How the CFA Research Challenge can contribute to the development of great finance professionals for the Cyprus investment funds industry
The Cyprus fund industry has reached records of €11bn+ AuM, and pace of growth is expected to continue through 2022 and onwards. Whilst discussion around protective legislation and compliance is a key component to creating a successful ecosystem, there was little attention on the need for well-educated skilled investment professionals with the required level of ethical and professional standards to meet that growth. The local market has for many years been dominated and focused on a strong accounting profession, which has served the incumbent market well, but with the momentous growth of the funds industry, it is time to pivot and identify the need for focused finance professionals as well. One such initiative is here to make an impact; the CFA Research Challenge (“RC"). It pivots our lens and focuses on the role of finance providing university students with hands-on mentoring and rigorous training in financial analysis and real-world experience in equity valuation. The rigorous program, spanning 6+ months, aims to identify future finance leaders and seeks to ensure participating students are well prepared to undertake the position of equity research analyst in an investment fund management company. Understanding the differences in the two professions is key to ensuring we are meeting the objectives of tomorrow in our talent pool.
The CFA RC is a global equity research competition organized on annual basis by the CFA Institute (“CFAI”) and the local Societies across the world. The CFA Society Cyprus created the CFA Cyprus RC & University Relations Committee (the “Committee”), hosting the local leg of the CFA RC competition. Many members of the CFA Society Cyprus support this competition by participating as volunteers, either as Industry Mentors, Graders or Judges. The program is further expanded by collaborating with established finance experts, professional service firms and with international banks to deliver relevant training to the cohort in areas such as equity valuation, Key Performance Indicators and Ratios, Equity Modelling, ESG, Report Writing and Presentation Skills.
Each year the Committee selects a relevant listed company and delivers a live investment analyst forum to the university students, where they are also given time to directly raise some bespoke questions to the Executive Management team of the subject company. They are then asked to prepare a written report, which focuses on the following areas:
Business Description: to deliver a coherent description of the current, and future strategic motives, broken down by products/services by segment and/or geographical allocation to assess key dependencies/concentration.
ESG: 2021 was a momentum year in the global ESG narrative which has seen the topic elevated from a niche to a mainstream pillar of growth for companies. The CFAI supports the integration of ESG in financial analysis and developed the Global ESG Disclosure Standards for Investment Products, which creates a framework for investment managers to communicate to investors the nature and characteristics of ESG funds and investment strategies more effectively. For this section of the report, students assess and document how ESG may impact the company’s short- and long-term prospects.
Industry Overview and Competitive Positioning: teams are tasked with analysing the industry dynamics and the competitive landscape using tools such as Porter’s Five Forces This tool incorporates brand, cost leadership and access to protected technology under five key areas: (1) threat of new entrants, (2) threat of substitutes, (3) bargaining power of customers, (4) bargaining power of suppliers and (5) competitive rivalry.
Financial Analysis: teams need to build an analytical model of historical performance and to produce informed forecasts. Using financial ratios such as gross/net/EBITDA margin, return on equity, current/quick/cash ratio, working capital cycle ratios, and debt servicing ratios, the teams need to interpret the performance, efficiency and health of the company.
Valuation: the results from the model need to form the valuation; what is the target price either on an absolute or relative basis. Understanding the relevance is also important; does the company/ industry operate with stable and predictable cash flows possibly lending itself to a DCF, or would the relative price of peers be more relevant? Sometimes the answer is both and therefore, there is a natural triangulation of valuations that needs to be undertaken to understand the implied value, possibly considering the use of a weighted average of various models.
Investment Risks: using a Risk Matrix framework, teams can assess financial, operational, regulatory, and legal risks using probability and likelihood measures. A successful report identifies systematic and non-systematic risks, many of which are not disclosed and need to be determined by research.
Industry veterans will understand that to complete the above analysis in such detail and with such expertise takes years to master. The teams carve out their free time, away from their ongoing studies, to deliver this enriching learning in paper form, delivering the first stage output for the challenge. The second stage is to bring the report to life in a presentation form, delivering a presentation to a panel of industry experts. This is indeed a real-world experience since research analysts are required to present their recommendations to an investment committee. The winning team qualifies to Sub-Regionals and can participate up to the Global Final competing with students in some of the top universities in the world.
Subject companies who have historically participated in the program include KEO, Vassiliko, Fourlis and this year the pre-selected company was Hellenic Petroleum, which was indeed a very relevant and challenging company for the teams. There has also been a clear shift in the mindset of those who contribute, with many looking to hire directly from this cohort, and more relevant for some of the most powerful and influential employers in Cyprus, such as Eurobank, PwC, KPMG, EY, Grant Thornton and Deloitte offering internships to the participants in order to really capture our future finance leaders.
As we see the world of education also shifting, we should all consider how we create not only a more defendable future talent pool, but also to consider how internship experiences, such as this offered by the CFA RC, will really transform our markets. This unique opportunity for practical training and exposure to industry experts, experience which cannot be obtained from any academic or professional course in finance, should be integral to our development. Fund management companies willing to invest in their human capital and looking for competent and skillful personnel should give value to university students having the relevant experience and training such as that offered by the CFA RC.