2020 CFA Program Changes

Our Evolving Profession





Hello,



The CFA® charter remains distinctive and in demand in the global investment marketplace because it provides a uniquely rigorous, globally relevant body of investment knowledge. Each year, we advance that knowledge and make it available in the form of these Refresher Readings. As an organization committed to professionalism, we believe lifelong learning is essential in the journey from credential to investment professional.

This year, we made important strides forward at all three levels of the curriculum. Factual references and data exhibits in Level I were updated to provide a more contemporary presentation. More substantively, we have added new content to Level II:

The curriculum's first full reading on machine learning (ML)—a branch of artificial intelligence that is having a profound impact on the investment industry

A segment on big data projects , which includes ML and natural language processing algorithms

More on corporate governance/ESG considerations in investment analysis , addressing the investment analyst's needs to evaluate environmental, social, and governance factors related to potential investments

Extended coverage of the mechanics and applications of exchange-traded funds and trading costs and electronic markets

The 2020 CFA Program curriculum also marks the completion of our multi-year overhaul of Level III. We introduced 14 new readings, so roughly 30% of Level III content is new. Topics include capital market expectations, derivative strategies, alternative investments, private wealth management, and portfolio management for institutional investors, as well as trading, performance evaluation, and investment manager selection. The curriculum also includes the first portfolio management cases in more than 20 years.





Ethics case content for 2020 in Levels II and III is almost entirely fresh. The new cases make notable improvements in modern workplace relevance and global diversity. They also cover a broader range of standards than the retired cases.





As the investment profession evolves, the learning environment must keep pace. Our Learning Ecosystem (LES)—a cutting-edge digital platform that consolidates the entire curriculum and all study tools—features a personalized study plan that can adjust the learning path to individual strengths and weaknesses. We now offer the CFA Program Level I curriculum on the LES, which is an important step toward increasing accessibility of our programs globally, modernizing the learning experience, and better maintaining fidelity to practice.





Our future curriculum plans include wide-ranging updates to factual references and data exhibits for Level III. Several readings from the three levels will be developed and revised to reflect the input from Practice Analysis and the feedback from the Curriculum Level Advisers about the curriculum’s gaps, overlaps, and weaknesses.





I hope that you benefit from this year’s readings and use them as an opportunity to stay current.





Sincerely,





Stephen Horan, CFA, CIPM

Managing Director, Credentialing





Level Volume Reading # Title CE/SER II 1 7 Machine Learning 2 CE II 1 8 Big Data Projects 2.5 CE



What Changed In the 2020 Curriculum?

You may be curious to know the difference between neural networks and deep learning nets or how big data can enhance financial forecasting. If so, new additions to the curriculum are a great place to start.

Machine learning and big data have only recently entered the lexicon of the investment industry but have already become an integral part of the research and trading processes for some firms. A new reading delves into the mechanics of machine learning and highlights its potential value to investment firms and professionals. The reading tackles central issues, such as the difference between supervised and unsupervised machine learning and which problems machine learning can and cannot solve.

Meanwhile, the explosion in big data—especially unstructured data from social media, web traffic, electronic images, and so on—is a game-changer for investment analysts. A new reading discusses ongoing efforts in the investment industry to gather huge volumes of unstructured data and transform them into neat, structured data. These structured data are both measurable and comparable, thus driving next-generation modeling among investment professionals. The tantalizing prospect for those at the vanguard of this modeling is a decisive edge over competitors relying solely on traditional forecasting.

The new “Big Data Projects” reading moves the discussion from theory to practice, presenting a real-world study of how unstructured data can train a machine learning model to predict investor sentiment on stocks. The ability to scrape text-based information on companies, sectors, and markets from almost any source and transform it into positive or negative indicators is truly powerful.

Why Does It Matter?

Much of the investment industry recognizes the potential of machine learning, but exploration of the topic can be frustrated by the complexity of existing written material. For non-specialists, the subject may seem impenetrable. The new machine learning reading demystifies the subject by taking a non-mathematical approach to it and using graphics and images to help readers visualize how machine learning algorithms actually work. The reading provides pointers for interpreting machine learning outputs and helps analysts define the problems that machine learning can help solve.

Machine learning is growing in importance among investment professionals but also plays a role in other core investment firm activities, such as risk management and trade execution. The reading quickly gets the generalist investment practitioner up to speed with the nuts and bolts as well as the relevant vocabulary to facilitate effective interaction with machine learning specialists.

Similarly, the big data reading represents an entry point to big-picture knowledge about fundamental change in the investment industry. For practitioners, acquisition of this knowledge could be essential for them to enhance their contribution to their firm’s evolution. Although unstructured data have long been applied to investment research in an informal way, the datasets and computing power now available mean they can be systematically applied, transforming investment analysis.

As with machine learning, seizing the opportunity offered by big data should be helpful in a spectrum of roles and activities aside from the investment function. It will affect, for instance, the ways in which marketing and sales professionals target and onboard prospective clients and how risk and compliance functions operate.









Level Volume Reading # Title CE/SER III 5 28 Overview of Private Wealth Management 2 CE III 6 33 Portfolio Management for Institutional Investors 3.5 CE III 6 37 Case Study in Portfolio Management: Institutional 1 CE III 6 38 Case Study in Risk Management: Private Wealth 1.5 CE



What Changed In the 2020 Curriculum?

Institutional and private wealth management clients are a well-established client segment for many investment firms. But the dynamics of these segments are changing rapidly: The combined size of these client segments has increased dramatically over the past decade, and needs are evolving. Accordingly, readings on both client groups get a full makeover.

The 10-year perspective is that the profile of institutional investors has mutated as defined contribution replaces defined benefit in the pension sphere, huge sovereign wealth funds with very long-term investment horizons have sprouted up, and an unprecedented interest rate environment has forced a rethinking of long-held investment beliefs. Amid these shifts, a new institutional investor reading discusses changing needs resulting from this growth, in particular how institutional investors manage liabilities, investment time horizons, liquidity needs, and their idiosyncratic legal, regulatory, and tax constraints.

Each investor type, alongside their unique constraints, is addressed in turn. A focused study of a university endowment highlights the challenges facing investors with ultra-long investment horizons. The study explores the interplay between strategic asset allocation and spending policies, looking at how endowments can use illiquid instruments while retaining sufficient liquidity and how derivatives can be used for tactical allocation.

Meanwhile, private wealth management is being driven by growing global affluence and by the desire of many wealthy individuals to manage their own finances. A fully updated reading discusses how high-net-worth investors might design and execute an investment plan, as well as the tools and techniques used by private wealth managers.

A private wealth study applies these tools and techniques to a European setting, following a fictional married couple through multiple stages of their life until retirement. The family circumstances and risk exposures are assessed in light of changing objectives and the resetting of long-term goals at different phases of our notional couple’s life. Relevant risk management solutions are suggested for each phase.

Why Does It Matter?

The market and industry developments since the global financial crisis of 2007–2009 demand a fresh look at the institutional investing landscape.

The character and aims of the investment portfolios of defined benefit plans, banks, insurers, sovereign wealth funds, university endowments, and private foundations are simply not the same as they were a decade ago. The revised reading covers the key changes succinctly but in sufficient detail to provide meaningful context. The reading highlights that evaluation of the changes requires knowledge and understanding of the increasingly complicated array of risks facing institutions today.

The university endowment study is a practical illustration of how to integrate these risks into the investment process. In particular, the study takes a deep dive into the CFA Institute Code and Standards violations that have the potential to arise during the manager selection process.

These readings should enable the generalist to differentiate between the needs of private clients and institutional clients. Although servicing of these needs may in practice be carried out by the same personnel, recognition of the unique demands of each and an adequate response may prove a key competitive advantage. In addition, in the private wealth segment, there are a number of sub-segments, each of which should be treated discretely. Given these profile differences, which include available wealth, risk tolerance, and cultural preferences, recognition of this segmentation is critical to protecting clients’ wealth and the firm’s reputation.

The private wealth study is set in a European context, but the risk management solutions advanced are applicable globally, so the study should be valuable to practitioners in a wide range of firms in a large number of jurisdictions.









Level Volume Reading # Title CE/SER II 3 22 Corporate Governance and Other ESG Considerations in Investment Analysis 1 CE/1 SER II 6 43 Exchange Traded Funds: Mechanics and Applications 1.5 CE III 3 15 Options Strategies 2.5 CE III 3 16 Swaps, Forwards, and Futures Strategies 1.5 CE III 5 26 Hedge Fund Strategies 3 CE III 5 27 Asset Allocation to Alternative Investments 3 CE



What Changed In the 2020 Curriculum?

Changing markets and investor needs, new technology and platforms, and cultural developments are driving shifts in asset classes and how they are used in portfolios.

Environmental, social, and governance (ESG) investments are a prime example. Evolving investor preferences and increasing disclosure from companies on non-financial issues are creating an industry within an industry. Many investment funds now incorporate some level of ESG analysis. A new reading describes how ESG factors can be measured and assessed by analysts and how this may affect governance practices at investee companies.

Despite predictions that alternatives would suffer irreparable damage in the post-financial-crisis era, the alternatives sector is booming. But perceptions of alternatives have shifted: They are seen less as high-octane return enhancers and are increasingly used for downside protection and income replacement. An updated reading explains how alternatives can mitigate risk, discusses when allocations to alternatives are suitable, and reveals processes for unearthing opportunities.

A new reading solely devoted to hedge funds outlines advantages and disadvantages of using them, focusing on six major hedge fund strategies and how they can be incorporated into portfolios. Notably, there is a discussion of the growing penchant for investing in risk factors,­ such as value, small cap, and momentum. An innovation in this reading is a framework for analyzing and using the most common risk factors employed in equity and multi-manager hedge fund strategies.

Derivatives are growing in popularity in investment management as fund managers seek ways to enhance returns and manage downside risk. A new reading on options highlights the use of the “Greeks” (delta, gamma, theta, and vega) for understanding and analyzing the risks in option strategies. Practitioners are offered practical examples of how option strategies can enhance portfolios.

An updated reading adds new content on the analysis and portfolio applications of swap, forward, and futures strategies. The revised reading contains practical explanations of how and when to use cross-currency basis swaps, volatility derivatives, and federal funds futures.

Last, but by no means least, exchange-traded funds (ETFs) come under the microscope. Few investment practitioners will have failed to notice the astonishing rise in ETF trading volumes. An entire new reading dedicated to ETFs, explaining how they are constructed and applied to portfolios, represents an acknowledgement that ETFs have become an important allocation tool for investors of all types and sizes. Issues explored include why bid–ask spreads occur, when tracking error occurs, and how well the costs of ETF ownership are understood.

Why Does It Matter?

The understanding and adoption of new asset classes and, consequently, investment strategies is a principal duty of the investment practitioner.

Evaluating how ESG factors affect company behaviour and performance provides analysts with a broader perspective on the risks and opportunities associated with a company’s securities. Failure to recognize corporate mismanagement of ESG issues, for example, has been shown on a number of occasions to create unwelcome and negative portfolio surprises. Increasingly stringent regulatory regimes and investor demand for greater awareness of resource and climate risks in asset allocation require professional investors to effectively evaluate ESG risks and incorporate them in portfolios.

In regard to alternatives, the term “alternative” now understates the importance of non-traditional investments, as institutional and private clients increasingly seek not just to supplement traditional long-only stocks and bonds but to replace them altogether. However, investment professionals, especially those who deal directly with clients, should acknowledge that hedge fund strategies offer drawbacks as well as benefits. The reading addresses nuances of hedge fund investing, including the possibility that hedge funds fail to deliver during periods of market distress—just when investors most need them to perform.

Not all firms use derivatives, but many are seeking to replicate assets’ returns more cheaply and with greater liquidity by using options. Many investment generalists will wish to sharpen their understanding of how swaps, forwards, and futures can be incorporated in equity and fixed-income portfolio management. Creating meaningful investment objectives through using options and then structuring options so the risks and payoffs are well calibrated are critical to the successful use of these instruments.

Finally, although ETFs are simple to trade, they are not always straightforward to use meaningfully in a broad portfolio. Practitioners shouldn’t miss this new reading on how and when ETFs can add value to client portfolios.











Level Volume Reading # Title CE/SER I 1 1 Ethics and Trust in the Investment Profession 1 CE/1 SER II 1 3 Application of the Code and Standards: Level II 1 CE/1 SER II 1 12 Economics of Regulation 1 CE III 1 3 Application of the Code and Standards: Level III 1 CE/1 SER III 1 4 Professionalism in the Investment Industry 0.5 CE/0.5 SER



What Changed In the 2020 Curriculum?

The investment industry requires trust to function. However, trust is a nebulous subject, and the underlying issues are constantly shifting, which is why the readings devoted to maintaining or restoring trust have been reworked. Revised readings provide updates on current issues affecting the investment industry and showcase practical steps for addressing them.

An updated ethics reading introduces a framework for ethical decision making and for understanding the conflicts that challenge ethical conduct. The aim is to help minimize the likelihood of unethical actions that could result in CFA Institute Code and Standards violations, regulatory breaches, and even criminal prosecution.





What professionalism means in practice in an investment management context and the link between professionalism and trust are discussed in an updated professionalism reading. The expectations for investment professionals are fully explored and clearly set out to help guide behaviour, particularly in ambiguous situations.

Standards also play their part in embedding trust. Practitioners are regularly faced with ethical and professional dilemmas that conflict with existing standards, so a range of new cases will help practitioners think through rational courses of action when challenges arise. The case studies clearly indicate how and when the CFA Institute Code and Standards apply.

No discussion of trust is complete without rules or, more precisely, regulation. The costs and effects of regulation receive less attention than the costs of investment management and operations to investment returns, but they are most definitely material and should not be underestimated.

Why Does It Matter?

Throughout their careers, investment practitioners are faced with ethically and morally ambiguous situations that lack clear rules on how to act. It will never be possible to anticipate all the potential circumstances and situations and reduce ethical risk to zero. Nevertheless, practitioners have an obligation to act as ethically as possible.

The new readings help practitioners identify potential ethical issues and think through possible solutions, even in the absence of clearly defined rules. Only by taking this responsibility as seriously as investment analysis, marketing, or processing can individuals play their part in curtailing unethical behavior and promoting trust in the investment industry. The readings also foster understanding of when and why violations of the CFA Institute Code and Standards occur, helping practitioners identify and avoid violations that can damage clients’ interests, the firm, and the careers of practitioners.

The regulation reading, meanwhile, brings the reader up to date with structural industry shifts, picking through complicated new rules, such as the European Union’s revised Markets in Financial Instruments Directive (MiFID II) and the General Data Protection Regulation (GDPR). Many firms have regulation specialists to inform investment professionals and support functions about changes in rules. But not all do, and it is incumbent on practitioners to take the initiative to get up to speed with the issues rather than waiting to be informed and, potentially, running afoul of standards, rules, and laws.











Level Volume Reading # Title CE/SER II 6 48 Trading Costs and Electronic Markets 1 CE III 2 10 Capital Markets Expectations, Part I: Framework and Macro Considerations 1.5 CE III 2 11 Capital Markets Expectations, Part II: Forecasting Asset Class Returns 2 CE III 6 34 Trade Strategy and Execution 2 CE III 6 35 Portfolio Performance Evaluation 2.5 CE III 6 36 Investment Manager Selection 1.5 CE



What Changed In the 2020 Curriculum?

Portfolio management is part science, part art. It is never static, evolving in tandem with new research, with markets, and with technology.

Investment manager selection deserves particular attention within the portfolio management process given the time and resources dedicated to manager selection. A new reading dedicated to manager selection focuses on how to determine which managers offer the best way to implement or express strategic allocation and risk decisions.

Portfolio performance evaluation is addressed in a revised reading that examines a variety of approaches, including return and risk attribution. The reading reviews long-standing tests of benchmark quality and various ratios used in performance appraisal, considering the benefits and limitations of each.

Capital markets expectations are a key part of the portfolio construction jigsaw. An updated reading explains how analysts develop expectations around economic developments and the potential biases and pitfalls in how they do it. The generalist practitioner is introduced to “nowcasting,” a methodology for tracking the business cycle, and the reading sheds light on a range of other technological breakthroughs that are disrupting traditional industry analysis.

An accompanying reading focuses on how to forecast returns from fixed-income, equity, and real estate assets. The reading covers risks faced by investors in emerging and frontier markets and also highlights the challenges of forecasting exchange rate movements. It introduces the concept of forecasting volatility.

Trading can be overlooked as a portfolio enhancer. But trade strategy and implementation can add as much value as analyst research, depending on the type of fund. A new reading explains why and how portfolio managers trade equities, fixed income, derivatives, and foreign exchange. Trade cost measurement, critical to assessing and enhancing the value added by the trading function, is described in detail using real-world examples.

A second new reading focuses solely on trading costs. It highlights the possibility of lowering costs through electronic trading and illustrates potential pathways for navigating the trading venue fragmentation that digitalization brings.

Why Does It Matter?

Portfolio construction plays a central role in the performance of a strategy. Matching the skill sets of outside investment managers to the desired outcome is essential to a successful strategy. Identifying manager skill, however, is not easy, and there is no single method for achieving it, so a framework for selection is helpful in identifying and evaluating managers. Quantitative and qualitative techniques are detailed to help guide the practitioner.

Setting expectations for returns, volatility, and relationships between assets or asset classes is also important in meeting investment aims. The capital market expectation readings should be helpful to generalists by providing them with the relevant economic “language” to engage meaningfully with strategists.

Knowledge of trading techniques and strategy is increasingly useful because the use of algorithmic trading, machine learning, and smart order routing for trade implementation is growing and mutating. Gaining a sense of the differences in trade implementation for each asset class is helpful for understanding the dynamics of the relevant market and also offers insights into good trade governance.

Because electronic trading now dominates trading in many asset classes, practitioners will want to understand who trades electronically, where they trade, and some of the common tactics used by traders. The reading encourages practitioners to take account of the risks of electronic trading and outlines how regulators are attempting to control these risks and stem the abusive trading practices that can occur in electronic markets.







