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The CFA bubble ?
Charl Marais
Ever since the Nasdaq bubble burst in 2000, global equity markets have been under severe strain for the last 3 years and the U.S. stockmarket seems to be heading for its fourth straight annual decline. Such a losing streak has last occurred 70 years ago and already there is talk of other bubbles waiting to burst, e.g. the bond market and real estate. However little notice is taken of a slightly different bubble, that of the number of candidates in the Chartered Financial Analyst (CFA) program, presented by the Association for Investment Management and Research (AIMR). The CFA program originated in the USA in 1963 when 284 candidates sat for the inaugural exam. In 2002 the number of candidates reached a record 76,231 across the globe, an increase of 16% over the previous year, while it is expected that the 2003 exams will see more than 80,000 test-takers. Considering the massive number of job-losses and other cost-cutting measures that are sweeping across the financial industry, it is therefore slightly alarming that the number of CFA candidates is still growing at an exponential rate. Several high-flying analysts on Wall Street have come under fire for not being objective in their research and recommendations. This has caused outrage among investors, especially against Salomon Smith Barney's Jack Grubman who strongly recommended WorldCom stock right up to the point of bankruptcy. Recently Eric Moskowitz wrote in the New York Post (28 February 2003) that "research analysts have become an endangered species on Wall Street as cost-cutting investment banks increasingly see them as a waste of money." Goldman Sachs added to the job losses last week by laying off six analysts and suspended coverage on 40 companies, including giants such as AOL Time Warner and Walt Disney. Therefore it makes sense to expect the CFA bubble to be pricked soon.

Chart 1 shows that most of the growth in the number of CFA candidates occurred post 1995, exactly in line with the growth of the stockmarket as measured by the Dow Jones Industrial Average and the S&P 500. What is worrisome however is that the growth in the number of CFA candidates is far greater than that of the stockmarket and that the gap between the two is still growing at an exponential rate, regardless of a 3-year bear market. After topping out at the end of 1999, the Dow Jones declined for 3 straight years and is currently just below its exponential mean. However the growth in number of CFA candidates is showing no signs of a slowdown and is a record 54% above its exponential mean. As the stockmarket has shown numerous times in the past, nothing goes up forever and that we can expect a reversion to the mean sometime in the near future. Students of stockmarket history will also know that whenever time series reverse, they usually overshoot the mean to the opposite direction before coming back to it.


Chart 1

Chart 2 plots the changes since the start of the bear market. This time the S&P 500 index is used, as it is more representative of the broader market for the shorter timeframe. From this chart we see that the number of CFA candidates have increased every year since 1999, with the exception of a drop in the number of Level 3 candidates during 2002, which resulted in a slight slowdown in the growth of the total number of CFA candidates. What will 2003 bring ? More of the same or the first negative annual growth since 1979 ? Only time will tell and it should be an interesting exercise to see how these charts proceed into the rest of the decade. An update of this essay will be posted once AIMR releases the number of CFA candidates for 2003. The exams will be written on 31 May 2003.


Chart 2

The author is a Level 2 candidate in the CFA program.
Data from www.aimr.org
Comments/criticisms are welcome at charl@anglorand.co.za

9 March 2003

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