hear more about the case. From the start of the event everybody could feel that there was more at stake than just winning one case. The negotiations during the case where intense and the discussions even more. At the end of the case there was a small lunch to also get to know Ernst & Young in a more informal matter. Having finished the lunch the students had to prepare themselves for the next case immediately, while BDO was already present to give their presentation. During this business case BDO had an extra trigger for the students: the winners of their case won a ticked in the skybox during a match of Ajax in the next season! A bit overwhelmed the students began at the case, after the winner was presented there was a small social drink whereafter the students finally had some time to relax. The next morning we began at a tight schedule with the case of ABN AMRO in the morning. With only 3 more cases to go the battle became even fiercer. During the second day there was only 1 business case scheduled what left us with time for leisure. Luckily the CFC was planned during the week with the best weather of this year, because we went surfing as day-activity. After some successful waves we had to return to Hotel Savarin for the rotation diner with all the participating companies. During the last day the students really did their upmost best during the cases of Rabobank and Kempen&Co. to turn the tide and still become the winner of the CFC 2012. After the last case of Kempen&Co. it was a very close call, but there was one winner: Team Blue! Again, congratulations. After three intensive days full of cases, presentations, surfing, lunches, dinners and social drinks we look back at, yet again, a successful Corporate Finance Competition. Hereby I would like to thank, the participating companies: Ernst & Young, BDO, ABN AMRO, Rabobank and Kempen&Co., we do sincerely hope to see you again next year, and of course my committee members, who made this competition all possible!

FSR news • 45



fsrforum • volume 14 • issue #5

International Research Project 2012

On the 20th of May 2012 all participants of the International Research Project have returned home. Some of them had left Vietnam for the Netherlands already two weeks ago, whereas others returned the 20th of May because they had decided to explore the region for two weeks after the official IRP program had finished. Irregardless of the time spent abroad, it can be safely said that everyone had a tremendous time. Although the schedule was at times stuffed with activities, none had trouble getting up early in the morning at times unfamiliar to the average student and getting in late at night again. After a day of meetings with great national and international companies, everyone was eager to grab a bite to eat together and party it up in the local hot spots of Bangkok and Ho Chi Minh City. Over the course of two weeks we visited several big Thai companies such as Siam Cement Group , PTT, Airports of Thailand and Bangkok Bank. In Vietnam we mainly visited plants of industrial companies such as Akzo Nobel and NedSpice. We also visited several large multinationals including Ernst & Young, KPMG and Toyota amongst others. It was very interesting to find out about the different views on corporate social responsibility of Thai, Vietnamese and international companies, and the practical issues which these companies are facing. Bangkok proved to be a huge, very vibrant city with large business districts, lots of traffic and a true 24-hour economy. We’ve met a lot of friendly people during the company visits and the Thai food they served us at lunch time was incredible. Ho Chi Minh City is much smaller than Bangkok, but has an idyllic vibe due its French architecture of some buildings in the city center. Business is picking up at rapid pace, but is still relatively small compared to Bangkok. Besides company visits, we have had a great time together enjoying the Thai and Vietnamese cuisines and nightlife. Although Bangkok has the massive clubs and fancy places, Ho Chi Minh City had fantastic bars with live music (of which some was sung by Joost A.). After two intense weeks we had to say goodbye to several participants that were heading home because of other responsibilities. Others left for Cambodia and the North of Vietnam. Several islands of Cambodia, Thailand and Vietnam have been visited by groups of participants. Most people saw the temples of Angkor in Cambodia which were incredibly beautiful. Some even went to Singapore and Hongkong. We can conclude that these were two (or four) great weeks in which we’ve learned as much as we’ve enjoyed and we would like to thank especially thank our partners, the Erasmus Trust Fund and STOER and everyone else who have helped us with the realization of the International Research Project 2012!

FSR news • 47

Een baan waarin je elk miljard moet omdraaien

Startende financials voor de Rijksoverheid Het gaat om veel geld. En het gaat om belangrijk geld. Geld dat van ons allemaal is. En dat besteed wordt aan zaken met een grote maatschappelijke impact. Zaken als milieu, veiligheid, onderwijs, gezondheidszorg en infrastructuur.

En die kunnen weer tot nieuwe beslissingen leiden. Dat maakt dit werk dynamisch, interessant en vooral uitdagend. Kun jij die verantwoordelijkheid aan?

We zoeken frisse, financiĂŤle professionals met een afgeronde studie Het is jouw taak om het financieringsbeleid voor te bereiden. Om te economie, econometrie of bedrijfskunde, een flinke dosis enthousiasme en affiniteit met maatschappelijke issues. zorgen dat een departement een correcte begrotings- en controlecyclus volgt. Of om de staatsschuld te beheren en geld te lenen op de kapitaalmarkt. Iedere beslissing vraagt om nieuwe berekeningen. Meer weten? Kijk op

fsrforum • volume 14 • issue #5

Finance Day 2012

On the 24th of May the Finance took place for the second time in history. This year, the schema was different than the first edition. As part of the ESE Orientation Cycle the Finance Day is aimed at the second and third year student who is about to choose which master or major study to follow. The Finance Day provides this student the opportunity to see what the finance world is all about and what the Erasmus University Rotterdam has to offer in this field. In cooperation with the EFR this year’s edition has been a great success. Despite the beautiful weather outside, about 60 students were present during the second edition of the Finance Day. This day started with three presentations from EUR representatives. Firstly, Prof.dr. Han Smit, program coordinator of Financial Economics at the Erasmus School of Economics, introduces his master program to the students. He was followed by dr. Marta Szymanowska of the Department of Finance RSM. She told the students more about the RSM Master’s program Finance & Investments. The third speaker was Jordy Streng, secretary of the FSR. He introduces the study association for all finance and accountancy students at the Erasmus University Rotterdam.

AMRO. In the current economic situation risk management is very important for a financial institution. Diederick van Mierlo explained how ABN AMRO is currently coping the actual risks. The day concluded with drinks ‘in De Smitse’. All in all the participants have gotten a better view on the possibilities in finance, as well academically as in practice.

After these introductory speakers, the practical part of the day started. The first speaker in this part was Yvonne Janssen of SNS Reaal Asset Management. She learned the students about investing responsibly. Topics like ‘What is responsible investment’, ‘How are efforts in responsible investment measured’ and ‘What would you do to invest responsibly’ were discussed. The day continued with a case study provided by the CFA, represented by Rogier van Aart and Sereeparp Anantavrasilp. The participants had to solve questions regarding growth indicators of equity stocks and predict the returns. Also, the possibilities to obtain the CFA degree were highlighted.


The final speaker of the day was Diederick van Mierlo, Managing Director and Head Corporate & Market Risk at ABN

FSR news • 49

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fsrforum • volume 14 • issue #5

Bachelor Accountancy Day 2012

On Wednesday the 23rd of May the Bachelor Accountancy Day took place in the Cruise Terminal Rotterdam. Each year this event is cooperatively organized with EFR, STAR and STAR MScFM especially for bachelor students who have an interest in accountancy. The goal of this event is to introduce the students into the different aspects of the profession of an accountant and learn more about the trajectory towards becoming an accountant. Deloitte, Ernst & Young, KPMG and PwC prepared a case for the students through which they could get more familiar with the day to day work of an accountant. The case had to be solved in groups of students accompanied by accounts of the Big Four firms. During the case the students were challenged to show their social, analytical and interview skills. The latter during an interview with the financial director of the company they were auditing. Moreover the students were informed about the study curriculum of the Master programmes at the Erasmus School of Economics and Rotterdam School of Management. Besides that, they were informed about the Chartered Accountant post graduate program. In the afternoon, after the students solved the case, from each of the audit firms one partner arrived. During the day the students had the opportunity to prepare questions they wanted to ask to the partners. The partnerforum consisted of an interactive interview with the four partners, presided by Mr. Gortemaker. During one hour the partners were questioned about different topics, ranging from workload to moral responsibility and personal life. The concluding drinks in the setting sun at the balcony of the Cruise Terminal gave the students the opportunity to get deeper into conversation with the accountants and the recruiters of the Big Four firms. It was an interesting and instructive day for the students. Besides the information about the profession of an accountant they had the opportunity to experience the atmosphere during the informal lunch and drinks. We would like to thank Deloitte, Ernst & Young, KPMG, PwC, Mr. Van der Wal and Mr. Gortemaker for their cooperation to make the Bachelor Accountancy Day this year again to a successful event.

FSR news • 51

fsrforum • volume 14 • issue #5

Introduction XVth board

Sep Vermeulen My name is Sep Vermeulen. Back in '91 I was born in Apeldoorn. After living in Apeldoorn, ­Terschelling and Aadorp for a few years I ended up in Epe. In this scenic village that has everything to offer for a kid I have lived for 11 years until I moved to Groningen to start my student life with Business Administration. This study was not entirely my cup of tea so the next year I shifted to Rotterdam to start off with Economics and Business Economics. Simultaneously I joined a rowing fraternity called Skadi. Here and at the economic faculty association I participated in a number of committees to learn a lot, see a lot and get to know numerous new students who also wanted to make the best out of their student life. With this notion and after marvelous stories of former board members of the FSR it was clear for me; I want to be in the XVth FSR board. As the chairman I will monitor and enjoy all the wonderful and professional events the FSR has to offer, with special emphasis on the new Erasmus Banking Congress!

Maaike Lanphen Hi, my name is Maaike Lanphen and this year I will be the secretary of the FSR. I am 21 years old and I was born in a little village called Blaricum. After 18 years I decided to study Business Administration at the RSM in Rotterdam. In my second year of study I joined the fraternity S.S.R.-Rotterdam. After three years of study, I wanted to do something else. Last year I organized the Female Business Tour and that’s when I decided that I wanted to become part of the XV Board of the FSR. I liked that the FSR is very professional and has a lot of great activities. This year I will organize some of these activities. I will organize the Accountants Firm Day and the Bachelor Accountancy Dag. I will also be responsible for the FSR Forum. I am really looking forward to next year with all the prodigious activities, interesting interviews and the wonderful time with my board members and committees.

Taco Smit Hi, my name is Taco Smit and I will be the treasurer of the XVth board of the FSR. Setting out from the peaceful promontories of Zeeland I decided to pursue my studies in Rotterdam. Three years ago I started my bachelor of International Business Administration at the Erasmus University and I can now look back upon a successful completion of my bachelor program. Besides my general tasks as a treasurer, I am also excited to broaden my view on the financial world and organize this year’s events together with our board and commissioners. Starting with a brand new Banking Congress to kick off the IBC 2012 and ending with the third FSR lustrum, this year promises to be extra challenging and inspiring to those interested in finance or accountancy.

52 • FSR news

Laurent Schmidt My name is Laurent Schmidt and I will take place in the XVth FSR Board as the Commissioner of External Relations. After 3 years of studying Economics in Rotterdam and thinking about starting a master, I thought it was time for something different first, something serious. After taking place in the FSR Banking Diner last year, I got in contact with the FSR and my request for an interesting challenge for the upcoming year was becoming to get shape! The possibility to get in touch with so many different companies and being “in charge” of maintaining and expanding the relationship between the FSR and its partners was what attracted me to this position. Next to fulfilling my board tasks I hope to get a somewhat clearer view of what my future of starting in the Finance world will look like. Furthermore I hope to have some scarce time left this year for my hobbies, going to the gym and riding my motorcycle. I’m really looking forward to this year and together with my board members we are going to make it a great year!

Margriet van der Lubbe My name is Margriet van der Lubbe and this year I will be the Commissionair Activities of the fifteenth FSR board. I grew up in ‘s-Gravenzande (a little town near the beach) and started in 2009 studying Economics and Business Economics here in Rotterdam. This year I finished my Bachelor and am planning to do my Master in Accounting. During my last year I participated in some events of the FSR (International Research Project and the Big 4 cycle) and I was impressed by the professionalism. This made me curious about the association and when asking around I only heard positive stories. I already had been an active member at other associations and a board member of the FSR seems to be the right challenge for me. This year I will be responsible for the International Research Project, Female Business Tour and Big 4 cycle and I’m really looking forward to organize these (and of course all the other) events together with my fellow board members and committees.

Joost Vlot Hi, my name is Joost Vlot and in the XVth board I will fulfill the position of Commissioner Finance Activities. I’m 21 years old and started with Business Administration three years ago. During the first years I participated in different committees within my student fraternity and during 2011 I became active at the FSR. The European Finance Tour committee was a perfect introduction to the FSR. It was a very good period to find out what FSR and all the companies had to offer and this made me decide to apply for the XVth board. I’m looking forward to organize all the financial activities in my portfolio.

FSR news • 53

Een duurzaam ontwikkelde carrière gaat langer mee. Academisch toptalent Je eerste baan is tegenwoordig vrijwel nooit je laatste. Maar vaak wel de baan die de rest van je carrière beïnvloedt. Droom jij van een loopbaan bij een multinational of de overheid, dan is de keuze voor je eerste werkgever eenvoudig: Deloitte. Veel topbestuurders in Nederland danken hun huidige positie aan een carrièrestart bij Deloitte. En dat is niet toevallig. Bij ons werk je namelijk al vanaf dag één voor toonaangevende organisaties aan innovatieve en vooral duurzame oplossingen. Niet omdat duurzaamheid vandaag de dag in de mode is, maar omdat wij weten dat het de sleutel vormt tot de businesskansen van morgen. Waardoor jij je kansen op de arbeidsmarkt ook weer verder vergroot. Zoek jij de beste start van je carrière? Begin eerst hier:

fsrforum • volume 14 • issue #5

FSR Alumni Association

Dear FSR Alumni, It is with great excitement that I can inform you about the ins and outs of our beautiful Alumni Association. At this moment, the academic year is reaching its end. The 14th FSR board is quite busy helping the new board with all of the startups and the FSR Alumni Association has the time to look back on a more than successful year. If we overlook the past year, we can joyfully look back at a more than successful Ketel 1 Friday Afternoon Drink at the Westelijk Handelsterein. The Ketel 1 Drink was organized for the members, just to keep up with their fellow Alumni members. Futhermore, the Alumni association gave an acte de presence at the OBD. The OBD (oud besturen diner/former boardmembers dinner) is a dinner where all of the former boardmembers of the FSR were invited at restaurant de Harmonie. This event is traditionally, just like this edition of the OBD, the event with the highest density rate under all of the Alumni events. The last peak on the FSR Alumni Association calendar was the Philips FSR Alumni Golf Championship. This edition the current Chairman of the FSR Alumni Association –Joris Kilwas challenged to defend his title and could be the first and only consecutive winner of the Championship. During the day, the more advanced golfers were challenged with not only a Longest Drive and a Nearie Competition. But also with the unforgivable golf course Delfland, Which under the windy conditions on Saturday 2nd of June was transformed in a links course.

During the Championship, the inexperienced Alumni members could also enjoy a beautiful day of golf. During a 2 hour clinic they got the basic skills of golf and afterwards they showed their new learned skills on a par-3 course! During the luxurious BBQ buffet, the organizing committee congratulated Bram Lips with his Philips FSR Alumni Golf Championship win. The FSR Alumni board did a good job as well, with a 2nd place for Joris Kil and a 3rd place achieved by the undersigned! Looking back at this successful year, we can only thank our FSR Alumni members for the great attendance at the FSR Alumni events and we would like to invite all of the current and previous FSR committee- and board members to join the network and be part of the fun! We, as Alumni board, make place for a new class of board members, which we wish all the luck in the upcoming year. We hope we can see lots of our FSR friends at one of the next Alumni events, because together we can increase the strength of the FSR alumni network and make the events fun and worthwhile to attend! Yours faithfully, Bart Lips Vice-Chairman FSR Alumni Association

FSR news • 55

fsrforum • volume 14 • issue #5

FSR Activity Agenda 2012-2013

September/October/November BIG 4 Cycle

March Corporate Finance Competition

Get to know the 4 leading accounting firms

Five star event: hotel, companies and participants!

Erasmus Banking Congress

Multinational Battle

The official kickoff of the International Banking Cycle

Four multinationals, five battling cities, are you part of it?

International Banking Cycle

April Female Business Tour

The investment in your career

November Accountant Firms Day

It might be a men’s world but it would be nothing without women

Get familiar with the world of accounting at a top class location in Rotterdam!

Want to know what finance is all about…

Investment Banking Masterclass Learn to valuate, like an investment banker

December Traders Trophy Can you handle the pressure?

January Finance Dinner Get acquainted with the world of banking

January-April CleanTech Challenge Grow your green ideas!

56 • FSR news

Finance Day April/May International Research Project Using your intellect for a charity!

National Investment Competition Invest and be a winner!

May Bachelor Accountancy Day Will you choose for a career in accounting?

European Finance Tour Exploring European financial world

Soms weet je precies wat je wilt

Soms sta je open voor suggesties Je hebt tijdens je studie alle mogelijke kennis opgedaan. En nu wil je aan de slag. Op een plek waar je al je ambities kwijt kunt. Waar de lat hoog ligt en waar je samenwerkt met professionals. Je start je carrière vliegend en gaat recht op je doel af. Dat is: het beste in jezelf naar boven halen.

Kom verder op

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Š 2012 PricewaterhouseCoopers B.V. (KvK 3412089) Alle rechten voorbehouden.

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Een succesvolle carrièrestart is meer dan een goede cijferlijst. Het begint met karakter en inzicht in jezelf. Ontdekken wie je bent, weten waar je naartoe wilt groeien Ên hoe je dat voor elkaar krijgt staat altijd aan de basis. Ernst & Young coacht jou actief op weg naar jouw succes. We bieden je volop kansen in de wereld van assurance, tax, transaction en advisory. Ontdek ze op

Editie 5 Investment Strategy  

Editie 5 Investment Strategy

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