A quick presentation of the M&A field…

May 15, 2022 by Louis DETALLE

A quick presentation of the M&A field…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains what does an M&A daily life looks like.

What does M&A consist in?

Mergers & Acquisitions (M&A) is a profession that advises companies wishing to develop their external growth, i.e. growth through the acquisition of a company or through a merger with it. M&A mandates are therefore carried out on the side of the company that wishes to acquire another company, “buy-side”, or on the side of a company that wishes to be acquired, “sell-side”.

What does an analyst work on?

The tasks of an M&A analyst are diverse and include, for example, drawing up a business plan, modelling different scenarios and strategies in Excel, and drafting information memorandums (IMs) on the various deals in progress. All these skills are then widely used for the mergers and acquisitions of companies, in the development of their external strategy, in their financial evaluation or in the analysis of databases. Overall, M&A allows you to move into any sector of finance and this is part of the reason why it is so attractive.

Why does M&A jobs appeal so much to students?

First of all, it is the dynamic working atmosphere that investment banking enjoys that also attracts young graduates. M&A is indeed marked by a culture of high standards and maximum commitment, with highly responsive teams and extremely competent colleagues. Working in a quality team is very stimulating, and often makes it possible to approach the workload with less apprehension and to rapidly increase one’s competence. The remuneration is also much higher than in other professions at the beginning of a professional career for a young graduate and it progresses rapidly. Finally, it is also the exit hypotheses that attract young M&A analysts.

What are the main exits for M&A?

Most professionals who started out in M&A move on to other types of activities where experience in this sector is required. This is particularly the case in private equity. After advising companies on their growth and expansion projects, the young investment banker has all the tools needed to work in investment funds. The skills are indeed transposable to the financial and strategic questions that private equity funds ask themselves in order to obtain a return on investment.

Switching to alternative portfolio management (hedge funds) is also a possibility. Hedge funds can invest in different types of assets such as commodities, currencies, corporate or government bonds, real estate or others. As a former M&A analyst, you have the skills to analyse the market and determine the assets that seem to be the most appropriate and profitable.

Finally, some former M&A bankers switch to corporate M&A, which involves determining which companies or subsidiaries the company should buy or sell. This can be a very interesting area as you have the opportunity to follow the acquisition of a company from start to finish and therefore take a long-term view of the company’s strategy.

Useful resources

Décideurs magazine Rankings for M&A banks in France (league tables)

About the author

The article was written in May 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Warren Buffet and his basket of eggs

May 12, 2022 by Rayan AKKAWI

Warren Buffet and his basket of eggs

In this article, Rayan AKKAWI (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022) analyzes the two following quotes “Do not put all eggs in one basket” and “Put all your eggs in one basket and watch that basket” often used by Warren Buffet to describe his investment strategy.

“Do not put all eggs in one basket”

I particularly liked this quote first because it is said by the world’s greatest investor and one of the richest people on the planet, Warren Buffet. I aspire this man due to his great investment philosophy which is to invest in great businesses at value for money prices and then by using the “buy and hold strategy” keep the stocks over the long term. He has bought great brands such as Coca Cola, Microsoft, and American Express. Second, I like this quote particularly because it is dedicated to any person who has little or no knowledge in investment, so it is easy to implement.

Analysis

If we analyze the wealthiest people in the world, they are entrepreneurs who have created companies that grew exponentially in value. For example, Bill gates who is the founder of Microsoft (1975), Jeff Bezos who is the founder of Amazon (1994), and Mark Zuckerberg who is the founder of Facebook (2004). And as we continue to analyze these founders, we come to realize that they have made their wealth by putting all their eggs in one basket at least early in their lives. However, not all of us have this entrepreneurial spirit and business success such as these brilliant men. Thus, when Warren Buffet said “do not put all eggs in one basket” he was referring to an average person who has little knowledge in investments. Therefore, he advocates investment into index tracker or passive funds which have the benefit of low charges, better performance, and large diversification than most active managed funds. This involves a buy and hold strategy which keeps share dealing charges low. Thus, it is always recommended to have 80% of investments in passive funds which are low cost, predictable, and conservative funds and 20% of investments in satellite which usually involve higher charges with greater volatility and greater returns.

Another way of looking at it is the following. One might decide to invest a certain number of personal wealth in a new business or in crypto. This would be a risky type of investment because another competitor might release a better and more attractive or even more affordable version of the product or service. Eventually, this might put you out of business if a customer writes a bad review of your product or business or if the bitcoin value drops.

So before you invest more time and money in your business, consider how you can manage your risk. First, you must think about your risk tolerance which depends on your age and current financial obligations. Second, you need to keep sufficient liquidity in your portfolio by setting aside an emergency fund that should be equal to 6 to 8 months’ expenses. For ensuring that there is easy accessibility to emergency funds, you should have low-risk investment options like Liquid Funds and Overnight Funds in your accounts. Then you need to determine an asset allocation strategy that works which refers to investing in more than one asset class for reducing the investment risks and this strategy also provides you with optimal returns. You can invest in a perfect mix of key asset classes like Equity, Debt, Mutual Funds, real estate, etc. One of the asset allocation strategies is to invest in a combination of asset classes that are inversely correlated to each other. After you have found the best mix of asset classes for your portfolio, you can reduce the overall investment risk by diversifying your investment in the same asset class. Think about diversifying by offering more than one product or service. To avoid liquidity risk, it is always better to stay invested in blue chip stock or fund. Investors should check the credit rating of debt securities to avoid default risk.

“Put all your eggs in one basket and watch that basket”

At the same time, Warren Buffet believes that diversification makes little sense if a person doesn’t know exactly what he or she is doing. Diversification is a protection against ignorance and is for people who do not know how to analyze businesses. Sometimes it is enough to invest in two or three companies that are resistant to competition rather than fifty average companies due to less risk. That is why it is as critical for a person to invest in a company where its values and vision are similar to that of the investor and to be able to watch closely the performance of that business and its stocks.

Thus, Warren Buffet believes that it is extremely crucial to be able to “watch your basket” or your stocks closely to better understand the stock market. For example, when the stock market is going down, it is the best way to start buying stocks because businesses will be selling at a discount.

Why should I be interested in this post?

One would be interested to read this post because it introduces the basics of investing in stock markets for an average person who has little knowledge in investments or for a student studying business. As a student, it is crucial and important to be able to have at least a general idea of the basic rules of investments and especially those stated by one of the most famous investors in the world such as Mr. Warren Buffet. Whether you are interested in buying stocks yourself or whether you are not, as a business student, you might be asked about investments and the financial market one time in your life and knowing some useful information about investments will be impressive for you. It will allow you to understand the bigger picture of financial markets, give some recommendations for your family and friends, and help you invest yourself in the safest and most successful way.

Useful resources

Berkshire Hathaway

About the author

The article was written in May 2022 by Rayan AKKAWI (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022).

Big data in the financial sector

May 12, 2022 by Rayan AKKAWI

Big data in the financial sector

In this article, Rayan AKKAWI (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022) explains the role of big data in the financial sector.

Big data is a term used for contemporary technologies and methodologies that are used to collect, process, and analyze complex data. Today, data is being created at an exponential rate. In fact, and according to a 2015 IBM study, 90% of the data in the world has been created in the past two years. As big data gets bigger, it becomes even more important and essential for executives in the financial sector to stay ahead of the curve. Also, it is expected that data creation will continue to grow moving forward in time.

Big Data in The Financial Sector

For decades, financial analysts have relied on data to extract insights. Today, with the rise of data science and machine learning, automated algorithms and complex analytical tools are being used hand in hand to get a head of the curve in diferetn areas of the financial sector.

Fraud prevention

First, data has helped with fraud prevention such as identity theft and credit card schemes. Abnormally high transactions from conservative spenders and out of region purchases often signal credit card fraud. Whenever this happens, the card is automatically blocked, and a notification is sent out to the card owner. This protects users, insurance companies, and banks from huge financial loses in a small period. This also made things even easier and more practical avoiding the hassle of having to call and cancel the card. Data science comes in the form of tool like random forests that can detect a certain suspicion. In addition, and to lower the chance of identity theft, data has helped ease this process through 3D passwords, text messages, and PINT code which have backed up the safety of online transactions.

Anomaly detection

Second, data has helped the financial sector through anomaly detection. Data analysis is not only created to avoid a problem but also to detect it. For example, data today helps with catching illegal insider traders. To do so, data analysts created anomaly detection algorithms that can analyze history in trading patterns and thus detect and catch abnormal transactions of illegal traders.

Customer analytics

Third, data has helped with improving customer analytics. Data analyzes previous behavioral trends of consumers based on historical transactions and then makes future predictions of how consumers are likely to act. With the help of socioeconomic characteristics, we can create clusters of consumers and group customers based on how much money we expect to gain or lose from each client in the future. Following that, we can come up with decisions to focus on a certain type of clients to make profits and cut on other customers to make savings. Thus, financial institutions minimize human errors by utilizing data science. To achieve that, first, by identifying uncertain interactions and then monitor them going forward. Finally, prioritizing the investments most vulnerable at a given time. For example, banks use this approach to create adaptive real risk score time models to identify risky clients and those who are suitable for a mortgage or a loan.

Algorithmic trading

Fourth and most importantly data has created algorithmic trading. Machines make trading based on algorithms multiple times every second with no need for approval by a stand-by analyst. These trades can be in any market and even in multiple markets simultaneously. Thus, algorithmic trading has mitigated opportunity costs. Thus, there are algorithmic rules that can help in identifying if there is a need to trade or not to trade and reinforces business models where errors are highly penalized and then adjust hyper parameters. We can see algorithms that exploit arbitrage opportunities where they can find inconsistencies and make trades which can cause problems. The huge upside is that it is high frequency trading; whenever it will find an opportunity to make a trading, it will. However, the downside is that imprecision could lead to huge losses due to lack of human supervision. That is why sometimes human interventions are needed.

Conclusion

Thus, we can say that data has become the hottest commodity that results in getting an edge over competition. Financial institutions spend a huge amount of money to get exclusive rights to data. By having more information, they can construct better models. The most valuable commodities are not analysts but the data itself. That is how the data science has revolutionized finance.

Characteristics of Big Data

When talking about Big Data, four main characteristics need to be considered to understand the why Big Data plays a transformational role in the financial sector: volume, variety, velocity, and value.

Volume

First, the amount also known as volume of data being produced on daily basis by users has been increasing exponentially by users. This large output of data has helped create Zettabytes (10¹² Gigabyte) and Yottabytes (10¹⁵ Gigabyte) of datasets in which companies can benefit by extracting knowledge and insights out of it. However, this amount of data cannot be processed using regular computers and laptops. Since they would require a lot of processing power.

Variety

Second, as the massive amount of data is being generated by multiple sources, the output of this data is unstructured making it hard to organize the data extract insights. Raw data extracted from the source without being processed does not provide any value to business as it does provide stakeholders with the ability to analyze it.

Velocity

Third, to address the issue of processing technological advancements have brought us to the tipping point where technologies such as cloud computing have enabled companies to process this large amount of data by utilizing the ability to share computational power. Furthermore, cloud platforms have not only helped in the processing part of data but by the emergence or cloud solution such as data lakes and data warehouses. Businesses are able to store this data in its original from to make sure that they can benefit from it.

Value

Finally, this brings us to the most important aspect of Big Data and that in being able to extract insights and value out of the data to understand what it is telling us. This process is tedious and time consuming however with ETL tool (Extract Transform Load) the data in its raw format is transformed so that standardized data sets can be produced. Insights can be extracted through Business Intelligence (BI) tools to create visualization that help business decisions. As well as predictive artificial intelligence models that help business predict when to take a strategic decision. In the case of financial markets, these decisions are when to buy or sell assets, and how much to invest.

Challenges Solved by Big Data in the Financial Industry

Utilizing Big Data in the finance industry presents a lot of benefits and helps the industry to overcome multiple challenges.

Data Quality

As previously mentioned, the multiple data sources present a huge challenge from a data management standpoint. Making it an ongoing and a tedious effort to maintain the integrity and the reliability of the records collected. Therefore, adding information processing systems and standardizing the data gathering and transformation processes helps improve the accuracy of the decision-making process, especially in financial services companies where real-time data enables fast decision making and elevates the performance of companies.

Data Silos

Since financial data comes from multiple sources (applications, emails, documents, and more), the use of data integration tools help simplifies and consolidate the data of the institution. These technologies facilitate processes and make them faster and more agile, which are important characteristics in the financial markets.

Robo-Advisory

Big Data and analytics have had a huge impact on the financial advisory sector. Where financial advisors are being replaced by machine learning algorithms and AI models to manage portfolio and provide customers with personalized advice and without human intervention.

Why should I be interested in this post?

This article is just an eye opener on the trends and the future state of the financial industry.

Like many other industries, the financial sector is becoming one of the most data driven field. Therefore, as future leaders it is vital to keep track and push towards data driven solutions to excel and succeed within the financial sector.

Useful resources

The Future of Cognitive Computing

Five Ways to Use RPA in Finance

About the author

The article was written in May 2022 by Rayan AKKAWI (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022).

Fiche Métier : Térsorier

May 11, 2022 by Emma LAFARGUE

Fiche Métier : Térsorier

Dans cet article, Emma LAFARGUE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024) décrit le métier de trésorier.

Que fait un trésorier ?

Le trésorier est la personne en charge des différents flux monétaire de l’entreprise. C’est lui qui gère la répartition et la distribution des liquidités (paiement des prestataires, rémunération des salariés) et qui veille à la stabilité financière. Il doit s’assurer que l’entreprise dispose d’un fonds de roulement suffisant pour son fonctionnement quotidien, c’est lui qui place l’argent et décide du financement et des investissements (en lien avec la direction stratégique)

Concrètement, ses missions au quotidien sont de :

Contrôler les dépenses et recettes de l’entreprise
Tenir le registre des différents mouvements financiers
Gérer les liquidités, c’est-à-dire veiller au remboursement des emprunts et à la rentabilité des investissements
Etudier les risques liés aux perspectives de placement

Avec qui travaille un trésorier ?

Le trésorier est en lien constant avec la direction de l’entreprise afin de décider de la stratégie de financement, de se mettre d’accord sur les investissements et les placements à effectuer.
Le trésorier est également le principal interlocuteur des banques et des investisseurs.

Enfin, il travaille en interaction avec les comptables, en charge de l’aspect technique des transactions financières : ils enregistrent les opérations et formulent des déclarations. Le trésorier quand-à-lui, est chargé des fonds directement.

Combien gagne un trésorier ?

Un trésorier gagne entre 3 700€ et 6 000€ brut par mois. Cependant, le salaire d’un trésorier junior varie entre 36 000€ et 48 000€ par an (source : cadremplois.fr 2021)).

Quel positionnement dans la carrière ?

Il est possible d’être trésorier junior. Cependant, les entreprises privilégient les personnes avec de l’expérience, c’est-à-dire ayant déjà exercé des fonctions de contrôleur de gestion ou comptable trésorerie.
Le trésorier peut aspirer à une belle évolution de carrière. Après 5 années, il peut bénéficier d’opportunités et évoluer en tant que directeur financier, responsable du service administratif, chef trésorier ou responsable trésorerie groupe.

Quelle formation ?

Pour être trésorier, un bac +5 est nécessaire en finance, commerce, gestion ou comptabilité.
Les formations peuvent donc être une école de commerce avec spécialisation en finance ou trésorerie ou un diplôme supérieur de comptabilité et de gestion (DSCG). Ces deux formations sont proposées par l’ESSEC : le DSCG peut être passé en parallèle et la spécialisation en finance se fait par le Corporate Finance Track disponible à Cergy et Singapour.

Lien avec le cours et concepts clés :

Pour être trésorier, il faut avoir une très bonne connaissance des différentes normes IFRS (International Financial Reporting Standards), du droit des affaires ainsi que toutes les notions de comptabilité et finance (Compte de résultat, Bilan, Tableau de financement, flux de trésorerie, fonds de roulement etc.)

Autres articles sur le blog SimTrade

▶ All posts about Professional experiences

▶ Anna BARBERO Career in finance

▶ Alexandre VERLET Classic brain teasers from real-life interviews

Resources utiles

Association Française des Trésoriers d’Entreprise

Cadremplois.fr Trésorier

A popos de l’auteure

Cet article a été écrit en Mai 2022 Emma LAFARGUE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024).

Mon expérience en contrôle de gestion chez Chanel

May 11, 2022 by Emma LAFARGUE

Mon expérience en contrôle de gestion chez Chanel

Dans cet article, Emma LAFARGUE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024) partage son expérience en contrôle de gestion chez Chanel.

Présentation de l’entreprise

Chanel est une entreprise française de haute couture, prêt-à-porter, accessoires, parfums et autres produits de luxe. Elle a été créée en 1910 par Gabrielle Chanel. La maison appartient aujourd’hui à Alain et Gérard Wertheimer et son siège est basée à Neuilly. La maison est connue pour ses produits tels que le parfum numéro 5 créé en 1921, le tweed ou encore les sacs. Chanel est une des rares entreprises du luxe qui n’est pas côté en bourse. Son chiffre d’affaires s’élève à 10 milliards de dollars en 2020.

Logo de l’entreprise Chanel
Logo Chanel
Source: Chanel

Mon poste et qu’est-ce que le contrôle de gestion ?

Le contrôleur de gestion est la personne chargée de contrôler les budgets de l’entreprise en lien avec la mise en œuvre de la stratégie de l’entreprise.

De mon côté, j’étais au service de contrôle de gestion « Reporting et Budget » au sein de la division Mode de chez Chanel (il existait aussi d’autres service de contrôle de gestion comme la gestion des stocks). Mon périmètre était très large, je gérais tout d’abord les budgets de fonctionnement des équipes (sans la masse salariale qui était gérée par un autre employé), cela concerne donc les déplacements, voyages, séminaires, intérims et différents frais consultants. J’étais en charge de toutes les équipes de la division mode : le digital, la communication, le service clients (CRM pour customer relationship management), les sessions d’achats, les opérationnels ainsi que les équipes produits.

Je gérais également les coûts de collection c’est-à-dire les coûts de création de tous les prototypes destinés aux défilés et les budgets des sessions d’achats, soit le moment après le défilé durant lequel les directeurs des boutiques monde se rendent au siège pour choisir quelle pièce sera présente dans quelle boutique.

Enfin, je m’occupais des budgets de la logistique (supply chain) et des centres de distribution (retail). Ce volet passait par une partie « Suivie de projet » qui concernait un nouveau centre de distribution. Il fallait donc suivre la mise en fonctionnement de ce centre, en particulier les dépenses de de fonctionnement (OPEX pour operational expenses) et les investissements (CAPEX pour capital expenditures).

Concrètement, durant mon stage, j’exerçais différentes missions :

Lors des clôtures mensuelles : mise à jour mensuelle des fichiers de suivi des coûts par l’extraction des données de la comptabilité et consolidation dans nos fichiers de suivi et tableaux de bord
Travail d’analyse : traitement des données, analyse des écarts existant entre les chiffres de prévisions et les chiffres réalisés
Reporting aux différentes équipes pour les tenir au courant de l’avancée dans leurs budgets

La partie la plus intéressante de mon stage, selon moi, a été l’élaboration des budgets pour l’année suivante. L’objectif de ce travail est d’estimer les dépenses pour l’année suivante afin qu’elles soient validées par la Direction Financière et la Direction Générale.
L’élaboration des budgets passe par des réunions avec toutes les équipes opérationnelles afin de définir leurs besoins, comprendre leurs différents projets et les estimer.

L’élaboration des budgets permet au contrôleur de gestion de rester informé des différents projets que mènent les équipes pour pouvoir ensuite suivre au plus près leurs dépenses l’année suivante.

Au niveau opérationnel, le contrôleur de gestion est donc en relation directe avec toutes les équipes opérationnelles dont il a la charge, avec le service de comptabilité qui est chargé d’enregistrer et d’imputer les factures et donc les différents postes de coûts. Le contrôleur de gestion est aussi en relation avec le responsable du contrôle de gestion et le directeur financier.

Compétences et connaissances requises

Le travail se fait principalement sur Excel, ainsi, il faut maîtriser les principales commandes : recherche (recherche H ou V dans les feuilles Excel), somme.si (sommes conditionnelles), TCD (tableaux croisés dynamiques), etc.

Il faut avoir des connaissances sur l’entreprise, le secteur dans lequel on évolue et les différentes équipes avec qui on est en contact de manière régulière pour établir les budgets. La connaissance de chaque équipe est importante car l’activité peut différer beaucoup d’une équipe à l’autre (le suivi des budgets pour les coûts de collection est totalement différent de celui effectué pour la logistique).

Il faut également des connaissances dans le domaine financier : savoir analyser un compte de résultat, comprendre les différentes notions comptables telles que les immobilisations et amortissements.

Un esprit d’analyse et de synthèse sont aussi nécessaires pour effectuer les reportings mensuels aux différentes équipes.

Enfin, les qualités relationnelles sont indispensables car le contrôleur de gestion est en constante interaction avec les autres services de l’entreprise.

Autres articles sur le blog SimTrade

▶ All posts about Professional experiences

▶ Anna BARBERO Career in finance

▶ Chloé POUZOL Mon expérience de contrôleuse de gestion chez Edgar Suites

Resources utiles

Chanel

Association Nationale des Directeurs Financiers et de Contrôle de Gestion (DFCG)

A propos de l’auteure

Cet article a été écrit en mai 2022 par Emma LAFARGUE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024).

Métier de Directeur financier

May 10, 2022 by Chloé POUZOL

Description du métier de Directeur financier

In this article, Chloé POUZOL (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024) présente le métier de Directeur financier.

Que fait un directeur financier ?

L’objectif principal d’un directeur financier est de développer stratégiquement et financièrement l’entreprise pour laquelle il travaille. Ses missions sont variées et nombreuses. Il est tout d’abord responsable de garantir l’équilibre financier de l’entreprise et d’optimiser ses performances. Pour cela, il encadre les équipes financières et comptables, établit les budgets, assure le suivi de la trésorerie et des écarts avec le budget, gère le besoin en fonds de roulement (BFR) et s’occupe de la gestion des dettes en anticipant les besoins de financement de l’entreprise.

Ensuite, le directeur financier est chargé de conseiller la Direction Générale sur les investissements à réaliser. Il décide des placements à effectuer, des plans de financement et suit leur mise en œuvre.

Le directeur financier doit aussi représenter l’entreprise lors des rencontres, des négociations avec les partenaires financiers et des réunions de la Direction générale au sein même de l’entreprise. Il est responsable de l’organisation des réunions et assemblées générales (notamment de clôture des comptes et pour les reportings) .

Enfin, le directeur financier doit mettre en place des procédures de gestion et d’optimisation et faire des veilles réglementaires relatives au secteur d’activité de l’entreprise. Il supervise le recouvrement et le juridique.

Avec qui travaille un directeur financier ?

Le directeur financier doit avoir une appétence pour le travail en équipe. En effet, il est en relation avec tous les services de l’entreprise pour établir les budgets de trésorerie et surtout avec les équipes comptables, administratives et financières. Il dirige lui-même une équipe composée d’analystes financiers, de responsables de la trésorerie, de spécialistes du financement et d’experts des crédits internationaux. Le directeur financier est également en charge des relations extérieures avec les bailleurs de fonds (les actionnaires et les créanciers comme les banques) et les organismes privés ou publics (Etat, régulateurs, associations professionnelles, etc.) concernés par l’activité de l’entreprise.

Combien gagne un directeur financier ?

Le salaire d’un directeur financier dépend de son expérience professionnelle, de sa formation initiale, du secteur d’activité et de la taille de l’entreprise dans laquelle il travaille. Cependant, le salaire mensuel moyen s’élève généralement entre 5 000 € et 6 600 € brut ; mais il peut aller jusqu’à 25 000 € brut pour un directeur financier très expérimenté. En tant que directeur, il est également possible de toucher des bonus.

Quel positionnement dans la carrière ?

Travailler en tant que directeur financier permet une mobilité professionnelle importante. En effet, il vous est possible d’une part de continuer votre carrière dans la même entreprise en travaillant à la Direction Générale en tant que DG ou PDG par exemple, ou d’autre part, en changeant d’entreprise pour occuper à nouveau un poste de Directeur Financier ou au sein de la Direction Générale.

Quelle formation ?

Être muni d’un Bac+5 et sorti d’une école de commerce comme l’ESSEC correspondent à la formation académique nécessaire pour occuper ce poste.

Cependant, le poste de Directeur financier n’est pas accessible dès la diplomation. Il est, en effet, nécessaire d’acquérir plusieurs années d’expériences dans le domaine de la comtpabilité, de la finance, du contrôle de gestion ou de l’audit.

Compétences requises ?

Il est évident que chaque directeur financier est différent et qu’en fonction de l’entreprise dans laquelle il travaille et des équipes qu’il gère certaines compétences seront plus nécessaires que d’autres. Il est tout de même possible d’affirmer que parmi les hard skills nécessaire, une bonne connaissance des aspects fiscaux, comptables, juridiques et financiers est essentielle à acquérir. Les compétences techniques s’acquièrent principalement avec l’expérience. De même, le directeur financier doit faire preuve de leadership et avoir le sens de l’écoute afin de bien manager ses équipes. Enfin, une forte résistance au stress ainsi que la capacité de convaincre un public sont des compétences humaines et comportementales (soft skills) très valorisées pour ce poste.

Artilcles à lire sur le blog SimTrade

▶ All posts about Professional experiences

▶ Anne BARBERO Career in finance

▶ Alexandre VERLET Classic brain teasers from real-life interviews

Ressources utiles

Cegos Fiche métier directeur financier

A propos de l’auteure

Cet article a été écrit en mai 2022 par Chloé POUZOL (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024).

Mon expérience de contrôleuse de gestion chez Edgar Suites

May 10, 2022 by Chloé POUZOL

Mon expérience de contrôleuse de gestion chez Edgar Suites

In this article, Chloé POUZOL (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024) partage son experience de contrôleuse de gestion chez Edgar Suites.

L’entreprise : Edgar Suites

Edgar Suites est une start-up fondée en 2016 par Xavier O’QUIN, Maxime BENOIT et Grégoire BENOIT. Elle propose à ses clients de vivre une expérience au cœur de la ville en logeant dans une suite urbaine : un mix idéal entre appartement et hôtel. Pour cela, l’entreprise loue des locaux initialement occupés par des bureaux, qu’elle transforme en T1 (studio), T2 (2 pièces) et T3 (3 pièces).

Exemple de suite

Source: Edgar Suites

En mai 2021, Edgar Suites a levé 104 millions d’euros auprès du fonds d’investissement BC Partners. Depuis cette levée de fonds, l’entreprise a triplé son activité avec presque 150 suites urbaines à Paris, Levallois Perret, Bordeaux, Lille et Cannes.

Logo de l’entreprise Edgar Suites
Logo Edgar Suites
Source: Edgar Suites

Mes missions

En tant que stagiaire, j’ai eu plusieurs missions bien différentes, certaines seulement temporairement et d’autres tout au long de mon stage.

Lorsque je suis arrivée chez Edgar Suites, il n’y avait pas encore de contrôle de gestion mis en place. L’entreprise avait juste quelques fichiers Excel avec lesquels elle faisait tant bien que mal les calculs de chiffres d’affaires (CA) et d’excédent brut d’exploitation (EBE) qui représente le bénéfice d’une société avant les intérêts, impôts, amortissement et provisions (EBITDA pour Earnings before interest, taxes, depreciation, and amortization)…

L’entreprise avait embauché un prestataire extérieur pour construire des fichiers de reporting financier et comptable grâce à un tableur (Excel) et une suite de logiciels qui permettent de transformer des données disparates en informations visuelles, immersives et interactives (Power BI). J’étais chargée de surveiller l’avancée du dossier, de superviser le respect des dates limites (deadlines) et surtout de vérifier la cohérence des fichiers envoyés (écarts, cohérences entre les grands livres, les résultats de l’entreprise (P&L pour Profit & Loss) et les budgets). Cela m’a ainsi permis d’apprendre à maîtriser un éditeur de requêtes de données (Power Query, un des logiciels de la suite Power BI) pour importer des données de l’entreprise dans le tableur Excel.

En plus de cette première responsabilité, j’ai été chargée d’améliorer les fichiers internes de suivi d’indicateurs utilisés pour l’aide à la décision et pour mesurer l’efficacité d’une mesure (KPI pour key performance indicator) notamment le coût au check-in et le coût par équivalent temps plein (ETP) qui est une unité de mesure permettant d’évaluer la charge de travail et la capacité d’un employé.

Réalisation des reportings mensuels

En plus de ces missions, j’étais responsable de la rédaction de tous les reportings mensuels pour BC Partners (le fonds d’investissement auprès duquel Edgar Suites a levé des fonds pour financer son développement) et pour les propriétaires d’immeuble à loyer variable (loyer calculé selon un certain pourcentage du chiffre d’affaires) où il s’agissait de calculer le chiffre d’affaires, les coûts fixes, les coûts variables du mois et ainsi les bénéfices du mois. Je devais aussi m’occuper des rapprochements bancaires (contrôle de la concordance entre les relevés des comptes bancaires et les comptes correspondant dans la comptabilité) et de la gestion des factures qui s’effectuaient à l’aide du logiciel Pennylane.

Réflexion sur la responsabilité sociétale des entreprises (RSE)

Enfin, j’ai également participé à la réflexion sur la responsabilité sociétale des entreprises (RSE) pour prendre en compte les enjeux environnementaux et sociaux d’Edgar Suites. Les dirigeants souhaitent, en effet, être labellisés B-Corp (Benefit Corporation). Une entreprise peut recevoir la certification B-Corp lorsque ses actions sont en adéquation avec les exigences sociales, environnementales et de gouvernance du public. Il s’agit d’une certification qui s’obtient après un long processus. J’ai donc effectué des recherches et conduit des entretiens pour trouver le cabinet de conseil adéquat pour nous accompagner tout au long de ce projet. J’ai également participé aux réunions de réflexion sur les actions d’Edgar Suites afin d’atténuer l’impact social et environnemental de l’activité.

Compétences et connaissances requises pour ce stage

Les principales compétences et connaissances techniques (hard skills) requises sont de maîtriser un tableur comme Excel et d’avoir de bonnes bases en comptabilité et en finance. En effet, pour réaliser les reportings, il était nécessaire de comprendre les données importantes de l’activité pour pouvoir les analyser et les synthétiser. Ces données importantes chez Edgar Suites étaient le coût par check-in, l’EBITDA, les coûts fixes et les coûts variables (notamment les loyers variables). De même, pour faire de la modélisation financière, il est essentiel d’avoir de bonnes connaissances financières afin de créer une logique et une présentation cohérente au sein du fichier.

Enfin, les compétences humaines et comportementales (soft skills) essentielles étaient principalement de savoir travailler en équipe ; cela permet de mettre à contribution les idées et les compétences de tous les membres du groupe pour améliorer le résultat du travail sur l’entreprise.

De façon générale, je suis très satisfaite de mon premier stage que j’ai effectué à la fin de ma première année à l’ESSEC. J’ai été responsabilisée et j’ai pu découvrir le fonctionnement comptable d’une entreprise ainsi que me familiariser avec la finance d’entreprise. En effet, j’ai pu manipuler les états financiers d’Edgar Suites pour me familiariser avec leur lecture et leur analyse. De plus, j’ai pu observer le fonctionnement des finances de l’entreprise : comment l’entreprise gérait ses coûts ; comment Edgar Suites essayait d’améliorer sa rentabilité ; quelles étaient les répercutions sur le plan financier des décisions de management …

Concepts clés

Je détaille ci-dessous quelques concepts clés qui m’ont été utile de maîtriser pendant mon stage :

Contrôle de gestion

Le contrôle de gestion est un service au sein d’une entreprise, chargé d’aider à la prise de décision. Il est responsable de l’élaboration des budgets, de la mise en place de procédures de gestion et de règles, du suivi des résultats, du choix des indicateurs clés dans les tableaux de bord et de la production et la diffusion d’outils de pilotage. L’objectif principal du contrôleur de gestion est d’optimiser les performances matérielles et financières de l’entreprise.

Chiffre d’Affaires

Le Chiffre d’Affaires (CA) correspond à la somme des ventes des produits ou services d’une entreprise. Il se calcule en multipliant les quantités vendues par leur prix de vente. Il s’agit donc d’un indicateur principal sur les performances de l’entreprise.

EBE ou Ebitda

L’Ebitda (Earnings before interest, taxes, depreciation, and amortization) correspond au bénéfice avant les intérêts, les impôts, les taxes, la dépréciation et l’amortissement. Il mesure donc la création de richesse avant toute charge. Il s’agit d’une notion assez proche de l’EBE (Excédent Brut d’Exploitation). Il existe deux formules pour calculer l’Ebitda :

Ebitda = Chiffres d’affaires – achats – autres charges externes – charges du personnel – autres charges

Ebitda = Résultat net + charges d’intérêts + charges d’impôts + amortissements et provisions

Lorsque l’Ebitda est positif, cela signifie que l’entreprise est rentable au niveau opérationnel mais pas forcément qu’elle est bénéficiaire (après la prise en compte d’autres éléments comme les charges financière).

Responsabilité sociétale des entreprises (RSE)

La responsabilité sociétale des entreprises (RSE) correspond à la contribution des entreprises aux enjeux du développement durable. Cela consiste à faire des efforts pour la protection de l’environnement et pour l’amélioration de la société. Ces efforts se font en collaboration avec toutes les parties prenantes (fournisseurs, clients, employés, actionnaires…). Il existe aujourd’hui de nombreuses certifications, comme la certification B-Corp, qui reconnaissent l’investissement des entreprises dans la RSE.

Articles à lire sur le blog SimTrade

▶ All posts about Professional experiences

▶ Anna BARBERO Career in finance

▶ Emma LAFARGUE Mon expérience en contrôle de gestion chez Chanel

▶ Ghali EL KOUHENE Asset valuation in the real estate sector

Ressources utiles

Edgar Suites

B-Corp France

A propos de l’auteure

Cet article a été écrit en mai 2022 par Chloé POUZOL (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024). Vous pouvez me contacter via mon adresse mail ESSEC pour plus d’information sur mon stage.

Momentum Trading Strategy

May 8, 2022 by Akshit GUPTA

Momentum Trading Strategy

This article written by Akshit GUPTA (ESSEC Business School, Master in Management, 2019-2022) explains the momentum trading strategy.

Introduction

The momentum trading strategy is a strategy where a trader buys a security when its market price starts to rise and then sells it when its price seems to have reached a top. Similarly, a trader sells (or short sells) a security when its market price starts to fall and then buys it back when its price seems to have reached a bottom. In other words, if we observe a positive price change or return today, we are long tomorrow, and if we observe a negative price change or return today, we are short tomorrow.

This trading strategy is based on the direction of the price trend (up or down) in the market and its relative strength. The rationale behind the momentum trading strategy is that, for an upward trend, if there is enough buying force behind the rise in the price of an asset, it will keep on rising until a strong selling pressure is seen in the market to reverse the trend. Similarly, for a downward trend, if there is enough selling force behind the fall in the price of an asset, it will keep on falling until a strong buying pressure is seen in the market to reverse the trend.

Momentum trading is a trading strategy with a short-term horizon where traders try to capture and profit from the price trend. The period for implementing a momentum strategy can range from a trend forming within a day or over several days. Momentum traders try to identify the strength of an ongoing trend in a particular direction and take a position. The strength can measured by different technical indicators discussed below. Once the strength of the trend begins to fall, the trader exits the position at a profit.

Momentum traders are least concerned about the fundamentals of the company for which the stock is to be traded. They rather use various technical indicators to understand the trend in the stock price, especially its strength.

Implementation

Figure 1 below illustrates the implementation of the momentum trading strategy for Apple stock over the period from April 1, 2020 to March 31, 2021.

Figure 1. Implementation of the momentum trading strategy for Apple stock.

Source: computation by the author (data source: Yahoo Finance).

In Figure 1, an upward trend can be seen forming in the period from November 22, 2020 to November 25, 2020 in the price of Apple stock. The trader following a momentum strategy will go long on the Apple stock till the momentum is in the upward direction. The right time to exit the long position is around December 2, 2020. By following this trend, the trader can capture a price movement of around $10 which is approximately 8%-9%, by going long on the Apple stock.

Momentum trading indicators

Momentum trading indicators help the trader to look for the formation of a trend and the signal of an entry/exit point, and also indicate the strength of that signal. We present below some of the most common indicators used to assess the strength of the trend: relative strength index (RSI), moving-average convergence-divergence (MACD) and Bollinger bands.

Relative Strength Index (RSI)

The RSI indicator is a technical indicator and is plotted on a chart which ranges from 0 to 100. It helps a trader in knowing the relative strength of a trend formation. The indicator is an oscillator which provides overbought or oversold signals based on the positioning of the line in the chart. During the uptrend, if the line crosses the 70 mark, an overbought signal is considered for the given security. Symmetrically, during a downtrend, if the line crosses the 30 mark, an oversold signal is considered. Momentum traders generally take a position in between in the indicator instead of waiting for a price reversal when the line crosses the given thresholds. For example, a trader can use the halfway mark of 50 to get an idea about the formation of a trend. If the RSI line crosses the 50 mark and is moving in an upward direction, it can show the high strength of the upward forming trend and the trader can take a long position in the respective stock.

Figure 2. Relative Strength Index of Apple stock.

Source: computation by the author (data source: Yahoo Finance).

Moving-average convergence-divergence (MACD)

The moving-average convergence-divergence (MACD) is a technical indicator based on the moving averages of prices over a period of time. The indicator helps in understanding the direction and strength of a trend. It also helps in understanding the rate at which the change in trend is happening.

The indicator is shown by two lines namely, the MACD line and the signal line. The MACD line is the difference between two exponential moving-averages, a long-term moving-average like a 26-day moving average and a short-term moving-average like the 12-day moving average. The signal line is made up of the 9-day exponential moving-average of the MACD itself and is placed on the same graph. A bar graphs plotted on the zero-line (X axis) showing the difference by which the MACD line is below/above the signal line. Generally, the indicator is used to understand the degree of the bullish or bearish sentiments in the market. If the MACD line crosses the signal line from below the zero-level moving upwards, it indicates a bullish trend. In such a scenario, a trader practicing momentum strategy would take a long position in the market seeing the trend.

Figure 3. Moving-average convergence-divergence of Apple stock.
MACD of Apple stock
Source: computation by the author (data source: Yahoo Finance).

Bollinger bands

The Bollinger bands is a very popular technical indicator that represents the volatility in the prices of a financial asset. The indicator consist of three lines, namely, a simple moving-average (SMA), and an upper band and a lower band. The simple moving average is usually computed over a rolling period of 20 trading day (about a calendar month for the equity market). The upper and lower bands are usually set by default to two standard deviations away from the simple moving average.

The width between the upper and lower Bollinger bands provides a range for price changes in the market (an indicator of volatility). The bands help to identify the overbought or oversold situations in the market for an asset. They can be used by a trader to identify possible entry or exit prices to implement the momentum trading strategy.

Figure 4 represents the Bollinger bands for Apple stocks. The price of the Apple stock is touching the lower band on November 2, 2020 and reverting just after that. This can be a signal for the momentum trader showing a trend reversal and the trader can take a long position in this stock till the price touches the 20-day SMA line which happens around November 5, 2020, thereby capturing a price movement of $8 approximately.

Figure 4. Bollinger bands of Apple stock.

Source: computation by the author (data source: Yahoo Finance).

Market conditions

Market liquidity and market volatility play a major role in the implementation of a momentum strategy.

A liquid market is generally preferred by traders in order to quickly enter and exit the market.

Stock price volatility is a major factor affecting a momentum trader’s decision to enter/exit a trade. A highly volatile stock can provide a good opportunity for a trader to earn high profits using this strategy as the asset prices can change dramatically in a short period of time. But a high stock volatility can also lead to huge losses if the prices move in an unfavorable direction.

The figure below represents the historical daily volatility (standard deviation of returns over rolling 10-day periods) of Apple stock over the period from April 1, 2020 to March 31, 2021.

Figure 5. Volatility of Apple stock.

Source: computation by the author (data source: Yahoo Finance).

You can download below the Excel file for the computation of the different momentum trading indicators mentioned above.

Risks associated with momentum trading

Although momentum trading is a commonly used strategy, the risks associated with it are quite high. The trader using this strategy should be careful about:

Entering the position too early
Exiting the position too late
Relying on rumors and fake news
Missing the indication of a reversal in the direction of the trend
Not applying a strict stop loss rule

Link with market efficiency

Market efficiency refers to the degree to which all the relevant information about an asset is incorporated in the market prices of that asset. Fama (1970) distinguished three forms of market efficiency: weak, semi-strong, and strong according to the set of information considered (market data, public information, and private information).

In the weak form of the market efficiency hypothesis, the current market price of an asset incorporates all the historical market data (past transaction prices and volumes). The current market price of the asset is then the best predictor of its future price.

In a market efficient in the weak sense, the autocorrelation of asset price changes or returns is close to zero.

A positive autocorrelation coefficient would imply that after a price increase, we should likely observe another price increase, and symmetrically, after a price decrease, we should likely observe another price decrease, leading in both cases to price trends.

The implementation of a momentum strategy assumes that the autocorrelation of price changes is positive, which contradicts the efficient market hypothesis.

In a market which is efficient in the weak sense (implying an autocorrelation close to zero), momentum trading strategies should not exhibit extra profit as traders are not be able to beat the market on the long run.

▶ Jayati WALIA Bollinger bands

▶ Jayati WALIA Moving averages

▶ Akshit GUPTA Growth investment strategy

Useful resources

Academic research

Fama E.F. (1970) Efficient Capital Markets: A Review of Theory and Empirical Work, The Journal of Finance 25(2): 383-417.

Fama E.F. (1991) Efficient Capital Markets II: A Review of Theory and Empirical Work, The Journal of Finance 46(5): 1575-1617.

Business analysis

Fidelity Learning center: Momentum trading strategy

About the author

Article written in May 2022 by Akshit GUPTA (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

The WHO's news on the HPV vaccine caused the stock prices of Zhifei Bio and Wantai Bio to plunge

May 6, 2022 by Pai LI

The WHO’s news on the HPV vaccine caused the stock prices of Zhifei Bio and Wantai Bio to plunge

In this article, Pai LI (ESSEC Business School, Global BBA, 2021-2023) shares her insights on the event “The WHO’s news on the HPV vaccine caused the stock prices to plunge”.

The Brief Introduction of the event

On 2022 April 11, the World Health Organization (WHO) announced on its official website that the WHO convened a meeting of the Strategic Expert Group on Immunization (SAGE) from April 4 to 7 to vaccinate one dose of human papillomavirus (HPV) vaccine. The expert group considered that only 1 dose of HPV vaccine can produce the same immune effect as 2-3 doses, and can effectively prevent cervical cancer caused by HPV infection.

As soon as the news came out, the stock prices of HPV vaccine concept stocks Zhifei Bio and Wantai Bio plunged. As of the close, Zhifei Bio fell 14.19%, and Wantai Bio once fell by the limit, and as of the close, it fell 9.46% and approached the limit.

Stock chart of Zhifei Bio and Wantai Bio

Source: Bloomberg.

Explanation of the Market reaction to the Event

The World Health Organization (WHO) website released information saying that from April 4 to April 7, the WHO Strategic Advisory Group of Experts on Immunization (SAGE) held a meeting, referring to the single dose of the HPV vaccine provides reliable protection, comparable to a 2- or 3-dose regimen.

Regarding the impact of the reduction in the number of HPV vaccination doses, at noon on April 14, After the stock market opened on the afternoon of April 14, the decline in the share price of related companies narrowed. As of the close, Zhifei Biological fell 14.19% to 116 yuan per share, with a market value of 185.6 billion yuan; Watson Bio fell 3.08% to 49.11 yuan / stock market value of 78.65 billion yuan; Wantai Bio fell 9.46% to 257.59 yuan / share , with a market value of 156.37 billion yuan.

The stocks of biology may be affected by the decline of three HPV vaccine companies. On April 14, many stocks in the A-share biological vaccine sector fell. For example, CanSino closed down 3.99%, and Kangtai Bio closed down 1.2%.

WHO press release

Source: WHO.

It is important to note that SAGE stated in the minutes of the meeting that it reviewed new evidence on the efficacy of single doses of HPV, and recommended that women aged 9-14 receive 1 or 2 doses, with a single dose providing comparable and high levels of protection. From a public health perspective, is more effective, less resource intensive and easier to implement. Likewise, 1 or 2 doses are also suitable for women between the ages of 15 and 20.

The current HPV vaccine policy in the world is 2 doses for girls aged 9-14 years, 3 doses for girls aged 15 years and above, and 3 doses for immunocompromised people of any age, including people with HIV.

Notably, SAGE emphasizes that more evidence is needed on whether reduced doses provide protection in immunocompromised groups.

The minutes also mentioned that WHO will conduct stakeholder consultations on these important policy changes before revising the position paper on HPV vaccination.

Predictions for the future

Regarding the recommendations of this WHO meeting on HPV vaccine, I believe that this meeting is only providing a recommendation and not implementing it, and that the current vaccination schedule is still dominated by 2-3 doses. In addition, WHO’s recommendations are mainly based on concerns about the slow introduction of HPV vaccine into immunization programs and low overall population coverage, especially in poorer countries, and the core is to address the huge gap between HPV vaccine supply and demand.

Even if the vaccination procedure is changed from three injections to two injections in the future, the improvement of industry penetration rate and accessibility is believed to effectively fill the market, which is expected to bring strong demand for HPV vaccination in relevant third world countries, and the export of Chinese domestic HPV vaccines is expected to accelerate. At the same time, for Merck’s nine-valent HPV vaccine, it is still in a stage of insufficient production capacity. Whether it is a two-shot or three-shot vaccination program, it is still in a stage of short supply. In conclusion, there is no need to worry too much about the impact on the performance of HPV-related companies.

About the author

The article was written in May 2022 by Pai LI (ESSEC Business School, Global BBA, 2021-2023).

My internship experience as a financial research analyst in Tianfeng Securities

May 6, 2022 by Pai LI

My internship experience as a financial research analyst in Tianfeng Securities

In this article, Pai LI (ESSEC Business School, Global BBA, 2021-2023) shares her internship experience as an assistant financial research analyst in Tianfeng Securities which is a Securities Research Institute in China.

The Company

Tianfeng Securities is a global full-license integrated financial securities service provider. Tianfeng Securities Research Institute is a high-end industry research think tank in China. It brings together more than 200 team members to build bridges and links between funds and industry and enhance the ability of financial services to serve the substantial economy.

Tianfeng Research Institute adheres to the “industry-oriented” driving force, creates a unique financial ecological alliance, forming a complete ecological chain that runs through the life cycle of enterprises and industries.

Logo of Tianfeng Securities

Source: Tianfeng Securities.

My Internship

My missions

The department I practiced for was the Securities Research Institute, and the position was financial research assistant. My work mainly consisted of two parts, the daily research work about industry and the related work of writing in-depth research reports about companies.

Daily work includes using a financial database called Wind (like Bloomberg but focused on mainland China) to find industry data, prospectus, company annual reports and other materials, doing market shares calculations, doing valuation models, collecting information for industry research topics, writing new stock purchase proposals, updating internal industry databases, modifying and improve the Powerpoint presentation of roadshow reports, operating social media for publishing weekly reports, comments, and in-depth reports.

In addition to the above routines, I also participated in the writing of the first draft of the Institute’s in-depth reports. At the beginning I wrote some simple company tracking reviews. These short reports were completed by referring to the relevant announcements and materials of the company. Next, I gradually participated in the writing of the in-depth reports. In the process of continuous maturity and improvement of the reports, I learned a lot of research skills.

Writing in-depth reports requires the collection of a large amount of financial and business data, and an overall overall grasp of the structure and context of the company. Not only did I improve my ability to understand the company’s business by collecting information from all parties, but I also learned to build a valuation model to predict the company’s future performance.

Required skills and knowledge

In terms of technical skills, you need to have financial knowledge, frameworks and insights for industry analysis and company analysis, and report writing skills. These professional abilities of mine have been greatly improved during this internship.
In terms of behavior skills, industry researchers need to have logical thinking ability to predict the future direction of companies and industries. In addition, interpersonal communication skills are also very important, through which research results can be presented to the buy-side clients in the best possible state.

What I have learnt

My biggest gain in this internship is that I learned how to write a professional report. I summarize the essential qualities of an extraordinary in-depth report into seven points:

The selection of the company is meaningful.
The core point of view about the company is highlighted.
The discussion about the business of the company is rigorous and logical.
The business and financial data are authentic and credible.
The business charts are clear and detailed.
The text is concise and straightforward.
The exhibit are exciting.

In addition, I also deepened my understanding of the industry of securities firm research. I realized that it is a highly homogenized industry, because the same teams research the same companies, and the companies provide the same type of information (announcements, financial and accounting data). This is an industry that pays great attention to timeliness. When a news comes out, investors expect to see relevant research results immediately, and will be swept away by other reports later. This is an industry with high barriers to entry. When looking for data, well-funded securities companies are equipped with sufficient database access qualifications, while small agencies can only search for free public information. Every year, many finance students try hard to get an internship in industry financial research, but few can get it. Therefore, in the face of such as intense competition, what we need to do is to maximize our core competitive advantages.

Three key financial concepts

Here are 3 useful valuation methods.

P/E Valuation Method

The Price-to-Earnings (P/E) valuation method is based on the price-earnings (P/E) ratio:

Price earnings ratio

EPS comes in two main varieties. TTM is a Wall Street acronym for “trailing 12 months”. This number signals the company’s performance over the past 12 months. The second type of EPS is found in a company’s earnings release, which often provides EPS guidance. This is the company’s best-educated guess of what it expects to earn in the future. These different versions of EPS form the basis of trailing and forward P/E, respectively.

The price-earnings ratio can be used to predict the stock price by the following calculation formula:

Stock price prediction based on the price-earnings ratio

P/B valuation method

The P/B valuation method is based on the price-to-book (P/B) ratio:

Price-book ratio

Generally speaking, stocks with low price-to-book ratios generally have relatively high investment value (in their balance sheet).
The price-to-book ratio can be used to predict the stock price by the following calculation formula:

Stock price prediction based on the price-to-book ratio

The P/B valuation method is suitable for companies with large and relatively stable net assets, such as steel, coal, construction and other traditional companies. However, it is not suitable for enterprises with light assets such as technology Internet and consulting services, which are small in scale and dominated by labor costs. The valuation should be based on the principle of “peer ratio and historical ratio”. Usually, the lower the price-to-book ratio, the safer the investment.

PEG valuation method

The PEG valuation method is based on the price-to-earnings growth (PEG) ratio:

Price-to-earnings growth ratio

In general, the smaller the PEG, the better and safer. But PEG>1 does not mean that the stock is overvalued. It must be measured according to the overall indicators of its peers. If the PEG is greater than 1, but its peers are higher than it, which also means that although the company’s PEG is already higher than 1, its value may also be is underrated.

Useful resources

Tianfeng Securities

Wind Database

About the author

The article was written in May 2022 by Pai LI (ESSEC Business School, Global BBA, 2021-2023).

Returns

April 20, 2022 by Jayati WALIA

In this article, Jayati WALIA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains how returns of financial assets are computed and their interpretation in the world of finance.

Introduction

The main focus of any investment in financial markets is to make maximum profits within a coherent risk level. Returns in finance is a metric that inherently refers to the change in the value of any investment. Positive values of returns are interpreted as gains whereas negative values are interpreted as losses.

Returns are generally computed over standardized frequencies such as daily, monthly, yearly, etc. They can also be computed for specific time periods such as the holding period for ease of comparison and analysis.

Computation of returns

Consider an asset for a time period [t -1, t] with an initial price P_t-1 at time t-1 and final price P_t at time t (one period, two dates). Different forms of defining returns for the asset over period [t -1, t] are discussed below.

Arithmetic (percentage) returns

This is the simplest way for computation of returns.

The return over the period [t -1, t], denoted by R_t, is expressed as:

Arithmetic returns

Logarithmic returns

Logarithmic returns (or log returns) are also used commonly to express investment returns. The log return over the period [t-1, t], denoted by R_t is expressed as:

Logarithmic returns

Log returns provide the property of time-additivity to the returns which essentially means that the log returns over a given period can be simply added together to compute the total return over subperiods. This feature is particularly useful in statistical analysis and reduction of algorithmic complexity.

Logarithmic returns additivity

Log returns are also known as continuously compounded returns because the rate of log returns is equivalent to the continuously compounding interest rate for the asset at price P₀ and time period t.

img_SimTrade_compounded_returns

Link between arithmetic and logarithmic returns

The arithmetic return (R^ari) and the logarithmic return (R^log) are linked by the following formula:

Relation between arithmetic and logarithmic returns

Components of total returns

The total return on an investment is essentially composed of two components: the yield and the capital gain (or loss). The yield refers to the periodic income or cash-flows that may be received on the investment. For example, for an investment in stocks, the yield corresponds to the revenues of dividends while for bonds, it corresponds to interest payments.

On the other hand, capital gain (or loss) refers to the appreciation (or depreciation) in the price of the investment. Thus, the capital gain (or loss) for any asset is essentially the price change in the asset.

Total returns for a stock over the period [t -1, t], denoted by R_t, can hence be expressed as:

Total returns

Where
   P_t: Stock price at time t
   P_t-1: Stock price at time t-1
   D_t-1,t: Dividend obtained over the period [t -1, t]

Price changes and returns

Consider a stock with an initial price of 100€ at time t=0. Suppose the stock price drops to 50€ at time t=1. Thus, there is a change of -50% (minus sign representing the decrease in price) in the initial stock price.

Now for the stock price to reach back to its initial price (100€ in this case) at time t=2 from its price of 50€ at time t=1, it will require an increase of (100€-50€)/50€ = 100%. With arithmetic returns, the increase (+100%) has to be higher than the decrease (-50%).

Similarly, for a price drop of -25% in the initial stock price of 100€, we would require an increase of 33% in the next time period to reach back the initial stock price. Figure 1 illustrates this asymmetry between positive and negative arithmetic returns.

Figure 1. Evolution of price change as a measure of arithmetic returns.
img_SimTrade_price_change_evolution
Source: computation by the author.

If the return is defined as a logarithmic return, there is a symmetry between positive and negative logarithmic returns as illustrated in Figure 2.

Figure 2. Evolution of price change as a measure of logarithmic returns.
img_SimTrade_price_change_evolution
Source: computation by the author.

You can also download below the Excel file for computation of arithmetic returns and visualise the above price change evolution.

Internal rate of return (IRR)

Internal rate of return (IRR) is the rate at which a project undertaken by the firm break’s even. It is a financial metric used by financial analysts to compute the profitability from an investment and is calculated by equating the initial investment and the discounted value of the future cashflows i.e., making the net present value (NPV) equal to zero. The IRR is the sprecail value of the discount rate which makes the NPV equal to zero.

The IRR for a project can be computed as follows:

IRR formula

Where,
CF_t : Cashflow for time period t

The higher the IRR from a project, the more desirable it is to pursue with the project.

Ex ante and ex post returns

Ex ante and ex post are Latin expressions. Ex ante refers to “before an event” while ex post refers to “after the event”. In context of financial returns, the ex ante return corresponds to prediction or estimation of an asset’s potential future return and can be based on a financial model like the Capital Asset Pricing Model (CAPM). On the other hand, the ex post return corresponds to the actual return generated by an asset historically, and hence are lagging or backward-looking in nature. Ex post returns can be used to forecast ex ante returns for the upcoming period and together, both are used to make sound investment decisions.

About the author

The article was written in April 2022 by Jayati WALIA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Supply and Demand

April 15, 2022 by Diana Carolina SARMIENTO PACHON

Supply and Demand

In this article, Diana Carolina SARMIENTO PACHON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022) explains the economic concept of supply and demand, which is key to understand the way markets work.

Supply and demand are the fundamental concepts that shape the way we make business and operate in the world. They construct both simple transactions such as the purchase of coffee or more compounded transactions such as the operations in the financial world. For this reason, it’s crucial to understand and uncover them deeper.

The basic concepts

Supply is referred to the amount available of a product that firms offer, whereas demand is the amount desired by consumers or households. When these quantities are equal, an equilibrium is reached and consequently a transaction takes place, leading to the well-known law of supply & demand which shapes the behavior of daily transactions and shifts in the economy. If price increases, then supply also increases; nonetheless, demand decreases as it’s more expensive for consumers to a buy good; on the contrary, if prices decline then supply also decline since producers would make less revenue whereas demand goes up as it is cheaper to buy. This dynamic takes place until the quantities of supply and demand are equal so that the optimum equilibrium is found.

Figure 1. Supply and demand.
img_Simtrade_risk_reduction_stocks
Source: computation by the author.

From another perspective, if demand escalates then price rises due to the high desirability of the good, meanwhile when demand drops it can create a surplus of supply which can drag the price down. Likewise, this scenario can be applied in financial markets e.g., in the case of a bullish sentiment in the market, there can be a positive speculation which creates a higher desirability for certain stock resulting in a decrease in price; nevertheless, when demand is low the price may drop because of a low or negative speculation on a specific stock.

Furthermore, the fundamental law of supply and demand can also explain the price movements seen in the financial markets. To illustrate, for a commodity such as coffee, if the surface of cultivation expands or if the harvest is good, it is very likely that the coffee price will sink as its supply will be abundant. Therefore, it is essential to consider the information about the market regularly as it can have a significant influence on the speculation of investors which will eventually define their demands and so the price of a stock. Consequently, it is very important to be able to determine how an announcement or any kind of information can affect the demand or even the supply of a stock, commodity, or financial instrument since this will define how markets will behave.

Special cases

However, it’s also important to mention that there are industries and situations in which the law of supply and demand does not apply. An instance of this is the luxury industry, in which the higher the product price set by firms, the higher the demand from consumers. This may be due to the value that costumers perceive by purchasing such items. Alternatively, oil is another example to be mentioned as its price has a low-price sensitivity which means that any change in its price won’t result in any significant demand changes, this could be due to the high necessity of oil in all industries which makes it crucial for daily operations.

Useful resources

Krugman, P. & Wells, R. (2012) Economics. 3rd edition. United States: Macmillan Learning.

Mankiw, G. (2016) The Market Forces of Supply and Demand (table of content) Principles of Economics. 8th edition. Boston: Cengage Learning.

Mankiw, G. (2016) The Market Forces of Supply and Demand (slides) Principles of Economics. 8th edition. Boston: Cengage Learning.

Deskara Supply and Demand: Law, Curves, and Examples

International Energy Agency (IEA) Supply and demand for oil

Sabiou M. Inoua and Vernon L. Smith The Classical Theory of Supply and Demand

About the author

The article was written in April 2022 by Diana Carolina SARMIENTO PACHON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022)

Risk Aversion

April 14, 2022 by Diana Carolina SARMIENTO PACHON

Risk Aversion

In this article, Diana Carolina SARMIENTO PACHON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022) explains the economic concept of risk aversion, which is key to understand the behavior of participants in financial markets.

Risk Aversion refers to the level of reluctance that an individual possesses towards risk. Specifically, it refers to the attitude of investors towards the risk underlying investments which will directly determine how portfolios are allocated or even how a stock may behave depending on market conditions. To elaborate, when market participants have higher risk aversion due to unfavorable market shocks e.g., natural disasters, bad news or scandals that affect a company or a security, this situation will cause a perception of higher risk leading to many selling, and thus decreasing prices. Therefore, risk aversion should be analyzed carefully.

Risk aversion and investor’s characteristics

It’s important to note that risk aversion can be highly variable over time as this notion changes along with investor profile, in other words with age, income, culture and other key factors, making it even more complex to evaluate than it appears in the traditional economics literature. To illustrate more accurately some of the factors that define an investor profile are:

Age

The older the person is, the more risk averse he or she is. On the contrary, younger individuals tend to be less risk averse which may be due to their high expectations and eagerness to attempt something new as well as the longer timeframe they have, whereas older people prefer safety and stability in their lives.

Income

Individuals with a smaller budget tend to have a higher risk aversion since they have fewer resources, and a loss would make a greater impact on them than a wealthy individual.

Past Losses

When an individual has already experienced some loss, she or he will be more wary of it since it’s now too costly to bear another loss; therefore, risk aversion will be significantly higher. An example of this is the post-crisis, as people have lost so much and this has had a negative impact on their lives, they tend to become more cautious of risk.

Investment Objective

For crucial events such as retirement or education, risk version tends to be higher as the individual cannot bear to risk for such a fundamental matter of his or her life.

Investment Horizon

Investors focused on short-term horizon tend to be more risk averse as they cannot take too much risk due to the short timeline.

Risk aversion and financial investments

Furthermore, risk aversion also takes into account more factors apart from those mentioned above, for this reason most of the time before creating the respective portfolio for an investor, financial advisors shape their client’s risk preferences in order to adjust the portfolio allocation to them. Many times, these can be conducted by questionnaires and tests that will accordingly assign a risk profile concluding with certain risk categories:

A Conservative profile refers to more risk averse individuals, the portfolios assigned for this type are mainly composed by both more secure & less volatile securities such as bonds, meanwhile stocks have a minimal participation.
A Moderate profile is attributed to more risk averse individuals who are willing to take more risk, however he or she does not want to step too much further. These portfolios are usually more diversified as they contain more types of securities in different percentages such as government & corporate bonds, and stocks.
An aggressive profile which is allocated to portfolios mainly composed in the highest percentage by the risky securities. For instance, the main securities could be stocks, specifically growth stocks or even crypto.

Due to all sensitive and private information used by financial institutions, financial regulatory entities are important to ensure the protection and transparency of information, thereby the Mifid (The Markets in Financial Instruments Directive) has been created in the European Union to fulfill such task through the use of rules and general standards.

Measure of risk of financial assets

Additionally, there are other mathematical metrics that can interfere in the risk profile, and depending on these the portfolio may be constructed:

Standard Deviation

It refers to the volatility of historical data, in other words how dispersed the data is over time which illustrates how risky the security may be. The higher the standard deviation, the higher the risk since this is suggesting that the stock is more variable and there is more uncertainty, thus a risk averse individual prefers a lower standard deviation.

Beta

It is linked with the systematic risk that comes with a stock, that is to say it illustrates the volatility compared to the market. Firstly, a beta equal to 1 indicates a volatility and movement equalizing the market, secondly a beta higher than 1 is referred to a security that is more volatile than the market, to illustrate B= 1.50 specifies 50% more volatility than the market. Thirdly, a beta less than 1 stipulates less volatility than the market. Therefore, the lower the beta the less risk exposure is found.

Modern Portfolio Theory & Risk

Introduced by Harry Markowitz in 1950s, the Modern Portfolio Theory illustrates the optimum portfolio allocation that maximizes return given a specific level of risk, in which risk is measured by the standard deviation and the return by the average mean of the portfolio. This explanation also leads to the one- single period mean-variance theory which suggests various portfolio allocations depending on the trade-off between return and risk. However, there are more advance models which explain this scenario in a multiperiod by rebalancing or diversifying further.

Risk aversion and economic conditions

Risk aversion does not only shape the portfolio allocation and its diversification, but it also may have a significant impact on the market as a result of expectations. When there are booming economic times, individuals usually feel more confident and thus less risk averse as a consequence of positive expectations of future cash flows; however, when a recession is coming investors may shift to a more risk averse behavior making them feel afraid of the future which influences them to sell certain stocks and, in this way, making the price plump. Although it may be seen as a simple emotion that defines the fear of risk, it still impacts in a very large extent the financial market as it dictates the roles and strategies behind investing, and thereby it is crucial analyze it carefully.

▶ Youssef LOURAOUI Markowitz Modern Portfolio Theory

▶ Youssef LOURAOUI Implementing Markowitz asset allocation model

▶ Jayati WALIA Capital Asset Pricing Model (CAPM)

Useful resources

Díaz A and Esparcia C (2019) Assessing Risk Aversion From the Investor’s Point of View Frontiers in Psychology, 10:1490

Desjardins Online brokerage The Risk Aversion Coefficient

Coursera course Investment management

Crehana course Trading: How to invest in stocks (Trading: Como invertir en Bolsa)

About the author

The article was written in April 2022 by Diana Carolina SARMIENTO PACHON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022)

My experience as a junior market research analyst at Procolombia

April 14, 2022 by Diana Carolina SARMIENTO PACHON

My experience as a junior market research analyst at Procolombia

In this article, Diana Carolina SARMIENTO PACHON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022) shares her experience as a junior market research analyst in the investment department at Procolombia.

The company: Procolombia

Procolombia is the Colombian government entity that promotes direct investment, exports, and tourism into Colombia. The entity has several offices both in Colombia and in different countries around the world in order to reach to other governments, and thus facilitate negotiations. Examples of the locations of these offices are Paris, New York, London, Tokyo, Beijing, Dubai, Mexico, among others.

Procolombia is divided into the three departments: investment, exports and tourism.

Investment

Investment department whose main mission is to promote and bring into Colombia direct foreign investment. Examples of investments executed by the promotion of Procolombia are Amazon, Softbank, and Harley-Davidson.

Exports

Exports department with the main objective of promoting Colombian good across the world, and its main mission is accompanying and support exporters as well as contacting different public and private entities interested in Colombian products.

Tourism

Tourism department main focus is promote tourists into Colombia and expand the market share of the country in the Latin-American tourism.

The investment department organization and execution

Firstly, the investment department is divided into four regional hubs: North-America & the Caribbean, Latin-America, Europe-Middle East & Asia. Each hub is specialized in its respective region and market. Secondly, each hub has a general manager and usually 4/5 advisors specialized in a specific industry (Chemicals, Industries 4.0 which refers to AI/IoT/digitalization, Investment & Real Estate, Agro, Energy, etc.) which would facilitate the operations of the department so that every person is assigned with a specific region and industry.

The process of bringing investment

First of all, the investment advisors from Procolombia contact the respective firm/investor to create a very first contact, or the investor may contact Procolombia to obtain the very first information.
In the second place, if the investor is interested, he or she will ask for further information and probably require the specific opportunities available. For this purpose, the Colombians firms or projects looking for investing usually provide their basic financial information such as EBITDA, debt ratios, and the amount of money required, so that investors can have the primary financial information.
Once the investor shows more interest after having analyzed the basic financial metrics, there will be some factories and free-trade visits alongside meeting with the respective companies in order to gain deeper insight, and if they finally decide to invest, Procolombia will be supporting them in legal and tax matters to facilitate their investment journey in Colombia.

My internship Experience

I was specifically an intern of the North America management team. My main mission was supporting the team by providing market research of the potential investment opportunities as well as the possible investors that could be reached in order to promote the country in North America (US, Canada, and Caribbean countries). Additionally, I provided the consolidation of financial data about different Colombian companies and consolidated such information in such a way that it was understandable by potential investors.

Furthermore, I also had to support the logistics of the various events in which Procolombia looked to promote the country usually with very important high-level guests such as ambassadors, officials or investors looking for large investments, experience that showed how negotiation among different countries were conducted and how was the planning of such plans executed.

Skills needed

This internship required computational abilities with the purpose of comprehending the data and financial information of companies along with rapid analytical skills that can synthetize and summarize such information efficiently.

Regarding soft skills: team oriented and adaptability are crucial as operations are most of the time executed by sharing diverse opinions and agreeing with others which requires the wiliness to work and listen carefully. Besides, confronting different situation which may be one’s out of comfort zone is also a very common situation in the workplace, thereby it’s essential to be open to different challenges and situations as new issues can arise at any moment.

Financial Concepts

Even though my internship was more focused on the promotion of foreign direct investments in Colombia, I was still able to have direct contact with some financial concepts that were used regularly in the running of the entity, such as Ebitda and Debt Ratio.

Foreign direct investment (FDI)

Foreign direct investment (FDI) indicates the transfer of foreign capital into an entity or organization with a long-term vision. For instance, when an American or European multinational corporation invests in Colombia with the aim of opening facilities in this country in order to facilitate the operations in the region, and probably improve profitability. An example of this is P&G, Henkel or L’Oréal, companies that invested in the country in such a way that the performance both in Colombia and Latin America becomes more efficient in addition to providing employment, development and technology .

EBITDA

EBITDA refers to Earnings Before Interest, Taxes, Depreciation & Amortization. In other words, it’s the operating income however the non-cash costs such depreciation & amortization are added. It is usually used because it reflects the earnings from operations and the efficiency of them.

Net debt

All the debt (long-term + shot-term) – all cash & equivalents which would indicate what they company still owed in case of liquidation

Solvency ratios

Solvency ratios were usually used so that the investor could know the debt state of the company such as debt ratio = Total obligations/ Total Liabilities indicating how much financial leveraged the company has. The higher it is, the riskier the company may be, e.g., a 0.5 debt ratio indicated that 50% of the firm assets are financed by debt.

Thus, this experience also helped to shape some basic financial knowledge in real life situations and even taught me the importance of understanding financial concept as even if they are not directly in our expertise, they will always be the base of discussions in the business world.

Useful resources

Procolombia

About the author

The article was written in April 2022 by Diana Carolina SARMIENTO PACHON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022)

A quick overview of the Bloomberg terminal…

April 11, 2022 by Louis DETALLE

A quick overview of the Bloomberg terminal…

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains everything there is to know about the Bloomberg terminal which is a must-know in finance.

How to use the main functions of the Bloomberg terminal?

One may notice that the keyboard of the Bloomberg terminal is a little strange. Indeed, this keyboard called Starboard, and contains red, blue, green and yellow keys for specific functions in addition to your regular keys.

Functions are unique Bloomberg applications that provide analysis and information on securities,
sectors, regions and more. Each function is accessed by typing in its unique mnemonic (a short, memorable name) and then pressing the key located in the lowest-right sided area of the keyboard.

Let’s review together the different functions of the buttons:

The HELP button is perhaps the most useful button for those just starting out. If you have questions about anything on the terminal, simply press the button once and a Bloomberg specialist will be there to start a live chat with you to resolve your questions.

In order to benefit from the latest news, users can simply type NEWS and press enter to get the latest information on market trends, movements and other relevant news.

Those in the finance industry chat via Bloomberg Messaging, which is essentially equivalent to Facebook Messenger but on Bloomberg. It enables you to send a message to anyone on the device. This means that anyone in the industry can technically contact each other instantly. No need to ask for someone else’s number or find out the best way to get in touch.

Main users of the Bloomberg terminal

Traders, brokers, analysts, portfolio managers, investors and executives are the Terminal’s primary consumer base as they need to access the data provided by Bloomberg easily in order to do their job.

A subscription to the Bloomberg Terminal costs approximately $20,000 a year, but that does not stop its customers from renewing their subscriptions because of its usefulness.

Training webinars

First and foremost, the Bloomberg beginner should work on the document available on Bloomberg website, Getting started on the Bloomberg Terminal, which will give you the main information on the keys and their function.

The best next step to get used to the Bloomberg Terminal is to complete the certification
course: Bloomberg Market Concepts (BMC). BMC is an 8-hour e-learning course that will
provide a visual introduction to the financial markets and covers nearly 70 Terminal functions which is enough for whoever wants to start using Bloomberg.

Useful resources

Bloomberg’s website

Capital Markets (BMC) Certification’s website

About the author

The article was written in April 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Bloomberg

April 11, 2022 by Louis DETALLE

Bloomberg

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains everything there is to know about Bloomberg LP, the international leader in the data-providing market…

Quick presentation of the company

Bloomberg LP is an American financial group specialized in services to financial market professionals and in economic and financial information. Bloomberg operates as a news agency and via numerous media such as TV, radio, press, internet, and books. The company was founded in 1981 by Michael Bloomberg, former mayor of New York City.

In its early days, Bloomberg LP’s activities were only based on the exploitation of a historical database of US Treasury yield curves, bought by the founder to its former employer, the investment bank Salomon Brothers. After that, the company added on its terminals a messaging system, retransmissions of financial assets’ prices and developed financial news flows long before the watershed of Internet.
In 1990, Michael Bloomberg installed his 1,000th terminal.

Type of people working at Bloomberg (types of jobs)

The careers available at Bloomberg LP are numerous and very diverse. The Board’s needs in terms of employees mainly consist of software designers to help design the Bloomberg’s terminals, sectorial financial specialists in order to provide precise and adequate analysis.
Finally, the last kind of profiles that Bloomberg needs are journalists and more broadly, people with great writing abilities since Bloomberg LP produces a huge flow of written articles every day. Bloomberg News for instance (one of many Bloomberg LP’s subsidiaries) has over 10 000 employees which gives an idea of the written flow emitted by the company.

Main competitors

As Bloomberg’s activities are very diverse, we will classify the main competitors of the American firm in respect to the activities.
For Bloomberg’s core business, which is the terminals, Thomson Reuters is the most natural competitor in this space (with products like Kobra, Eikon, D3000). The terminal business is built on a fantastic technology platform that provides comprehensive financial information. There are other competitors, such as Dow Jones Industrial Average FX Trader, which have specialized in one type of industry whereas Bloomberg remains a generalist.

Bloomberg’s editorial branch’s main competitors would be Reuters, the FT, the Wall Street Journal, and other traditional financial news companies. The same goes for their TV/radio operation (their competitor would be CNBC).

Use of data in financial markets

The explosion of financial data, enabled by the Internet tremendous potential, caused an explosion of demand for financial data. As evidenced in 2006 by the British mathematician and Tesco marketing mastermind Clive Humby’s quote, “Data is the new oil”, the data market seems to be limitless.

In addition, as Bloomberg acquires many of his competitors, such as BNA and BusinessWeek, this contributes to curbing the number of data providers and improving the monopoly of Bloomberg on the data-providing market.

Useful resources

Bloomberg

Thomson Reuters

About the author

The article was written in March 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Specific risk

April 1, 2022 by Youssef LOURAOUI

In this article, Youssef LOURAOUI (Bayes Business School, MSc. Energy, Trade & Finance, 2021-2022) explains the specific risk of financial assets, a key concept in asset pricing models and asset management in practice.

This article is structured as follows: we start with a reminder of portfolio theory and the central concept of risk in financial markets. We then introduce the concept of specific risk of an individual asset and especially its sources. We then detail the mathematical foundation of risk. We finish with an insight of the relationship between diversification and risk reduction with a practical example to test this concept.

Portfolio Theory and Risk

Markowitz (1952) and Sharpe (1964) created a framework for risk analysis based on their seminal contributions to portfolio theory and capital market theory. All rational profit-maximizing investors attempt to accumulate a diversified portfolio of risky assets and borrow or lend to achieve a risk level consistent with their risk preferences given a set of assumptions. They established that the key risk indicator for an individual asset in these circumstances is its correlation with the market portfolio (the beta).

The variance of returns of an individual asset can be decomposed as the sum of systematic risk and specific risk. Systematic risk refers to the proportion of the asset return variance that can be attributed to the variability of the whole market. Specific risk refers to the proportion of the asset return variance that is unconnected to the market and reflects the unique nature of the asset. Specific risk is often regarded as insignificant or irrelevant because it can be eliminated in a well-diversified portfolio.

Sources of specific risk

Specific risk can find its origin in business risk (in the assets side of the balance sheet) and financial risk (in the liabilities side of the balance sheet):

Business risk

Internal or external issues might jeopardize a business. Internal risk is directly proportional to a business’s operational efficiency. An internal risk would include management neglecting to patent a new product, so eroding the company’s competitive advantage.

Financial risk

This pertains to the capital structure of a business. To continue growing and meeting financial obligations, a business must maintain an ideal debt-to-equity ratio.

Mathematical foundations

Following the Capital Asset Pricing Model (CAPM), the return on asset i, denoted by R_i can be decomposed as

img_SimTrade_return_decomposition

Where:

R_i the return of asset i
E(R_i) the risk premium of asset i
β_i the measure of the risk of asset i
R_M the return of the market
E(R_M) the risk premium of the market
R_M – E(R_M) the market factor
ε_i represent the specific part of the return of asset i

The three components of the decomposition are the expected return, the market factor and an idiosyncratic component related to asset only. As the expected return is known over the period, there are only two sources of risk: systematic risk (related to the market factor) and specific risk (related to the idiosyncratic component).

The beta of the asset with the market is computed as:

Beta

Where:

σ_i,m : the covariance of the asset return with the market return
σ_m² : the variance of market return

The total risk of the asset measured by the variance of asset returns can be computed as:

Decomposition of total risk

Where:

β_i² * σ_m² = systematic risk
σ_εi² = specific risk

In this decomposition of the total variance, the first component corresponds to the systematic risk and the second component to the specific risk.

Decomposition of returns

We analyze the decomposition of returns on Apple stocks. Figure 1 gives for every month of 2021 the decomposition of Apple stock returns into three parts: expected return, market factor (systematic return) and an idiosyncratic component (specific return). We used historical price downloaded from the Bloomberg terminal for the period 1999-2022.

Figure 1. Decomposition of Apple stock returns:
expected return, systematic return and specific return.
Decomposition of asset returns Computation by the author (data: Bloomberg).

You can download below the Excel file which illustrates the decomposition of returns on Apple stocks.

Why should I be interested in this post?

Investors will be less influenced by single incidents if they possess a range of firm stocks across several industries, as well as other types of assets in a number of asset classes, such as bonds and stocks.

An investor who only bought telecommunication equities, for example, would be exposed to a high amount of unsystematic risk (also known as idiosyncratic risk). A concentrated portfolio can have an impact on its performance. This investor would spread out telecommunication-specific risks by adding uncorrelated positions to their portfolio, such as firms outside of the telecommunication market.

Useful resources

Academic research

Evans, J.L., Archer, S.H. 1968. Diversification and the Reduction of Dispersion: An Empirical Analysis. The Journal of Finance, 23(5): 761–767.

Markowitz, H. 1952. Portfolio Selection. The Journal of Finance, 7(1): 77-91.

Mossin, J. 1966. Equilibrium in a Capital Asset Market. Econometrica, 34(4): 768-783.

Sharpe, W.F. 1963. A Simplified Model for Portfolio Analysis. Management Science, 9(2): 277-293.

Sharpe, W.F. 1964. Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19(3): 425-442.

Tole T.M. 1982. You can’t diversify without diversifying. The Journal of Portfolio Management. Jan 1982, 8 (2) 5-11.

About the author

The article was written in April 2022 by Youssef LOURAOUI (Bayes Business School, MSc. Energy, Trade & Finance, 2021-2022).

Systematic risk

April 1, 2022 by Youssef LOURAOUI

In this article, Youssef LOURAOUI (Bayes Business School, MSc. Energy, Trade & Finance, 2021-2022) presents the systematic risk of financial assets, a key concept in asset pricing models and investment management theories more generally.

This article is structured as follows: we introduce the concept of systematic risk. We then explain the mathematical foundation of this concept. We present an economic understanding of market risk on recent events.

Portfolio Theory and Risk

Markowitz (1952) and Sharpe (1964) developed a framework on risk based on their significant work in portfolio theory and capital market theory. All rational profit-maximizing investors seek to possess a diversified portfolio of risky assets, and they borrow or lend to get to a risk level that is compatible with their risk preferences under a set of assumptions. They demonstrated that the key risk measure for an individual asset is its covariance with the market portfolio under these circumstances (the beta).

The fraction of an individual asset’s total variance attributable to the variability of the total market portfolio is referred to as systematic risk, which is assessed by the asset’s covariance with the market portfolio. Systematic risk can be decomposed into the following categories:

Interest rate risk

We are aware that central banks, such as the Federal Reserve, periodically adjust their policy rates in order to boost or decrease the rate of money in circulation in the economy. This has an effect on the interest rates in the economy. When the central bank reduces interest rates, the money supply expands, allowing companies to borrow more and expand, and when the policy rate is raised, the reverse occurs. Because this is cyclical in nature, it cannot be diversified.

Inflation risk

When inflation surpasses a predetermined level, the purchasing power of a particular quantity of money reduces. As a result of the fall in spending and consumption, overall market returns are reduced, resulting in a decline in investment.

Exchange Rate Risk

As the value of a currency reduces in comparison to other currencies, the value of the currency’s returns reduces as well. In such circumstances, all companies that conduct transactions in that currency lose money, and as a result, investors lose money as well.

Geopolitical Risks

When a country has significant geopolitical issues, the country’s companies are impacted. This can be mitigated by investing in multiple countries; but, if a country prohibits foreign investment and the domestic economy is threatened, the entire market of investable securities suffers losses.

Natural disasters

All companies in countries such as Japan that are prone to earthquakes and volcanic eruptions are at risk of such catastrophic calamities.

Following the Capital Asset Pricing Model (CAPM), the return on asset i, denoted by R_i can be decomposed as

img_SimTrade_return_decomposition

Where:

R_i the return of asset i
E(R_i) the risk premium of asset i
β_i the measure of the risk of asset i
R_M the return of the market
E(R_M) the risk premium of the market
R_M – E(R_M) the market factor
ε_i represent the specific part of the return of asset i

The beta of the asset with the market is computed as:

Beta

Where:

σ_i,m : the covariance of the asset return with the market return
σ_m² : the variance of market return

The total risk of the asset measured by the variance of asset returns can be computed as:

Decomposition of total risk

Where:

β_i² * σ_m² = systematic risk
σ_εi² = specific risk

In this decomposition of the total variance, the first component corresponds to the systematic risk and the second component to the specific risk.

Systematic risk analysis in recent times

The volatility chart depicts the evolution of implied volatility for the S&P 500 and US Treasury bonds – the VIX and MOVE indexes, respectively. Implied volatility is the price of future volatility in the option market. Historically, the two markets have been correlated during times of systemic risk, like as in 2008 (Figure 1).

Figure 1. Volatility trough time (VIX and MOVE index).

Sources: BlackRock Risk and Quantitative Analysis and BlackRock Investment Institute, with data from Bloomberg and Bank of America Merrill Lynch, October 2021 (BlackRock, 2021).

The VIX index has declined following a spike in September amid the equity market sell-off. It has begun to gradually revert to pre-Covid levels. The periodic, albeit brief, surges throughout the year underscore the underlying fear about what lies beyond the economic recovery and the possibility of a wide variety of outcomes. The MOVE index — a gauge of bond market volatility – has remained relatively stable in recent weeks, despite the rise in US Treasury yields to combat the important monetary policy to combat the effect of the pandemic. This could be a reflection of how central banks’ purchases of government bonds are assisting in containing interest rate volatility and so supporting risk assets (BlackRock, 2021).

The regime map depicts the market risk environment in two dimensions by plotting market risk sentiment and the strength of asset correlations (Figure 2).

Figure 2. Regime map for market risk environment.

Source: BlackRock Risk and Quantitative Analysis and BlackRock Investment Institute, October 2021 (BlackRock, 2021).

Positive risk sentiment means that riskier assets, such as equities, are outperforming less risky ones. Negative risk sentiment means that higher-risk assets underperform lower-risk assets.

Due to the risk of fast changes in short-term asset correlations, investors may find it challenging to guarantee their portfolios are correctly positioned for the near future. When asset correlation is higher (as indicated by the right side of the regime map), diversification becomes more difficult and risk increases. When asset prices are less correlated (on the left side of the map), investors have greater diversification choices.

When both series – risk sentiment and asset correlation – are steady on the map, projecting risk and return becomes easier. However, when market conditions are unpredictable, forecasting risk and return becomes substantially more difficult. The map indicates that we are still in a low-correlation environment with a high-risk sentiment, which means that investors are rewarded for taking a risk (BlackRock, 2021). In essence, investors should use diversification to reduce the specific risk of their holding coupled with macroeconomic fundamental analysis to capture the global dynamics of the market and better understand the sources of risk.

Why should I be interested in this post?

Market risks fluctuate throughout time, sometimes gradually, but also in some circumstances dramatically. These adjustments typically have a significant impact on the right positioning of a variety of different types of investment portfolios. Investors must walk a fine line between taking enough risks to achieve their objectives and having the proper instruments in place to manage sharp reversals in risk sentiment.

Useful resources

Academic research

Markowitz, H. 1952. Portfolio Selection. The Journal of Finance, 7(1): 77-91.

Mossin, J. 1966. Equilibrium in a Capital Asset Market. Econometrica, 34(4): 768-783.

Sharpe, W.F. 1963. A Simplified Model for Portfolio Analysis. Management Science, 9(2): 277-293.

Sharpe, W.F. 1964. Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19(3): 425-442.

Business analysis

BlackRock, 2021. Market risk monitor

About the author

The article was written in April 2022 by Youssef LOURAOUI (Bayes Business School, MSc. Energy, Trade & Finance, 2021-2022).

Financial products marketing in neobanks

March 24, 2022 by Cynthia LIN

Financial products marketing in neobanks

In this article, Cynthia LIN (ESSEC Business School, Global BBA, 2018-2022) explains how neobanks market their financial products.

Introduction

Marketing of financial products in neobanks has become an integral part of their daily tasks because of the increased awareness of the benefits of financial products and services to consumers. Also, the marketing has been defined as the act of persuading a potential customer to purchase a financial product, service, or service in a neobank.

Neobanks

A Neobank is a kind of digital bank without any physical branches. These are completely operated online. Consumers don’t have to be physically present at a specific location. They are usually mobile operated, leveraging technology to minimize operating costs and offer a customer-friendly interface.

Neobanks can be called fintech firms that provide digital and mobile-first financial solutions payments and money transfers, money lending, and more. The neobank tends to work as a tech-savvy decision-making model and handle cash more easily and openly. These banks gather and assess data, understand the trends, try to quantify the behavior of their customers, and then come out with predictions/results. They are cheaper, quicker, and can leverage a single network with the entire financial portfolio.

Neobanks are quick, transparent, and more reliable than megabanks, although neobanks prefer collaborating with them for financial products. Neobanks are also known as challenger banks. They have transformed banking sectors and made them appealing to millions of customers. For example, the U.S. confirmed that chime had over 11 million customers (Corander, 2021). The previous year, they had eight million customers; in response, other banking sectors are working extra hard to improve their products and services to survive the competition. They make money by using business models different from those used in banking institutions.

Financial product marketing

Financial product marketing refers to a range of marketing solutions tailored to the needs of financial services companies. Highly effective financial product marketing uses digital channels to promote new financial products and increase brand awareness.

Here are 5 strategies for financial product marketing:

Go mobile with your financial product marketing initiatives: your mobile experience should provide the same ease-of-use and functionality as your website.
Make social media an important tool: understand your target audience and post the right content on the right channel to maximize engagement.
Create educational content: simple educational content that is clear and easily understood by people who may not have prior knowledge about finances.
Invest in emerging technologies: disruptive technologies like blockchain, chatbots and artificial intelligence (AI) help financial companies reduce operational costs and gain new clients.
Bet on transparency: customers who believe your company is transparent are more likely to recommend your services or leave positive online reviews.

Marketing of financial products by neobanks

The marketing of financial products by neobanks include advertising and marketing strategies to promote financial products and services that neobanks offer to the market. The marketing of financial products and services in neobanks has increased the interest of consumers in financial products and services offered by neobanks. The increased adoption of these marketing techniques has also increased the neobank’s adoption rate of financial products and services (Zoi, 2021). Moreover, adopting marketing strategies has enabled neobanks to use various techniques to market financial products and services to consumers.

Neobank’s marketing strategies includes television advertisement, radio advertisement, newspaper advertisement, direct advertising, online advertising, sales promotion, sales promotion, direct selling, and personal selling. This have been felt through the increased interest, awareness, and patronage toward banks and products offered by neobanks.

Let’s take the example of Revolut:

Customer is King: Revolut are aiming to be very transparent and open by sharing a lot of company insights on their blog
Solving a real issue: Focus on building a state-of-art platform from the ground up with design, functionality, and speed at its core.
Unique buying experience: Provide a very distinctive and innovative product packaging.
Hassle-free onboarding process: Revolut focused on eliminating all unnecessary touch points and providing a fast connection with minimal data collection.
Turn clients into fans and salesmen: Revolut launched a merch line of branded products including t-shirts, hats, hoodies etc. to turn clients into fans.

Conclusion

In conclusion, neobanks use various marketing techniques, usually more digital-oriented in order to market their financial products and services. They use marketing strategies to develop new products, services, and strategies to improve their brand image and awareness. Furthermore, neobanks should be able to use a marketing strategy to attract new customers and maintain the loyalty of existing customers for them to be able to compete with other banks.

Ressources

Zoi, S. (2021). FinTech and digital transformation in financial services: a new digital financial world (Master’s thesis, Πανεπιστήμιο Πειραιώς).

Corander, B. (2021). Neobanks: Challenges, Risks and Opportunities.

Revolut

About the author

The article was written in March 2022 by Cynthia LIN (ESSEC Business School, Global BBA, 2018-2022).

Financial communication in family firms

March 24, 2022 by Cynthia LIN

Financial communication in family firms

In this article, Cynthia LIN (ESSEC Business School, Global BBA, 2018-2022) presents the importance of financial communication in family firms.

Introduction

Financial communication is mainly used by companies that publicly trade their shares on a stock exchange, to interface with actual and potential financial stakeholders such as retail and institutional investors and financial analysts. The prevailing belief is that unlisted, family-owned companies do not need to publish financial information, except for their statutory accounts. This leads us to ask to what extent this is the case.

Communication within the firm is an integral part of communication in a family, as the family is the primary unit that makes up the firm. Also, family businesses can only be operated by a direct relative. While family firms are usually successful, they are still family businesses, and therefore, the family is not likely to share the fruits of its success.

Thus, family firms need to have a clear communication strategy in place. The purpose of a family business communication strategy is to ensure that the core members of the company stay in communication. The family firm communication strategy is also crucial because each firm has different communication needs. Some may need more face-to-face communication, while others may need more written communication or phone or email communication.

Financial communication

In general, the framework that organizes the financial reporting process has several elements. The most important element of financial reporting is the content of the information. There is a natural tension between the desire of managers to provide complete information and the need to be cautious about the extent of disclosure. Historical quantitative financial data is generally not a concern, as companies are legally required to provide such data in their financial statements. Despite increasing attempts to limit companies’ discretion, the regulations still give them considerable leeway in reporting their results. Therefore, companies should go beyond the basics and provide useful supplements and interpretations.
Family businesses are generally more reluctant to disclose forward-looking information, which can help to highlight the impact of a new strategic decision on financial data, because they need to protect themselves from litigation in case, they provide ammunition for stakeholders to take legal action, or because they fear that information will leak to competitors.

Another important element that has a significant impact on financial reporting is the composition of stakeholders. Companies interact with many stakeholders, and the objective of financial communication is to inform these stakeholders about the economic situation of the company. The optimal method of communication depends on the composition of the stakeholders, although equity investors are often considered to be the main recipients of such communication.

Two other factors can potentially influence financial communication. These factors are the visibility of the company and the credibility of the management. Low visibility of the company, due to low awareness of its existence, limits the group that can be influenced by a disclosure package. Even a perfectly designed information package is ineffective if it does not reach the target group. On the other hand, a lack of credibility on the part of management can reduce the response to financial communication, even if the problems of information content and visibility have been overcome. When outsiders have confidence in management, they are much more likely to accept management’s interpretation of the company’s current situation.

Why communication is important in family firms?

Good communication is not just a matter of transmitting information between interested parties. It starts with a clear understanding of the family business’ objectives, strategies and roles, relayed through the most acceptable and effective channels to convey the desired message, and follow-up to ensure that understanding.

The family narrative, for example, is an important, relatively formal communication tool that links family history, culture, goals and strategy.

The unique characteristics of family businesses, including concentrated ownership in the hands of a controlling family and family involvement in the management or running of the business, limit the need for detailed financial disclosure. Influential shareholders (the controlling family) have all the information they need to assess the risk and return of their investment in the company and to make investment decisions. Family-controlled companies usually provide little external information, as the main investor (the family) already has this information. In addition, family shareholders generally act like entrepreneurs who want to keep their competitive advantage secret.

Family business: the case of Auchan

The Auchan holding company, for example, is an unlisted company and is heavily owned by the family. The company must regularly refinance itself on the debt markets and has a credit rating from Standard & Poor’s. Financial communication at Auchan is done regularly on a voluntary basis in order to give the financial community a better view of the company and its plans.

In general, management has a wealth of information on the company’s activities and economic situation. They must decide what information should be included in the financial communication and how to communicate it in the most transparent way to a wide range of internal and external stakeholders. In family businesses, concern for the reputation and long-term viability of the business requires particular attention to financial reporting. It is therefore worth examining whether the components of financial communication in family businesses differ from those in non-family businesses.

Conclusion

In conclusion, family businesses can benefit from a communication strategy, and family members must be made aware of the strategy. Additionally, to be effective, the communication strategy must be communicated, and family members must adopt the strategy simultaneously. Also, family firms’ communication strategies must consider the communication needs of the different family members. The information must be delivered to the right people, in the right way, at the right time, with the appropriate level of detail.

Useful resources

Ferramosca, S. and Ghio, A., 2018. Accounting choices in family firms. An Analysis of Influences and Implications. Cham: Springer International Publishing.

Campden FB (Family in Business)

About the author

The article was written in March 2022 by Cynthia LIN (ESSEC Business School, Global BBA, 2018-2022).

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