Thursday, June 21, 2012

Does The CFA Exam Waste A Billion Dollars?

The Chartered Financial Analyst (CFA) designation is an achievement that is very difficult and time-consuming to reach. Many companies in the investment industry seek to hire and promote candidates that have achieved a CFA charter. These companies will usually encourage employees to register and take the exams. With the June exam now in the rearview mirror for many people (this author included), it is time to ask, should companies even support their employees taking the CFA exam?

The week before this year's exam as I was sitting in a library and noticed many other candidates studying, I thought back to a common press release that is published each year by Challenger, Grey & Christmas Inc that attempts to quantify the lost productivity due March Madness. Following in the footsteps of that article, I will document out the lost time, quantify it and see if the markets show any excess volatility in that period.
The CFA institute reports that successful candidates spend at least 300 hours studying for the exam. Since the pass rate is often below 50% for the exams, this number will be reduced down to 200 hours on a per candidate basis. If you studied less than that and passed the exams, congratulations! If you studied more and still failed, there is always next year.
Looking at the link above, we can see that the number of student taking the exams has risen each year from just over 76,000 in 2002 to over 149,000 for the June 2012 exam. This number includes all registered candidates, so it overstates the number of people that actually took the exam (if you look around on exam day, you will see a good number of empty chairs for level 1 and 2). Assuming the number of candidates sitting for the exam increased by 5% over the previous year, the estimated total for June 2012 is 120,000 people.
The Challenger article cites the average private-sector wage as $23.29 per hour. It is safe to say many candidates in the financial industry dwarf this wage, but candidates in other countries may make less. For the purposes of simplicity, I will round this number to $25 per hour as a wage.
Using the simple math of Average Hours Studied * Number of Candidates * $25 means for 2012, over $600 million of productivity was lost by the CFA exam. If we use the higher estimates for this number, it could easily translate into over a billion dollars of productivity lost to the exam.
Here are some estimates for the past 5 years. Note: I excluded the December test takers from this calculation, so these estimates may understate the effects:
June 2, 2007: 71,897 participants, $359 million
June 7, 2008: 92,081 participants, $460 million
June 6, 2009: 104,116 participants, $520 million
June 5, 2010: 111,731 participants, $558 million
June 4, 2011: 115,027 participants, $575 million

Given the above information, it comes back to the point, should companies still sponsor the CFA charter? The lost time in productivity is staggering. Companies are losing worker hours. The average charter holder will have studied for over 900 hours to pass all three exams. This time could have been spent making business contacts, working more or anything else. Despite all of this, many people (myself included) still believe that the curriculum is beneficial and has enhanced their productivity at work. This is evident in the steadily increasing enrollment to take the exam each year. Congratulations to everyone who studied and sat for the exam. Enjoy these next few weeks before results come out and hopefully the CFA Institute does not add a Level IV to the testing requirements.

Monday, August 22, 2011

To DRIP or Not to DRIP (Seeking Alpha Article)

I just posted a Seeking Alpha article over here that outlines BDCs and whether or not reinvesting your dividends is worthwhile.

The companies to be examined for this article will be American Capital (ACAS), Apollo Investments (AINV), Ares Capital Corp (ARCC), Blackrock Kelso Capital Corp (BKCC), Kohlberg Capital (KCAP), Main Street Capital Corporation (MAIN), PennantPark (PNNT), Prospect Capital (PSEC), Solar Capital (SLRC) and Triangle Capital Corp (TCAP).

Tuesday, August 9, 2011

BDC Weekly Roundup 8/5/2011

Between this debt ceiling debate and the S&P downgrade, things have been busy at the BDCR. Here is a quick update post.  The BDCR Index was crushed this past week with a -5.97% loss from a level of 296.91 on 7/29/2011 to 279.19 for the week ending 8/5/2011. The major winners were TCAP (+4.30%) and GAIN(+2.99%) and the major losers were MCGC(-25.31%) and AINV (-15.03%).


The markets are going crazy. I hope everyone was able to get their trades through these past few days. If I was able (cannot trade due to restricted list) to trade, I would have gone with some of the top guys from my previous article.

Good luck out there!

Wednesday, July 27, 2011

BDC Weekly Roundup 7/22/2011

Will Congress figure out this Debt Ceiling business already? They are playing with fire and worrying the market. The BDCR Index had a mixed week with a 0.53% gain this past week from a level of 312.45 on 7/15/2011 to 314.09 for the week ending 7/22/2011. The major winners were ACAS (+4.08%) and ARCC (+3.9%) and the major losers were CODI (-4.92%) and KCAP (-2.99%).


Earnings season is coming up next week, most of the BDC-R companies will report earnings.

Wednesday, July 13, 2011

A look at High Dividend Stocks (BDC / Finance) and Ranking Them

(This article will also be cross-posted on Seeking Alpha, if you read the article there and have come back here, welcome to BDCR! If not, thank you for still reading. Due to some extensive work over these past few weeks, I now have some great historical data on the BDCR companies. This post is the first of hopefully many deep dives into the companies.)

It is quite common for a major financial website to post a link of "dividend darlings". A dividend darling list typically involves a group of companies that have a strong history of paying increasing dividends over their lifespan. If you look on Forbes, Investopedia or Seeking Alpha you will see lists containing some chosen companies.
This article will include a "dividend darling" list that is exclusively focused on BDCR-followed companies. Not only will the current dividend high-rollers be highlighted, but I will rank the companies based on history and dividend coverage. All of the information gathered is available on the SEC website and/or your favorite financial website (Yahoo, Google, DailyFinance, etc). I want to reward companies that have been around for awhile and ding those that are not paying and covering their dividends. This means that a company like American Capital (ACAS), which was once the top of the heap in terms of dividend payers, will now be more towards the bottom of the list.
Below is the criteria:
  1. Is the company currently paying a dividend? I am penalizing a company that does not pay a regular dividend. I know owning ACAS over the past year with a 94% return would have been a far better total return, but I am looking at BDCs strictly on a yield-basis and not a total return basis for this article. 10 pts
  2. Does the company have a strong dividend history? For example, Prospect Capital Corporation (PSEC) likes to publicize its history of dividend increases and consecutive dividends. One thing it fails to mention is that in May of 2010, the company slashed its dividend by 10 cents per quarter, skipped most of its June dividend and changed over to a monthly payout (which overall I believe was a good thing). This list will penalize a company for doing that. 3-6 pts (3 pts for never missing a dividend, 3 pts for never cutting a dividend)
  3. Is the dividend currently covered by net investment income? I covered this in a previous post in which I explained why I believe it matters. Below you can see the updated chart. Again, the same situation applies where I multiplied a monthly dividend payer by 3 to turn it into a quarterly dividend. 3 pts
  4. How long has the company been paying dividends? I believe companies that have successfully navigated the 2007-2009 period should receive an extra credit above those companies which may have IPO'd over the past two years. 1-2 years is 1 pt; 2-5 years is 2 pts; 5+ years is 3 pts
Given this format, the max score a company could receive is 22 (5+ years of consistent dividends covered by NII) and the minimum score is 1 (company is still in business). For the BDC-R companies, the range of scores was 21 as a max and 3 as a min.
click to enlarge image

Discussion of Results
As you can see, most of the companies are in the higher range of the numbers. This is partially due to the sample selection (I do not track some of the newer BDCs at the moment) and the favorable market conditions for BDC companies.
The main negative on the scoreboard was dividend cuts. Only 5 of the companies listed here have not cut their dividend. Of those 5, PennantPark Investment Corporation (PNNT - first dividend June 2007) and Compass Diversified Holdings (CODI - July 2006) have been around for awhile. Solar Capital Ltd. (SLRC - March 2010) and Horizon Technology Finance (HRZN - December 2010) are new to the world.
The other major reason for taking away points is the fact that most of the companies listed do not cover their dividend with net investment income. This means that they are either not covering their dividend or are cannibalizing their portfolio to meet payout requirements. One such company is MVC Capital (MVC). It realized losses on portfolio companies at 23 cents per share so it could meet its dividend payment of 12 cents per share. By continuing this payout, it reduced its book NAV from 17.71 to 17.38 during the six month period ending April 30th 2011.
Only 7 out of the 26 companies are "safely" covering their dividend as of their last reporting dates, which safely means their NII is greater than or equal to their current dividend. These companies are PNNT, HTGC, Kohlberg Capital (KCAP), KKR Financial Holdings (KFN), Triangle Capital (TCAP), GLAD and MCG Capital Corporation (MCGC).
The Clear Winner
PNNT (PennantPark Investment Corp) comes out ahead of the pack with a solid dividend history and good earnings numbers. It scored a 21 out of a possible 22 and the only detraction was due to the firm's lack of longevity (only paying dividends since June 2007).
The first runner up is Hercules Technology Growth Capital. There has been a fair amount of good press on HTGC this year and it appears that the company has done a good job of backing up what people are saying about it Nicholas Marshi, one of the top posters on BDC companies on Seeking Alpha, did an extensive write-up on the company in March of this year.
Former-troubled BDC KCAP (Kohlberg Capital) is also sitting high on the list. The company was hit with a shareholder lawsuit in 2010, a changing of auditors (it switched from Deloitte to Grant Thornton) and restatement of earnings (again check the SEC website for the filings). For example, the restated as of June 30th 2009 earnings adjusted total assets down by $25m, which slashed the NAV from 11.09 to 9.73 and gave more fuel to the arguments it had with its lender BMO. It appears that the company may have weathered the storm and could be worth a deeper look into its financial statements and conference call logs.
At the bottom of the list is EQS. While not a BDC, EQS was a strong dividend-paying stock for 8 years and at this point it is too early to tell if the new management will be able to revitalize the company. SAR (remember GNV Investment?) is also sitting at the bottom as it has yet to show any signs of breaking out of GNV's slump.