Steadyhand Blog

Five Lessons From the Recession - Relearned

Mon, 13 Jul 2009 12:50:00 PDT

A lot of thought has been going into the lessons learned from the recession. That's prompted me to think about what has come out of the turmoil in the capital markets. It didn't take long to come up with a list. Here are my top five lessons learned, or should I say relearned: When it comes to markets and cycles, investors are not very good students. We seem to make the same mistakes over and over.

Leverage is a two-way street. During the years leading up to the summer of 2007, credit was available to any person, organization or investment firm that wanted it. The signs all said one way and there were no stop lights. But when debt is introduced to the mix, the range of possibilities is increased. The worst-case scenario should determine how much leverage is tolerable, but with low interest rates and a strong economy, that option wasn't being considered.

As an asset manager, it was also frustrating to see that investment returns created by leverage (and other forms of financial engineering) were being treated as equal to those based on corporate profits. While trying to temper clients' expectations, we found ourselves competing against levered products offering “potential” returns. Don't they know debt works both ways?

Don't get carried away on one theme and stray from your long-term strategy. The investors that had all their money with Bernie Madoff were extreme cases, but long cycles and past success do tend to lead people away from their long-term asset mix. Whether it was the Nifty Fifty in the 1970s, technology in the '90s or resources this time around, we're prone to getting carried away. And not just the amateurs, the pros do it too. Everyone on the buy side was watching the Ivy League schools – Harvard, Yale and Princeton – to see how they were generating such high returns, but this cycle they went overboard on illiquid investments (real estate, private equity and commodities) and got caught in a cash squeeze. I was guilty of letting my (and our clients') exposure to corporate bonds creep up after many years of good returns.

Don't assume liquidity will be there when you need it. When there is plenty of money flowing, investors start to believe it will always be there. “There is a wall of liquidity out there, the market can't go down,” was a common refrain in 2006 and 2007 when the pockets of hedge fund and private equity managers were bulging.

As I've said before, don't ever base an investment strategy on capital flows. The money tap can turn off in an instant – and without warning – which is what happened in the summer of 2007. Whether it's an individual needing money from his/her portfolio, a corporation refinancing its loans, or a structured product rolling over short-term financing, it should never be assumed that markets will be favourable, or even available, at the moment of need.

When I was a young sell-side analyst in the 1980s, I once admonished the chief financial officer of Canadian Pacific Ltd. for doing an equity issue when it didn't appear the company needed the capital. He stared at this nervy, naive punk and said, “I took it because it was there.” I didn't get his point at the time, but it eventually sunk in.

Risk management systems work until they don't. And they don't when circumstances extend beyond the range of expected outcomes. Sophisticated formulas assume that correlations are stable and distribution curves are normal. But correlations are as erratic as a driver on a cellphone and we don't need to be protected until abnormal times.

And yet, the elegance of the models is hard to resist. As managers, we get sucked into micro-managing unimportant stuff (tracking error versus the benchmark, style factors and cross-correlations) and fail to use common sense on the big stuff.

Finally, it's not different this time. It's just another episode of the same show. The economic and market cycle has not been repealed, even though former president George W. Bush and former U.S. Federal Reserve chairman Alan Greenspan tried their darnedest. Booms lead to busts, and extreme booms lead to what we have now. Therefore, price is always important, no matter how much capital is available or how compelling the story behind the investment is. And it's always better to sell when people around you are greedy and buy when they are fearful.

Not long ago we were thinking that we'd never have a recession because of “Chindia.” Now we are questioning the potential for a recovery. This is no different than any other cycle. Individuals and organizations adapt to a new set of circumstances. Inventories will be reduced, uneconomic production taken out of service, debtors delevered, and lo-and-behold, growth will reappear, from a lower, more sustainable base.

In an interview with Barron's magazine last fall, Jeremy Grantham, chairman of GMO in Boston, was asked if we will learn anything from the crisis. He answered, “We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.”

Unfortunately he's right. But let's at least commit to remembering these five lessons. Repeat after me…

Podcast: Second Quarter Review

Fri, 10 Jul 2009 12:08:47 PDT

In this podcast, Tom and Scott review the second quarter of 2009.

The equity markets rebounded sharply in the quarter, with many stocks posting strong gains. The corporate bond market also enjoyed a long-awaited recovery, as yields declined and the credit environment improved. Our funds bounced back to varying degrees, with the Global and Income funds posting notable advances and the Small-Cap fund turning in a more modest gain.

Listen now (the file many take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

It Will Never be the Same

Thu, 02 Jul 2009 08:43:54 PDT

By Tom Bradley

“Things will never be quite the same again. Western businesses in particular will be well served by moderating future expectations. That goes for investors too.”

- Tim Price, PFP Wealth Management, June 22nd, 2009

I read Tim Price regularly and always enjoy his perspective. I also understand the predicament that the developed nations have got themselves into. My 2009 mantra – the strong get stronger – applies to countries as well as companies. The world order will go through accelerated change as a result of the recession and financial crisis.

But I think the ‘it will never be the same’ statements we’re hearing from Mr. Price and others are gratuitous. We are always in a state of ‘it will never be the same’. People and businesses change and adapt. We use iPods instead of record players. We ride 21-speed bikes instead of 3-speeds. We have shoes for every sport instead of one set of sneakers. We own a Wrap portfolio from our bank branch instead of stocks with a broker.

Capital markets will continue to go up and down with new information and changing investor sentiment (the stock market is up 30-40% from its ‘end of the world’ low in early March). Investment bankers will help companies raise capital in the equity and debt markets (my bondie friends have never been busier doing new issues). Businesses and investors will use less leverage than they did a few years ago. And cycles will be as predictable as rain in Vancouver.

In a speech last week, Scotiabank CEO Rick Waugh said, "Expectations have to be adjusted. We are in a new norm.” He went further to say, “That new norm means a lower level of absolute profitability."

These comments make good press, and public relations, but they fly in the face of the facts. The gem of Canadian industry, consumer banking, is better than ever. Executives in other sectors would kill for the banks’ margins in wealth management. And in their capital markets businesses, there is a lot less competition.

To re-enforce the point, consider BNS’s most recent quarter in which its return on equity was an obscenely good 17.6%, down from an indescribable 21.4% a year ago. 17.6% in the middle of a recession. I rest my case.

We are being subjected to too many grandiose statements about the world changing. We are in a recession. Times are tough. But the cycle will play out like every other and new winners will emerge on Wall Street and Main Street.

Fixed Income Gems Can Still Be Had if You Add a Bit of Risk

Mon, 29 Jun 2009 08:21:28 PDT

The Globe and Mail, Report on Business
Published June 27, 2009

Over the past nine months, I've talked often in this space about risk being cheap. Investors can't let past losses blind them to the opportunities that have emerged from the banking crisis and recession.

From time to time I get a note from a frustrated reader who would like to take advantage of market weakness, but doesn't have the scope or time horizon to do so. Being further along in their investing cycle, they are looking for continuing income and can't absorb short-term losses.

For these investors, adding to equities might be appropriate to some extent, but there are other ways to take advantage of market opportunities. Indeed, they can amp up potential returns without straying from the bond market.

Fixed-income securities or funds are less volatile than the stocks, but bond investors are still taking risk – interest rate and credit risk.

Interest rate risk simply means that if rates go up, a lower-yielding bond will be worth less. On the other hand, if rates fall, the bond becomes more valuable and the price goes up. Longer-term bonds generally have higher yields and the potential to generate better returns, but they react more dramatically to changes in interest rates. So the longer the term of a bond (more interest rate risk), the more volatile the price will be.

Credit (or default) risk refers to the possibility that the borrower will not be able to make interest payments and/or repay the loan at maturity. Government-guaranteed bonds have no credit risk (we hope), while corporate bonds have varying degrees depending on the quality and stability of the company. The greater the chance of default (think Air Canada and Nortel), the higher the yield will be to reflect the additional risk.

Every bond has a different mix of interest rate and credit risk. A short-term government bond is least risky (modest interest rate risk and no credit risk), while a longer-term bond issued by a debt-laden, cyclical company is at the other end of the spectrum.

Over long periods of time, taking credit risk has paid off for investors. Owning a diversified portfolio of corporate bonds delivered higher overall returns, though there were years when they performed poorly. More often than not, the higher yields on corporates carried the day.

But that trend came to an abrupt halt in 2007, when there was an irresistible rush to safety, pushing government bond yields down. Meanwhile, buyers of corporate bonds demanded higher yields to compensate for skyrocketing credit risk (a weaker economy invariably leads to missed interest payments and more defaults). In 2007, government bonds beat corporates by 3.4 per cent.

Typically, corporates bounce back after a negative year, but that didn't happen: 2008 was worse, as government bond yields headed toward zero, and corporate yields moved up to reflect the uncertain outlook. Corporates again trailed governments, this time by a staggering 13.3 per cent.

Through this period, the yield spread (or gap) between corporate and government bonds widened dramatically. In the first part of 2007, the extra yield a corporate bond holder received was stable at about 80 basis points. The spread rose to 150 points by the end of the year and hit a high of 410 points at the peak of the crisis last January.

It was in this Depression-like context that I talked about taking more risk. Investors were being amply compensated for taking credit risk. Getting an extra 400 basis points of yield for owning a bank note seemed like a reasonable reward/risk bet.

So far in 2009, corporates are doing well. With more certainty in the banking sector and continued low yields on government bonds, buyers quickly reversed field and bid up the price of corporates. Meanwhile, the bond investors who fared well during the crisis by not owning corporates have seen a slightly negative return. The DEX All Government Index, which is a good proxy for safety, is down 0.5 per cent year to date.

The ups and downs in the bond market have resulted in the biggest divergence of returns that I've ever seen. Long-term track records were built and broken in a matter of a few quarters. Typically, a performance differential of 0.25 to 0.5 per cent between bond managers is considered significant, with first-quartile managers beating fourth by less than 1 per cent. But in 2007 and 2008, firms that took the right amount of credit risk (i.e., very little) ran ahead of their less fortunate competitors by 3 to 4 per cent a year. Some of Canada's top bond managers, which had superb credit records previously, were knocked off their pedestal, although in most cases they are roaring back in 2009.

The past two years remind us that not all bonds are the same and that seeking higher returns increases the volatility of a portfolio. But with safety still very expensive (products such as high-interest savings accounts and GICs are paying very little interest) it makes sense for income investors to prudently take some risk. The opportunities aren't as juicy today as at the beginning of the year, but the reward/risk balance is still in their favour.

R.E.S.P.E.C.T.

Wed, 24 Jun 2009 16:59:52 PDT

By Tom Bradley

We need your help Aretha! It seems that the little Canadian technology company that could, Research in Motion, has trouble getting respect.

This is hardly a statistically robust analysis, but it has been evident to me for years that RIM and its hugely successful Blackberry are rarely given their full due by the non-Canadian press. While I’m not a regular reader of the Wall Street Journal publications anymore (it’s the Financial Times for this guy), it has always struck me that the Journal was quick to point out the Blackberry’s flaws and keen to promote anything new from pretenders like Palm.

I was reminded of that by a recent article entitled ‘CrackedBerry’ in Barrons, a WSJ publication, which sounded warning sirens about the Blackberry’s market position. But what prompted me to post on this was an article about smart phones in The Economist (June 13th issue). The piece talked about Nokia, the new Palm phone and the iPhone, but there was no mention…not a word…of the world leader, Research in Motion.

I find this lack of recognition frustrating as a proud Canadian and Blackberry user, but as an investor, I don’t mind at all. Investing is all about expectations and I always prefer to buy a stock where the outlook is subdued.

Our clients own Research in Motion in the Steadyhand Equity Fund.

Podcast: Tom & Christine Discuss the Global Equity Fund

Thu, 18 Jun 2009 08:43:45 PDT

By Scott Ronalds

Christine Montgomery from Edinburgh Partners, the manager of our Global Equity Fund, has been traveling in North America this week meeting with companies (research) and clients (hand-holding). We dragged her out of the San Francisco fog and welcomed her to our sunny (partly) headquarters yesterday, where we reviewed the portfolio and talked shop.

In the attached podcast, Tom and Christine discuss a number of issues, including:

The recovery in the global equity markets
The on-going shift in the portfolio from defense to offense – health care, telecom and cash positions have been reduced, while exposure to cyclically exposed growth businesses and emerging market stocks has been increased
The fund’s exposure to Asia and the types of companies that represent compelling investments in the region
The attributes that Edinburgh Partners looks for in technology stocks, which have seen their weight in the portfolio double over the past year, from 13% to 26%
An update on the fund’s holdings in the financial sector

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

Book Review: Panic

Tue, 16 Jun 2009 08:21:56 PDT

By Scott Ronalds

Panic is a compilation of articles that shed light on the most severe upheavals in recent financial history – the crash of ’87, the Russian default and subsequent collapse of Long Term Capital Management, the Asian currency crisis of 1999, the Internet bubble, and the U.S. subprime mortgage crisis.

Although the book is edited by Michael Lewis (the author of Liar’s Poker and Moneyball), the articles were written by various prominent financial journalists/authors including Roger Lowenstein, Paul Krugman, Lester Thurow and Lewis himself. While many of the pieces appeared in publications such as The Wall Street Journal, The Economist, The New York Times, and Fortune, some are excerpts from books written at the time.

As taken from the inside cover, “Some of the pieces paint the mood and market factors leading up to the particular crash, or show what people thought was happening at the time. Others, with the luxury of hindsight, analyze what actually happened.”

I found it particularly interesting, not to mention entertaining, looking back at the articles written in the dot-com era. From the incredible rise and subsequent drubbing of start-ups such as Pets.com, Books-A-Million, and Egghead.com, these pieces do a good job illustrating the euphoria and emotion that can so easily overcome investors.

The last section of the book, which deals with the subprime crisis, also has several well-written articles that help explain how Americans got into the current mortgage mess, where defaults and the phenomenon of ‘negative home equity’ have become all too common. If you’re looking for a plain-English explanation of the emergence and function of complex investment vehicles such as CDOs, SIVs and credit default swaps, the collection of articles that Lewis has chosen are a good place to turn.

Panic is a great read for the patio this summer – assuming that the house connected to that patio isn’t worth less than the mortgage attached to it.

Hedge Fund Costs Add up to Bad Math

Sun, 14 Jun 2009 19:20:50 PDT

The Globe and Mail, Report on Business
Published June 13, 2009

I'm not a hedge fund manager, but I find their place in the industry to be forever fascinating. Indeed, this week I went so far as to publicly debate the proposition “Hedge funds are dead” with Toreigh Stuart of Man Investments, a hedge fund conglomerate. Due to weak debating skills and a stacked audience, I lost, but I like to think I'm smarter for it.

Hedge funds sound more exotic and mysterious than they really are. They are investment managers that own stocks and bonds just like the rest of us. There are two key factors that distinguish them, however. They charge more for their services and they pursue a wider range of strategies.

Because the term hedge fund covers various types of managers, many people view the fee factor as the only differentiator. Hedgies charge their clients an annual base fee just like conventional managers (traditionally 2 per cent), but they also collect a portion of the profits. The performance bonus has historically been 20 per cent of any returns above a defined level. I use the words “traditionally” and “historically” because fees are currently in a state of flux.

To generate attractive returns that justify a premium fee, hedgies bring more tools to the challenge. They can short stocks if they want to benefit from price declines. They often use leverage. And they can invest more freely in derivatives. In general, they are less constrained than conventional managers, which allows them to go further afield in pursuit of returns.

For example, to generate an 8-per-cent annual return, a conventional manager can buy and hold a portfolio of stocks, which subjects clients to all the volatility that goes along with equity ownership. For long-term investors, there's nothing wrong with that.

Hedgies may choose to do that too, and often do, but they can also take a more stable, lower-return strategy and combine it with some leverage. By amping up a strategy that's perceived to be more reliable with the use of debt, the manager hopes to achieve that same 8-per-cent return. An example of this would be to borrow short-term money cheaply and invest it in longer-dated, higher-yielding corporate bonds or mortgages.

The alternative strategy represents a unique set of risks and will provide a different pattern of returns, but there is no new magical return being invented in the long run. In recent years, some of these strategies were perceived to be a free lunch – i.e. equity-like returns with bond-like volatility – but that proved to be misguided. It was just a case where the risks associated with leverage, bond defaults and illiquidity were underappreciated for a brief, irrational moment.

The fee and tool kit criteria encompass a broad range of investment managers that pursue strategies with names like market neutral, long/short equity, merger arbitrage, event-driven and distressed debt. I should note, they also capture some conventional managers that just want to charge more.

When we look at the investment industry as a whole, logic and mathematics tells us that for every investor who beats the market, someone has to lose. It's a zero-sum game. The total value-added (returns in excess of index returns) nets out to zero, minus any costs. (Note: The math is not quite that simple. We could have two managers winning by a little and one losing by a lot. And the use of leverage prevents the equation from totalling exactly zero.)

Behind their immense growth in the past decade is an underlying assumption that hedgies can generate returns that more than offset the fees they're charging. And in so doing, transfer added-value, or alpha as it's called, away from the conventional managers.

There are some good reasons that suggest this could happen. The extra tools along with fewer constraints and the ability to attract the “best and the brightest” are real advantages. But while there will always be individual firms that earn their fee each year (since the debate, I've had friends and foes not-so-subtly remind me of which ones they are), the question remains, can hedgies over all steal away enough alpha to justify the fees?

No amount of research, statistics or beer will change Mr. Stuart's and my view on this issue. Both sides can produce numbers that support their argument, and I'm not here to get in the last word.

Where there is no debate, however, is how the “collective” client (all investors combined) is affected. As capital shifts from low-fee funds to high-fee products (hedge funds and other structured products), the costs go up while the total added-value remains the same.

That's bad math any way you look at it.

Hedge Funds are Dead

Wed, 10 Jun 2009 10:13:15 PDT

By Scott Ronalds

Be it resolved that hedge funds are dead - or at least the model as we know it needs to change.

This is the position that Tom Bradley argued in a debate yesterday at a luncheon held by the Alternative Investment Management Association (Canada’s hedge fund association).

With a tougher environment ahead, increased scrutiny from regulators and clients, and a weaker performance record to sell, Tom opined that the hedge fund model which has earned a reputation of being client unfriendly, under-regulated and exorbitantly expensive is certainly in intensive care, if not dead.

You can read Tom’s full argument in today’s Globe and Mail. Both sides also presented their case on BNN yesterday with Howard Green. Watch the rerun here.

Re-balancing When Needed

Mon, 08 Jun 2009 09:14:31 PDT

By Tom Bradley

Last week Chris and I met with Scott Robertson, a financial planner from Ottawa. Scott is a veteran and has a straight-forward, no-nonsense approach to his craft. That was clear when we asked him when and how often his clients re-balance their portfolios. He said without hesitation, “When they’re out of balance.”

That makes sense. Nice and simple. Why get hung up on quarterly or yearly. Just do it when you need to. Set a range as to how far the portfolio can stray from its long-term mix (5 or 10%), and then take action when the limits are exceeded.

I would only add that having a re-balancing rule based on the calendar (i.e. annually) requires less monitoring of the portfolio and totally takes the emotion out of it. It’s a crutch we can lean on when the heart is getting in the way of taking action. I think calendar-based rules are more ‘automatic’ than the range-based rules.

In either case, our view is that re-balancing makes sense for most clients given that (1) the long-term, strategic asset mix represents their best guess as to what’s appropriate for them, (2) calling the market in the short term is impossible and (3) it dampens down the volatility of a portfolio. A disciplined re-balancing regiment forces us to buy low and sell high without emotion getting in the way.

Is It Justified?

Thu, 04 Jun 2009 08:58:34 PDT

By Tom Bradley

People are having trouble with this rally. Indeed, I admitted to being uneasy about the speed and magnitude of the market’s move in a recent post.

What’s spooking people is that it’s happening at a time when the economy is in the dumper and it’s not clear how we’re going to get out. Repeatedly I hear people saying, “The market’s move isn’t supported by what’s going on in the economy.” Indeed, as I write this, an email from Advisor.ca flashes across my screen saying that the economy shrunk 1.4% in the first quarter.

But as investors, we have to remember:

The market looks forward. The past influences investors’ views, but future profitability drives stock returns.
Very little of a stock’s valuation is derived from current earnings, or losses. When investors take ownership in a company, they are buying a future stream of earnings and dividends. The first three or four years of that stream accounts for about 15% of the value, while the other 85% is derived from what happens in years 4 and beyond. Too often investors get mixed up on their emphasis – 85% of their focus on the next year or so.
The market doesn’t need economic news to move. The recent ride could be explained by the fact that stocks got oversold and were trading at silly valuations...silly cheap. At that point, perhaps, the urgency factor moved from the sellers (who were getting tapped out) to the buyers (who had lots of money to spend).

Then again, maybe there’s another explanation. The reality is that the economic and market landscape is so complex, we can’t ever make a definitive bet on what will happen in the short term.

This market move shouldn’t surprise investors. And nor should another 10-30% move - up or down - over the next X months.

The State of the Canadian Investor

Mon, 01 Jun 2009 08:16:44 PDT

The Globe and Mail, Report on Business
Published May 30, 2009

As our firm passes the two-year mark, we aren't able to generalize about where our clients are coming from or why they chose us, but we can make some observations about what their previous portfolios looked like, and more broadly, the state of the Canadian investor.

I'm referring to the clients for whom we manage a significant portion of their wealth, as opposed to those who have used Steadyhand funds to complement what they're doing elsewhere. Our sample is a biased one, because more often than not our new clients are unhappy with their old provider. My mother (no choice) and in-laws (loyalty) are exceptions.

I am generalizing when I say that we have met too many clients that don't know what they own, how much they're paying and most importantly, how they're doing. In many cases, the biggest part of what we do for them is pull together all of what they own and help them answer those three simple questions.

When we sort out what they hold, it's invariably too much – too many providers, too many securities and too much confusion. One of my most popular columns was about a couple that owned 29 mutual funds between them. We've seen portfolios that surpassed that level a number of times.

This trend to overdiversification has multiple contributors. The clients have their money spread around in too many places, the advisers or dealers have them invested in too many overlapping products (a different one for every registered retirement savings plan season), and many of those products hold hundreds of securities in their own right.

The problem with being overdiversified is that clients don't remember why they own the securities and don't have a good reading on what their asset mix is, which is the most important part of the investing process.

They also end up with what amounts to a high-cost index fund, which leads to the fees question. Certainly, we found situations where clients were paying too much for services they weren't receiving, but that wasn't the biggest problem. With few exceptions, our new clients didn't know what they were paying previously, and it wasn't always easy to find out.

They weren't clear about what the fee arrangement was with their adviser – commission or asset-based – and they were often jolted to find out the magnitude of the deferred sales commissions when they went to move their account (otherwise known as the dreaded DSC).

Again, there is lots of blame to go around on the question of cost. The clients aren't asking the questions and the industry has gone out of its way to obscure the numbers.

On the “How have I done?” score, clearly everyone is unhappy these days. But again, the issue isn't only about returns. It's also about not knowing what the numbers are, and whether investors are doing well or poorly in the context of the market. They are left to guess based on their quarterly statements.

These observations come in the face of a research piece recently published by Chicago-based Morningstar called Global Fund Investor Experience. The report analyzes the fund marketplace in a number of countries, highlighting the strengths and weaknesses of each. Canada ranked seventh out of 16. We received As and Bs in all categories except one. Under “Fees and Expenses,” we took home a failing grade.

In the context of what we've observed, the F for fees is not a surprise, but the A for transparency certainly is. Canadian investors would not rate the industry that highly, although in fairness to Morningstar, the gap is likely due to how funds are sold here, not faulty analysis. The direct-to-client model is well established in the U.S. and elsewhere, but in Canada, mutual funds are overwhelmingly sold through third-party dealers – bank branches, investment dealers and financial planners. It is the use of these intermediaries, who are responsible for reporting to clients, that increases the potential for cloudier transparency.

Watching our RRSPs go up used to be fun, but the markets of the past two years have changed that. For many, investing is now like insurance – a necessary evil. That's unfortunate because the responsibility for generating income in retirement is increasingly falling on their individual shoulders. Canadian investors need to become more engaged in their investing, not less. This doesn't necessarily mean they need to pick their own stocks and bonds, but they do need to be good consumers of financial services. That includes having a well-articulated plan, knowing what they own, what they're paying and how they're doing.

You Go Girl!

Fri, 29 May 2009 10:36:50 PDT

Posted by guest blogger Lori Lothian (Steadyhand Director)

“Fess up, fellows: The masters of the universe have turned out to be masters of disaster. No matter which aspect of the financial crisis you consider, there is a man behind it.”

This was the opening paragraph of an article recently posted in the Wall Street Journal that reinforces our view that women are great investors, and even better clients! Realistic expectations, discipline and patience lead to better returns, and women investors tend to employ all of these hallmarks.

The article was timely because last night we hosted a third Investment Seminar for Women. Our thesis in holding these seminars is that women have all the potential in the world to be great investors, but lack time, information, confidence and/or interest. The aim of these seminars is to demystify the process of investing and, in so doing, show women that what they really need to be savvy investors is what they already are - good consumers. Sounds simple, and it should be!

So why aren’t more women ‘taking the reins’ of their families’ investment decisions? I don’t know the answer, but I did enjoy the somewhat tongue in cheek theory I recently heard advanced by Tracy Theemes, an investment advisor at Sophia Financial Group in Vancouver. Tracy put it this way: Women tend to carry the bulk of responsibility for family matters. It’s not unusual for men to have two jobs around the house – taking care of the investments and BBQing. It’s very difficult for women to say to their partners, “sorry honey – its just BBQing for you.” As with all stereotypes, this one contains a kernel of truth, although it’s interesting to note that when we asked the women at our seminar to identify their main barriers to investing, only one said that it was their partner’s responsibility.

What’s interesting is that the very reasons that hold so many women back from becoming engaged investors are those that make them good at it. For example, many women at our seminars say they feel uncomfortable with financial jargon and the confusing array and complexity of investment products. At the risk of quoting Martha Stewart, “that’s a good thing!” They are uncomfortable for a reason, and it has nothing to do with them. Jargon and complexity mask poor investment products and choices, and every investor should be insisting on plain language, straight answers to all their questions, achieving a thorough understanding of what they are buying, and clear, transparent reporting.

Obviously there are compelling reasons for women as a group to be more engaged in investment decisions. Life circumstances are one. All women, whether young, old or middle aged, will be unpartnered at some stage of their lives, and will simply have no option. Importance is another. Few matters have more significance in terms of women and their families’ quality of life than investment decisions. But the main reason why women should become more engaged investors is, as the article suggests and we believe, they’re good at it!

We are encouraged by the attendance and the feedback we are getting from our seminars and are planning sessions for Calgary, Winnipeg and Toronto. Let us know if you would like to be notified of these events.

Teachers Expel BCE

Tue, 26 May 2009 13:28:36 PDT

By Tom Bradley

The Ontario Teachers Pension Plan ("Teachers") came within a hair of buying BCE at $42.75. Clearly the powers that be at Teachers thought enough of the BCE franchise that they were willing to pay up for it and use substantial amounts of leverage to do it. By taking the company private, they would have moved decisively to surface value, including management changes, capital investments, and financial and tax restructuring.

But the deal didn’t go through and we learned this week that Teachers has sold 30 million shares at $23 ($713 million), which represents a substantial portion of the 40 million shares it held at March 31st.

Now, we all know that the world has changed and the economy is weaker than it was when the deal was being pursued. Particularly in Ontario.

But $23?

Also, the competition for wireless telephone customers is intensifying with new players coming into the market and Rogers continuing to take advantage of its technology lead.

But $23?

I don’t pretend to know what the thinking was behind the sale. In light of the fact that BCE has Teachers’ man at the helm (George Cope) and is implementing a strategy that Teachers supported, it is hard to figure. It may have happened for structural reasons. The private equity division was where the action was during the takeover attempt, while these shares were likely sold by the ‘public equities’ division. The two teams obviously have a very different view of what BCE is worth.

But $23?

It speaks to how structural issues and size can lead to head-scratching decisions at times, issues we write about a lot in this space. We want our managers as ‘unconstrained’ as possible – no marketing or organizational issues getting in the way of investment decisions. We also want our money managers to be ‘right-sized’. Teachers has some advantages over smaller managers (see Size a Liability of Nimble Field of Stocks and Bonds), but one of them isn’t nimbleness and cost of trading. It had to move BCE down a buck or more (4%+) to sell their shares.

Trading Range

Fri, 22 May 2009 08:57:55 PDT

By Tom Bradley

In 26 years of doing this, one of the phrases I find least useful is, the market “is range bound” or “will stay in a narrow trading range over the next X months”. I don’t have conclusive data on it, but I believe that these types of predictions are almost never right.

I’ve heard these words used more over the last couple of weeks. It’s not surprising, because they usually come out after the market has had a good run and people are worried that it’s running out of steam.

The implications of those words are that (1) the speaker has an ability to predict the market in the short term, and (2) the market is going to do something it hasn’t been done since...well, I can’t remember when. Certainly not in the last decade or so. What sounds like an innocuous little throw-away comment is actually a very bold statement.

I thought this was important to write about only because there are times when investors base decisions on this kind of analysis. They shouldn’t.

A Tip of the Hat to the 'Capitalist'

Fri, 22 May 2009 08:56:10 PDT

By Scott Ronalds

Blogger Canadian Capitalist published a complimentary posting on Steadyhand the other day. He highlighted four aspects of our firm that we emphasize on our website and in our conversations with investors:

Low cost
Concentration
Co-investment
Low turnover

On this last attribute (low turnover), he rightly points out that turnover in our Global Equity Fund and Income Fund were remarkably high last year. The Global Fund’s audited turnover rate in 2008 was 179%. A note of clarification is necessary, however. This figure is misleading, as it includes cash management transactions that were made in a money market product held in the fund. Put simply, every time the manager redeems money from this short-term instrument, it impacts the turnover of the fund. When these transactions are excluded from the calculation, turnover was a much lower 35%.

As for the Income Fund, we expect turnover to be much higher than in our equity funds, as the manager pursues a number of strategies within the fund and bond managers constantly ‘fine tune’ their portfolios when implementing interest rate anticipation, duration, and other strategies.

Canadian Capitalist and others like him are doing a good job of educating investors on some of the industry’s flaws and dirty secrets while also providing useful tips and advice. His blog is worth a visit if you haven’t already seen it.

Podcast: Uneasy About the Market Bounce?

Tue, 19 May 2009 11:36:54 PDT

By Scott Ronalds

Stock markets have rebounded 25-35% since the lows reached in March. Feeling uneasy about the recent bounce? In this podcast, Tom expands on his recent Globe and Mail column and provides some advice to investors who are unsure what to do at this point.

Listen now or subscribe to our podcasts via iTunes or RSS.

Uneasy About the Market Bounce? Just Stick to Your Plan

Sat, 16 May 2009 10:33:15 PDT

The Globe and Mail, Report on Business
Published May 16, 2009

What do we do now?

Has the market gone too far too fast? Is it projecting too robust an economic recovery? Is it going to give back its gains as corporate earnings continue to disappoint?

Or is this the beginning of the next bull market? Did stocks overcompensate for the economic crisis? Are we starting to see the results of all the fiscal and monetary stimulation?

I've been fully invested since the fall, so I'm feeling better about things, even though I started rebalancing toward equities too soon. I arrived at this position because stocks were cheap, not because I thought the economy would recover any time soon. Based on long-term prospects, the reward/risk scenario for owning stocks made sense.

While there is no more uncertainty today than there was two months, or two years, ago, I find the current market situation to be unsettling. That's because stocks are 25 to 35 per cent less cheap than they were in March. The markets have rocketed up, while the long-term business environment is no better, and quite possibly worse - we are borrowing heavily from the future to get through the present.

I'm not alone in my unease. The current situation is just as stressful for those who are underinvested. For the most part, investors that are holding cash are doing so because of the dire economic outlook. They weren't denying stocks were cheap; they just wanted to wait for more certainty before they bought.

But their objectives haven't changed and they still need to generate a return that is considerably higher than what guaranteed investment certificates (GICs) or government bonds provide.

So what should we do at this point?

We should do what we always should do. Continually and unemotionally assess what the reward versus risk scenario is for the investments that are available to us - GICs, bonds, stocks, real estate. Then make sure the expected long-term returns are reflected in our long-term asset mix.

For example, if an investor's circumstances and objectives call for 70 per cent of her portfolio to be in stocks, and she thinks stocks will beat fixed income over the next three to five years, then her mix should reflect that. She should have at least 70 per cent of her portfolio in stocks.

For portfolios that have an alignment between valuations and long-term mix, there probably isn't a lot to do right now. Given the magnitude and speed of the rally, there may be a need for some rebalancing, but nothing more.

More action is required for those who are uncomfortably outside of their long-term asset class ranges. Investors that have their money in the bank or under the mattress have to think hard about how they're going to get to a fully invested position. Risk-free assets served them well through the crisis, but won't protect against "shovel-ready" inflation, nor will they generate the kind of returns necessary to build up a nest egg.

Another group that has work to do are investors who need to change their strategic mix. I'm referring to those who learned the hard way that they have too much risk and/or not enough liquidity in their portfolios. Extreme points in a market cycle are never a good time to make changes to a long-term target, because emotions are running high and valuations are working against you. But with a meaningful rise in the market, they now have an opportunity to start moving to a more appropriate place.

We don't know where the market goes from here. Hopefully, the current rally has shown us how difficult it is to make that call, particularly when basing it on an economic forecast. You may get the big picture right, only to find that the market is way ahead of you.

The rally has also demonstrated the benefit of sticking to a long-term plan and rebalancing, even when it feels awful to do so.

In the meantime, those of us who are driven by valuation and long-term earnings power can take solace from the words of Geoff MacDonald of Edgepoint Wealth Management.

At a presentation this week, he described their portfolios as going from "silly extreme valuations to very attractive valuations" since March 7.

So what's to be uneasy about?

Everyone is an Economist II

Thu, 14 May 2009 14:19:37 PDT

By Tom Bradley

As I pointed out in a recent post (Everyone is an Economist), we all have a tendency to become economists at extreme times like this. Everyone has a view on the economy, the dollar, Ben Bernanke, U.S. consumer debt and Wall Street’s demise. And with our increased focus comes increased confidence and conviction that our view is right.

I read a piece last weekend that reminded me how hard it is for economists, or big picture thinkers in general, to get it right. And of particular importance to me, how hard it is for said thinkers to enhance our investment returns.

In his weekly letter, Tim Price of PFP Wealth Management in the U.K. wrote:

“The essential problem of Traditional Economics is that it assumes a largely closed system of...incredibly smart people but in unbelievably simple worlds. The reality...is that the economy is closer to being a complex, adaptive, dynamic system – not unlike a living organic being, vulnerable to illnesses and other sudden exogenous outbreaks.”

Thinking and talking about the big picture is interesting, fun (for some of us at least) and it makes us better conversationalists. But for those who are charged with generating investment returns for our clients, we have to be careful how we use it.

Morningstar Study: The Investor Experience

Wed, 13 May 2009 09:37:37 PDT

By Scott Ronalds

Morningstar recently published a comprehensive report on the ‘investment climate’ for mutual fund investors titled Global Fund Investor Experience. The report analyzes the fund marketplace in a number of countries around the world, highlighting the strengths and weaknesses of each.

Overall, Canada received a B grade and placed 7th out of the 16 countries surveyed. The topics of analysis, and the grades issued, were as follows (grades in brackets):

Investor Protection (A)
Transparency in Prospectus and Shareholder Reports (A)
Transparency in Sales Practices and Media (A)
Fees and Expenses (F)
Taxation (C)
Distribution/Choice (B+)
Overall (B)

Sure enough, it was our failing grade in the fees and expenses category (where Canada received the lowest grade of any of the surveyed countries) that dragged the overall score down. The following excerpt on the topic is sure to ruffle some feathers in the advisor community:

“Canadian investors do not pay much attention to fees. Canadian investors are comfortable with the high fees because they don’t know how low these fees should actually be. Assets tend to flow into average- or higher-fee funds because Canadian investors use financial advisors to help them make decisions. Advisors direct client assets to funds that pay better trailers. And since the trailer is included in the MER, the result is that assets flow into higher-fee funds.”

Given the heavy regulation in place in our industry, it’s not surprising that Canada scored an A grade in the investor protection and transparency categories. We would argue, however, that a key topic is being overlooked: transparency in client account statements. Few firms disclose any meaningful fee or performance information in their account statements, which are a key element of the ‘investor experience’. Nonetheless, we applaud the goal of the report, which is to begin a dialogue about industry best practices from the perspective of the shareholder.

We’ll take a stab at starting the dialogue. How would you rank the above topics of analysis in terms of importance to you? Do you feel that any other topics are missing? Post your comments below. And don’t hold back.

"I Don't Know"

Fri, 08 May 2009 08:43:57 PDT

By Tom Bradley

That’s my answer when asked where the dollar is going.

As regular readers know, I’m not short on opinions, nor is it the case that I’m not well informed on the economic and political forces at work. I just think predicting currency movements is impossible to do.

In this week’s Economist magazine, the Buttonwood column is about the currency markets. It provides some insight into what’s going on, but what it does more than anything is confirm that I will never know the answer to the dollar question.

Take your pick as to which of the factors discussed in the column will hurt or help the U.S. dollar.

The U.S. government’s unconstrained resolve to fix the economy by printing money and running big deficits.
The disappearance of the ‘carry trade’, which in previous years was widely used by hedge funds and other financial institutions.
Higher real yields (after inflation) in the U.S. than in Canada, Japan and the U.K.
Investors around the world increasing their appetite for risk.
The shrinking U.S. trade deficit.

Reinforcing my confusion was a story in the Globe and Mail yesterday on how the University of Toronto lost upwards of $600 million when a currency hedge went against them. The U of T funds hedged their U.S. dollar exposure back into Canadian dollars when the loonie was trading above par. I know a few of the people that are involved with University of Toronto Asset Management and they are experienced and scary smart.

The only way they’re not smarter than me is they didn’t say, “I don’t know”.

Safety is Expensive

Thu, 07 May 2009 09:17:25 PDT

By Scott Ronalds

We’ve been advising clients that safety is expensive these days. In other words, investors are getting paid very little for holding low-risk assets such as money market products and government bonds. The counterpoint is that the latter securities (government bonds) have provided stable income and attractive capital growth over the last several quarters, while the equity markets have been in a tailspin.

Yet, some would argue that the price of safety has become dangerously high. Warren Buffett has even suggested that there’s a bubble in U.S. Treasury bonds. The term bubble may be misleading if viewed as an event that can lead to a permanent loss of capital. You’re going to get your money back from the government, after all, if you hold these bonds to maturity. But portfolios heavy in ‘governments’ could be vulnerable to a price correction.

Consider the facts. The yield on a 5-year Government of Canada bond is roughly 2.0%, while a 10-year bond is at 3.1%. Both are near historic lows. While they may not increase overnight, interest rates will likely rise over the medium-term once the economy gets back on track and inflation starts to re-emerge.

Our back-of-the-envelope calculations tell us that an increase in rates of 1% would lead to a decrease of roughly 4-5% in the market value of the 5-year bond, and 8-9% in the value of the 10-year bond. If rates were to increase by 2%, the 5-year issue would fall 9-10%, while the 10-year bond would drop about 15% in value.

If you buy government bonds with the intention of holding them to maturity, these numbers don’t mean much, as you’ll receive your original investment back at maturity and collect the coupon payments along the way. But those coupon payments are minimal and if you need to sell your bonds prior to maturity, you could be hit with a loss.

There’s also the opportunity cost to consider. High-quality corporate bonds currently offer a significant yield advantage over governments, and have greater upside potential for price appreciation. The point is that with interest rates as low as they are, safety is indeed expensive.

When in Doubt, go BIG

Tue, 05 May 2009 11:43:13 PDT

By Tom Bradley

A writer in the Financial Times this morning suggested that BMW and Mercedes need to worry about scale. With Fiat and Porsche playing the role of consolidators, the auto industry is going to have fewer, larger players. Therefore, as the logic goes, the small guys need to do something. BMW and Mercedes must have a bigger sales base over which to spread their R&D and drive costs down.

The writer may be right, but I find it interesting that there is always an underlying assumption that bigger is better. Scale is always the default position. (Note: My last post was about size in the investment industry, specifically the drive by Ontario Teachers Pension Plan and OMERS to get bigger)

But this bias is not confined to autos and investment management. It is a theme that runs through all industries. The rationale for getting bigger is invariably rooted in cost reduction – reduced overhead, better buying power, shared distribution and more efficient research and development. When companies talk about ‘revenue synergies’, I usually tune out. Cost cutting is reasonably predictable, but revenue enhancement is rarely fulfilled.

What is often missed, however, is that there are distinct disadvantages to scale. Senior management gets spread too thin. A bigger market share makes it more difficult to grow. In some cases, managers are forced to move from offense to defense – i.e. they have to defend what they have (bought), as opposed to grabbing for more.

The scale argument is more balanced than it often appears. Executives and commentators are too quick to trot out the need for scale.

After all, GM has scale. Chrysler has scale. AIG, Citigroup, Merrill Lynch, Bear Stearns, Lehman Brothers, Countrywide Financial and Royal Bank of Scotland all have (or had) serious scale. And Canadian companies like Abitibi, Canwest and Teck are players of international proportion.

Would I like to increase my margins via cost reduction? You bet. Am I willing to sacrifice having a tight, talented management team that is focused on eating the competitors’ lunch and building on the strengths the company has? No way.

Give me focused excellence over mega-mediocrity any day.

Size a Liability in Nimble Field of Stocks and Bonds

Sun, 03 May 2009 16:16:17 PDT

The Globe and Mail, Report on Business
Published May 2, 2009

Last week I was at the Richard Ivey School of Business speaking to an investing class. It is part of the Benjamin Graham Centre for Value Investing, which has grown in international prominence under the firm hand of professor George Athanassakos.

I had to sneak in the back door because I'm a card carrying "agnostic" when it comes to investment style. So, rather than talk about price-to-book or discounted cash flow, I focused my talk on how our industry makes it hard for money managers - value, growth and otherwise - to do their job.

Under one heading "Size Kills," I talked about how scale in investment management is a big impediment. The time and cost of executing trades for multibillion-dollar firms is considerably higher than for their smaller brethren. They have fewer stocks to choose from (that are big enough to invest in), and yet they need to hold more stocks to fill out their portfolios. And large managers often can't take a big enough position in the stocks they really like to have a meaningful impact on their clients' returns.

But in the face of this argument come recent statements by Ontario's mega-pension funds - the Ontario Teachers' Pension Plan and the Ontario Municipal Employees Retirement System (OMERS) that they are not big enough. Both organizations, which manage $87-billion and $44-billion respectively, are opening their doors to other pension plans in hopes of adding to their scale. Smaller funds will be able to tap into the expertise and capability of these large organizations.

The pronouncements by Teachers and OMERS are in response to recommendations by Ontario's Expert Commission on Pensions, which was led by Harry Arthurs. In its report, the commission stated that "the cumulative effect of the several advantages that large plans have over small plans is extremely significant. These include lower investment fees, in-house investment expertise, private placement capabilities, ability to spread investment risk through diversification, reduced administrative unit costs, and enhanced availability of education, information and service."

In light of this statement, the students are left to wonder. "Who is right - the experts or Bradley?"

Well, we both are actually.

The big plans have a lot to offer the little guys. Teachers is a leader in terms of investment management and pension administration, and has been partly responsible for moving other public funds up the sophistication ladder (whether they'll admit it or not). Today, Canada's mega-funds, including the Canada Pension Plan and some of the provinces, are at the forefront of institutional investment management in the world.

In addition to Mr. Arthurs' list, there are other benefits that come from hooking into a mega-fund.

The first is leadership, which is a big issue for small plans. Many organizations just don't have the right mix of executives and employees to effectively manage a plan. They don't have people like Jim Leech at Teachers, Leo de Bever at Alberta Investment Management Corp. or Doug Pearce at British Columbia Investment Management Corp., and the teams behind them.

The second is time frame. The big funds are better able to take a long-term perspective. With all due respect to Prem Watsa and Fairfax Financial, Teachers is probably the closest thing we have in Canada to Warren Buffett's Berkshire Hathaway. It is unconstrained in the type of investments it will consider and has less need to worry about reporting to clients quarterly.

But there is another side to the Teachers/OMERS sales pitch.

The big guys' capabilities and sophistication are fallible. The Caisse de dépôt et placement du Québec proved that last year (down 25 per cent), as did some high-profile U.S. funds like Harvard University.

Small plans with capable leadership have advantages the mega-funds will never have. They have access to asset classes that Messrs. Leech, de Bever and Pearce can only dream about - small-capitalization equities and Canadian corporate bonds to name two. And of note, these categories carry considerably lower fees than the increasingly grounded world of alternative investments, which command a 2-per-cent base fee plus a 20-per-cent performance bonus.

They have a much broader range of managers to choose from and can give them assignments that are more aligned to their plans' needs. While equity management in the pension world is overwhelmingly focused on the indexes, smaller managers have the flexibility to run more concentrated, less benchmark-oriented portfolios.

Small plans can apply common-sense risk management as opposed to the more sophisticated and, dare I say, complicated practices of the big financial institutions (including the global investment banks), which have proven to be less than reliable.

Teachers and OMERS give the "big is better" message a loud and credible voice and their case has some merit in the pension world. In private wealth management, however, where the banks and CI Financial CEO Bill Holland are constantly talking about the need for scale, the argument is less convincing. Their "scale" businesses are not offering real estate, private equity, hedge funds or benefit administration. Their clients are investing in good old stocks and bonds.

Students, please take note, in those areas, size does kill.

The Silly Season is Here

Wed, 29 Apr 2009 16:57:10 PDT

By Tom Bradley

The 2009 Lipper Awards have been announced and the ads and emails have started. There will be a rush of fund firms announcing the loot they've collected.

Last year we had some fun with our industry's 'silly season'. We announced our own LIPPY Awards. This year, we'll hold back a little on our comments:

There isn't anything more ridiculous than giving an award for 'One Year' performance. I'm embarrassed to be part of an industry that would tolerate this.
One-year performance is about as random as you can get. To give an award, accept one, or advertise it is a travesty. To acknowledge one-year anything, and attribute skill to it, eats into the credibility of our profession.
I implore the investment professionals at the mega-fund companies to do something about this. Don't bring your firm and industry down to such a low level. Act like investors, not bad salesmen.
Go down the hall to your marketing department and tell them to STOP. Don't let them do the newspaper ads and emails to advisors pronouncing you've won a one-year award for your fund. Then go back to your office and call Thomson Reuters and tell them you refuse to accept the award.

As I said, we're going easy this year.

Recession or Depression?

Wed, 29 Apr 2009 16:56:00 PDT

By Tom Bradley

Michael Nairne and his partner (in all respects) Joanne Swystun started a firm called Tacita Capital in 2006. It is a family office for “exceptionally affluent families.”

Tacita publishes research pieces from time to time, the latest of which was recently published in the Financial Post (It’s a Recession, not a Depression). With the ‘recession versus depression’ debate raging, the article is timely. It sheds some light on some of the lesser known facts about the 1930’s, in particular how portfolios performed. Michael points out that most analysis fails to take into account three things: dividends, after-inflation (real) returns and the recovery.

There is no disputing the massive declines that investors experienced, but for those that gutted it out, the depression’s full-cycle picture was better than it is usually portrayed.

The U.S. stock market didn’t start to recover until 1932, after the market had declined 80% from its peak. It got back to breakeven (in real terms) by 1936.

Balanced investors (20% government bonds, 15% corporates, and 65% stocks) fared better. Their portfolios declined in value by 32% and were back to breakeven by mid-1935. By the end of 1936, a balanced portfolio was up 35% from its peak level.

Interestingly, portfolios that were regularly re-balanced toward equities (when the stock weighting was 20% out of line) declined further than ones that didn’t, but generated a 79% return by 1936.

Michael makes no bones about the fact that it would have been tough to hold on through the depression, as it is today.

His article reinforces two things that we’ve been talking about repeatedly. First, that there are two sides to the cycle and to be successful, investors have to navigate both the up as well as the down.

And second, we’re not sitting at a market peak today. Even with the recent rally, most stock markets are still trading 35-40% below their 2007 peaks. At this juncture in the cycle, we should raise our return expectations for the next few years, not lower them.

Podcast: Active vs. Passive Management

Wed, 29 Apr 2009 16:56:00 PDT

By Scott Ronalds

Many studies on active vs. passive management draw the conclusion that the latter strategy (more commonly known as ‘indexing’) is superior because it generates higher returns. Notwithstanding the ‘sloppiness’ of some of these comparisons, it is true that many active managers underperform their benchmark. But it doesn’t have to be this way. Most active managers aren’t given a fighting chance. They are burdened by impediments such as high fees, tight constraints and a focus on short-term performance. When these issues are addressed, it’s a different ball game.

In this podcast, Tom expands on the active vs. passive debate. In doing so, he sheds some light on his Globe and Mail article from last weekend, and points to a recent piece on the topic published by Morningstar.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

Confessions of a Melancholic Money Manager

Wed, 29 Apr 2009 16:56:00 PDT

The Globe and Mail, Report on Business
Published April 18, 2009

Let me set the scene. A generic portfolio manager enters a psychiatrist's office and starts talking. Let's be a fly on the wall.

Thank you for seeing me, doctor. Sure, I can lie down on the couch.

When I was here last time, it was about my golf game. I still need your help there, but can we talk about work? I'm finding the nine-to-five is my biggest challenge these days.

Okay, I'll start at the beginning. Well, I'm an "active" money manager. That means I try to own the stocks that have the best chance of going up and disregard the rest. If I can't find ones that are undervalued, I stay in cash and keep my powder dry for a better day.

As you know, I love what I do, but it's not just these markets that are getting me down. I'm constantly worrying about beating the banks, other asset managers, the banks, hedge funds, the banks and every full-service broker in the country. My clients and partners want me to beat all of them every quarter, every year, all the time.

The banks? Oh, did I repeat myself? Ha ha. Everywhere I turn in the wealth management industry, they are there.

But Doc, I'm starting to realize that it's not the banks I need to worry about, or Coleman, Sprott and Kanko. It's the "passive" guys. The indexers. The exchange-traded funds sold by Barclays, Claymore and BetaPro that exactly replicate the S&P/TSX composite index, the S&P 500 and other such monsters. The holders of my funds need to do better than they would if they held an ETF in a discount brokerage account. That's how I justify my existence.

But the bloody index is so hard to beat. It has a lower fee than I do. It doesn't change much, so it's efficient from a trading and tax perspective.

It has no style or industry sector constraints and doesn't hold cash that drags down returns when markets are rising. And it isn't affected when a high-profile portfolio manager jumps ship.

But even with these advantages, Doc, we active managers usually outperform the indexers in weak markets like this. That's because we carry at least a little cash, which provides a cushion when markets are going down. And we tend to own less of the sectors that have been on long bull runs and make up a disproportionate amount of the index. We're not momentum players like they are.

From what I can tell, we mostly did beat the indexers over the past couple of years, but not to the degree we normally do. We should have blown them away in this type of market.

Why didn't we? Part of the reason may be that too many of us run high-fee funds that look very similar to the indexes we're trying to beat. But that doesn't totally explain it because even managers that have no idea what the index looks like, such as Brandes, Irwin Michael and Francis Chou, have struggled. I guess it's because the market declines have been so broad-based. Everything has gone down, Doc, even the defensive stocks. And anything with leverage has been eviscerated.

Light at the end of the tunnel?

Um, I know that pointing out other people's problems won't fix my own, but ETFs have their issues, too. They're proliferating as fast as mutual funds did in the '90s and making many of the same mistakes.

The sponsors are confusing people and giving them more opportunities to blow themselves up. Each new fund is more specialized and exposed to a narrower set of risks. I feel like my job gets easier with each new offering.

I say that because funds based on industry sectors or specific themes encourage market timing and sector rotation, which sounds easy in the ads, but in reality is tougher to do than hitting a three iron consistently.

New products tend to be built around strategies that have done well in the recent past, so they encourage investors to chase performance. And some allow people to use leverage to amp up short-term returns - double your exposure, double your fun. I like my clients' chances versus investors who are trying to do this stuff.

And Doc, the ETF's big cost advantage is getting eaten into. No, it's not because my fellow actives are lowering their MERs much, but rather ETF fees are creeping up. Some of the new "Funds of ETFs" aren't much cheaper than a low-cost balanced fund. You can even buy one that has a trailer fee built in. What is it about my industry that compels it to take a good, simple idea like a mutual fund or ETF and turn it into a Hydra that will inevitably confuse and defeat the individual investor?

I guess I'm kind of getting worked up, eh Doc? Well, thanks for listening. Just being able to talk about it makes me feel better already. Oh, and I'll book something for next week on the golf thing.

Bond Trades - What am I Paying?

Wed, 29 Apr 2009 16:56:00 PDT

By Tom Bradley

There was great news today. The Investment Industry Regulatory Organization of Canada (IIROC) released a proposal to enhance disclosure requirements for over-the-counter (OTC) trades, including bonds.

IIROC is one of two regulatory bodies for investment dealers (why have one when you can have two?). The other is the Mutual Fund Dealers Association (MFDA), which regulates Steadyhand.

While our industry generally scores poorly on transparency, OTC trading is particularly bad. There are no public quotes that the client can look at to assess how well the dealer has done on his/her behalf. In the case of bonds, investors don’t know what commission they are paying, and most don’t know that they’re paying a commission at all.

In essence, the dealer is taking a commission out of the spread or difference between what the trader acquires the bond for (i.e. a 5-year bond priced at $100 and yielding 5%) and what it goes into the client account as (i.e. $100.75 yielding 4.85%). Every dealer’s process is a little different and the size of the spread depends on the type of account and how big the trade is. Some advisors facilitate trades at a very small spread.

But no matter how it works, none of this is revealed to the client.

I don’t know if the new disclosure rules will eventually happen, how it will work, or whether it will be effective, but I’m encouraged with the direction IIROC is taking. If clients are going to make an informed decision about how they want to invest in bonds, they need to understand what they’re paying.

Buying individual bonds makes sense if the account is big enough, the client or advisor knows what they’re doing and the pricing on the trades is reasonable. For other investors, a low-fee bond fund is a much better option (note: most bond funds are high-fee and don’t make sense). With a fund, the investor gets professional oversight and a diversified portfolio of bonds, which is particularly important when investing in corporates.

I am an equity guy by training, but I’ve worked with family members who held bonds in their brokerage accounts. From that experience, I can say unequivocally that better disclosure, any disclosure, is desperately needed and long overdue.

The World Has Changed

Wed, 29 Apr 2009 16:56:00 PDT

By Tom Bradley

More and more commentators and experts are acknowledging that the world has changed. The framework for the future that Pimco’s Bill Gross laid out recently – namely de-levering, de-globalization and re-regulation – encapsulates what I’m reading every day, as does his resulting caution.

I guess it’s my contrarian blood, but I do think we have to be careful going too far in declaring that the world has changed. As the pronouncements get bigger, more confident and extend further into the future, it is more likely they will be wrong.

No doubt, this downturn is a biggie. It’s the most severe one any of us have seen and will cause serious dislocation. And de-levering will take time. Steps have been taken to address the problems in the capital markets (margin calls made, hedge fund lending reduced, equity capital raised), but consumers have a long way to go to get their affairs in order and governments of course are going the wrong way.

But as the list of concerns expands and the conviction builds (which is a trend I’ve definitely noticed), it feels like we’re piling on. It’s easy to come up with more doom and gloom, but difficult and less topical to seek out the balancing items.

So here are my bold, confident predictions of what’s on the other side of the ‘world has changed’ ledger.

First, I can say without hesitation that not all of the grand pronouncements are going to come true.

Second, in the new world, we will be surprised at how big the gains will be for the strong, prudent players. Well-positioned countries, companies and individuals are going to move up the ladder, maybe a few rungs this time. We’ve focused on the weak so far, which is natural, but the strong will also prove to be a noteworthy feature of this cycle.

This recession will accelerate the shift of economic power to the developing world. Many emerging market countries are sporting a current account surplus and are better financed than in previous crises. I’m not suggesting that they’re ‘decoupled’ from the worldwide recession, but they may weather the storm better and come roaring out the other side. It could be a seminal moment for some of the Asian countries in particular. Canada has a chance to be in that category, although the determination of the Federal government to subsidize the past as opposed to invest in the future weakens our case.

With regard to companies we invest in, think about the opportunity that the Canadian banks now have in front of them. The environment for their basic banking services, both for retail and corporate customers (yes, they still do that), is fabulous. And with a few exceptions, their global competitors are reliant on government funding and unable to do acquisitions. Unless our big five experience further unexpected blowups, their world standing is on the rise.

Individuals with confidence, discipline and a job (importantly) stand to gain as well. Goods and services will be marked down in price and investment opportunities (stocks, real estate, and businesses) will be plentiful. It is a buyers’ market.

And finally, I remain confident that this will be a cycle like all others. The downside will be bad and may last a while, but the excesses will be purged and the next up cycle will occur. The longer and deeper we go, the more powerful the other side will be.

Stocks have halved in price and corporate bonds are trading at depression-like valuations. The markets are telling us the world has changed. But not everyone will be impacted the same way and not all of it will be bad. Indeed, good news and opportunity will become a bigger part of our changing world as we move forward from this point.

Podcast: First Quarter Review

Wed, 29 Apr 2009 16:56:00 PDT

By Scott Ronalds

In this podcast, we review the first quarter of 2009 and discuss how our funds have fared in the current market environment.

While it was another ugly quarter for equities in general, there were some bright spots, with some stocks posting strong gains. On the fixed income side, the bond market continues to provide positive returns for investors, but with government bonds yielding under 3%, the best opportunities remain in the corporate sector.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

Steadyhand NHL Playoff Pool

Wed, 29 Apr 2009 16:56:00 PDT

By Scott Ronalds

Dig out the white towel and put the razor away. It’s playoff time.

Get in on the action by entering the Steadyhand NHL Playoff Pool. Entry is free, and the winner will walk away with a team jersey of their choice. Tom would suggest a Mats Sundin Canucks jersey, of course.

Register online by clicking here. Enter the pool name (Steadyhand) and password (Steadyhand) in the text boxes to the left of the ‘Sign In’ link and click the drop down box to select ‘Playoffs’. Once you’re logged in, click the Entry Form tab and select your team.

All entries must be submitted by Wednesday (April 15) before 4:00 PM (PST).

Feel free to give us a shout at 1-888-888-3147 if you have any questions.

Good luck to all!

'It Will Sell': Feedback from the Trenches

Wed, 29 Apr 2009 16:56:00 PDT

By Tom Bradley

My last posting on packaged investment products generated a lot of feedback. There were some great comments posted on the blog, but I received many more emails from readers of the Saturday Globe and Mail. Below are snippets from some of the emails.

Of note, more than half of them are from fellow investment professionals who have had experience with the ‘products’ and feel the same way I do. The sampling very much represents the consensus of my feedback so far.

“As an advisor myself, I come across prospects who have these types of investments in their portfolios and have no clear understanding of the products. I often see PPN's inside fee-based accounts.” (TB note: Putting a PPN, that is already loaded with fees, into a fee-based account is egregious.)

"Excellent article Tom. Incredible how the industry knows that consumer ignorance is highly profitable.”

“I hope your message opens many people’s eyes, as it very well should!”

“I've noticed you're still criticizing ppns in your articles. I think it’s pretty funny that people would do that - given ppns are probably the best performing products in many people’s portfolios. Anyways - there is a significant increase in transparency and regulation for PPN both from the issuer and dealer perspective. Far more regulation, transparency, and better returns than the hedge fund industry...Bottom line is - I'm happy to pay a higher price for a product that will protect me from meltdowns like the one we are going through”

“Your Saturday column was sooooooo right on. We always say to our clients...if a guy talks to you about a PRODUCT or something where your capital is GUARANTEED...IT IS REEEEAAALLL EXPENSIVE. The salesman or his company will make the dough.”

“Your recent article in the Globe contains a sentence, Who's insuring who? Does one insure he or him?
He - who
Him - whom
Therefore, Who is insuring whom?
That simple.”
(TB: I need all the help me can get on this stuff.)

“Keep up the great work by informing Canadians about all these useless financial products out there.”

“Once again thanks for an excellent article today. "It will sell" is a clear proof that there is little difference between many salesmen in the financial industry and George Foreman. Except of course, that George's grill actually works.”

'It Will Sell': A Tipoff for Bad Investment Products

Wed, 29 Apr 2009 16:56:00 PDT

The Globe and Mail, Report on Business
Published April 4, 2009

As the wealth management industry works through this bear market, investment products that promise certainty and limited downside risk are going to be popular. With guaranteed investment certificates (GICs) offering minuscule yields, stock-market-related products with “guaranteed income” and “principal-protection” will be big sellers.

I think that's unfortunate for two reasons. First, we're now in a favourable environment to take more risk, not less. And second, investors give up a lot of return for the fancy features they're buying. Such things as downside protection, tax deferral or arbitrage and convenience come with a price.

My purpose here is to illuminate some of the tradeoffs investors make when they go beyond plain vanilla.

But first some background. I developed an aversion to complex investment products and packaging about 10 years ago. I was at Phillips, Hager & North at the time and we had a number of investment bankers come through our offices pitching us on their newest creations. They wanted to work with us because we had a good brand name that would lend credibility to the products. At the sessions I attended, I always asked the same question: “Is this good for the client?” I never once was told that it was. There was some diverting of eye contact, hemming and hawing, and on a couple of occasions, the answer was simply: “It will sell.”

We once committed to working with one of the banks on a product that saved high-tech executives taxes when they exercised their stock options. We thought it looked like a reasonable idea, but as we got further into it, we became increasingly uncomfortable. We calculated that the executives could achieve higher after-tax returns without a complicated structure. Fortunately, we were able to escape our commitment honourably when the high-tech bubble burst.

From that point on, I've done research (sometimes vicariously through much smarter colleagues) on many new packaged products and rarely have I come up with a different answer to my question. What I got was a notebook full of issues.

Lack of transparency: We should always understand the basics of what they're investing in, even when an adviser is involved. But products like principal-protected notes (PPNs) and guaranteed income funds are complicated and hard to figure out. Too often investors don't know how they work, what the underlying assets are and how much they're paying.

Misalignment of objectives: A lack of understanding often leads to investors buying products that are ill-suited to their needs. For example, a 40-year-old with a 30-year investment horizon shouldn't be buying short-term stability or principal protection, no matter how appealing it sounds. A bumpy 8 per cent return is what she/he needs, not a smooth 4 per cent.

The marketing imperative: My undergrad degree was in marketing, but when it comes to product design, that area of business should play a secondary role. Sales and marketing departments want things that will sell, which means looking in the rear-view mirror. The easiest sale is whatever worked last year (I recently saw an ad for a “bear-resistant” fund). In general, marketing-driven products encourage investors to “buy high.”

Overdiversification: “One-solution” products, including some wrap funds, are convenient, but tend to be too diversified. By having multiple managers in each asset category, the product (I'm reticent to call it a portfolio) owns hundreds or thousands of stocks. Effectively, it's an index fund with an annual fee that's two percentage points higher than it should be.

Complexity risk: In many packaged products, there are so many moving parts that it's difficult to determine what risks are being taken. That complexity sometimes results in outcomes that were unforeseen by bankers and advisers (liquidity drying up; the worst bear market in 80 years; global bank failures). Other times, however, the risks have been identified, but not communicated. The creators of PPNs (the type known as Constant Proportion Participation Insurance) have always known that their notes were path dependent (i.e. if the underlying asset goes too far down in value before it goes up, eliminating any chance of a positive return). That potential outcome is never openly discussed with potential buyers, even though it reduces the value of the note.

Degrees of separation: It's best if money managers live and die with the performance of their funds. Managers should be invested alongside clients. With packaged products, that accountability gets diluted with every person that gets between the client and the portfolio of stocks and bonds.

Cost: And with every degree of separation comes more fees. When investment bankers, lawyers, traders, money managers, insurers, marketers and salespeople get involved, they need to be paid. As a result, structured products are expensive.

Who's insuring who?: There is a common misconception about fancy investment products. Too often buyers believe that someone else is paying for the insurance and guarantees. Wrong. There is no new source of return being invented. Additional costs come directly out of what is earned by the underlying stocks and bonds.

There are other issues scribbled down in my notebook – poor liquidity, misunderstood by advisers, bad names – but I'll stop there.

I liken structured products to Viagra. The industry is hooked on them because they stimulate sales. They're a specialty product that should be used by few, but are sold to many. And the buyers get instant gratification, but pay for it in the long run.

Case Study: Pat and Stephanie

Wed, 29 Apr 2009 16:56:00 PDT

By Scott Ronalds

Nobody likes looking at their account statement these days. No matter where you’re invested, returns are ugly. But beyond the numbers, there’s often a lot to be desired. We’ve had a number of statements come across our desk lately from investors who are looking for a new home. And in many cases, the foundation is shaky. One portfolio review in particular prompted the case study below.

Meet Pat and Stephanie. They’ve managed to put away a decent sum of money in their RRSP accounts, but they feel left in the dark on a number of fronts.

They don’t know what the performance of their accounts has been over the past 10+ years. They don’t know what they pay in fees every year. They own a long list of funds and have trouble interpreting their account statements. They’re not sure if they’re following a consistent investment philosophy, and they would like to know more about the decisions being made within the funds they own. Pat and Stephanie want to be more involved in the management of their retirement savings and are ready to explore an alternative to their current advisor.

A close look at their combined portfolio reveals that they own 14 mutual funds. Almost all of them fall under the dreaded deferred sales charge (DSC) category, which means their advisor reaped a handsome up-front commission for essentially locking them into these funds. If they sell, they’ll be subject to steep penalties.

While they are embarrassed to say they don’t know what the overall fee on their portfolio is, they can’t be blamed, as it is nowhere to be found on their statement. A little digging and some math reveals that they currently pay a fee of 2.58% a year on their portfolio of $164,000. That’s $4,230 a year based on their portfolio’s current value. Expressed this way, it makes them squeamish.

Of their 14 funds, they own 5 Canadian equity funds (including an oil & gas sector fund), 3 global equity funds, 2 U.S. equity funds, a balanced fund and 3 income funds. Their asset mix is roughly 65% equities and 35% fixed income. Upon closer look, they own over 700 stocks in their portfolio, with a lot of duplication and no direction. It’s a dog’s breakfast. In essence, they own a very expensive index fund.

After they were presented with the facts, Pat and Stephanie turned to their advisor and asked what the fees would be if they decided to transfer their account. They received a vague answer, “somewhere between 3-6%...it varies by fund.” Not much help. But in other words, they could be hit with redemption fees of $5,000-10,000 if they move on from their current relationship.

The couple wants to simplify, cut costs and put their retirement savings with proven money makers. They’ve committed to move to a new manager the 10% of their portfolio that isn’t subject to DSCs (investors can sell 10% of their holdings in a DSC fund each year without a penalty), as well as some of the funds with lower redemption fees. They’ll transition the rest of their portfolio over time to avoid larger redemption fees.

Pat and Stephanie have decided to take action and seek an alternative to the status quo. Steadyhand was designed for investors like them, and the couple will weigh our concentrated, non-index oriented, low fee approach against a list of other managers they have short-listed. They’ve made an important first step, though...they’re not just standing Pat.

Everyone is an Economist

Wed, 29 Apr 2009 16:56:00 PDT

By Tom Bradley

Recession? Depression? Recessionary depression? Who knows?

In the dark moments of an economic and market cycle, I find that everyone becomes an economist. Traders, analysts, portfolio managers, advisors and individual investors all amp up their contribution to the dismal science. Even if their skill-set if far removed from monetary policy, central bank stimulus, housing starts or trade flows, they feel compelled to give it a shot.

I’ve made a few ill-conceived attempts at economics (I hated micro and macro in university), but at least they were driven by a sense of dislocation or opportunity. It wasn’t a cyclical thing. For instance, after spending time in the U.S. in 2005, I took a special interest in their housing cycle (I proved to be right, but was too early). When oil got silly, I weighted in on supply and demand (again, right but early), although I admit to being over my head.

The point is that we all need to keep an eye on the context in which we’re investing (the big picture), but more importantly, we have to be careful that we don’t stray from what we do well into areas where we have no expertise or edge. In other words, portfolio managers shouldn’t forecast GDP and strategists shouldn’t pick stocks.

In the meantime, test my theory and keep an eye on the economist count. I guarantee that when the economy settles back into a more normal growth pattern, the fraternity will shrink considerably.

Note to Board: Please do a Reality Check

Fri, 27 Mar 2009 16:14:23 PDT

By Tom Bradley

Manulife is going to pay its retiring CEO $12.5 million in 2009. Dominic D’Alessandro’s pay cheque for 5 months work will be made up of cash ($2.5 million) and restricted shares ($10 million). To quote chairwoman Gail Cook-Bennett, “[the compensation] should be seen in the context of his contribution in the building of these franchises over [the last 15 years].”

Mr. D’Alessandro has been one of Canada’s leading executives for many years. His company is one of the best insurance companies in the world. Unfortunately, Mr. D’Alessandro and his team made a risk management error on their variable annuity business, which has cost them dearly. They made the decision not to hedge the market risk attached to these products, which in combination with the sharp market decline, has impacted Manulife’s capital ratios and significantly changed the market’s perception of the company. At the end of the day, the variable annuities may not actually cost Manulife much in terms of real dollars, but the stock (MFC - $15) now trades at barely a third of its 2007 high, which is a level not seen since 2000.

This announcement is interesting for all kinds of reasons, one of which is that Manulife has consistently been rated as one of Canada’s top companies in terms of corporate governance in the annual Globe and Mail survey.

I can’t help but wonder what their governance consultant would put in his/her quarterly report to the board in the coming weeks. It might look something like this.

Notes to Board:

1. I see that Mr. D’Alessandro’s 2009 compensation was based on his 2007 total compensation. The directors should be aware that NOBODY is making what they made in 2007. Nobody in the financial services industry. And certainly nobody who had serious performance issues over the last couple of years.

2. Our shareholders are seriously underwater right now. A $10 million ‘going away’ gift in the current circumstance is highly offensive to them and will appear to be totally out of touch with reality. In truth, a $10 million ‘going away’ gift in any economic environment is out of touch.

3. We have paid Mr. D’Alessandro very well over the last 15 years. If we want a reminder of that, we need look no further than our release to the press which indicated that he held share units and stock options worth $48 million at the end of 2008, down from $177 million at the end of 2007. Both of those numbers indicate that Mr. D’Alessandro has done well by us.

4. I would strongly urge the board to prevent Mr. D’Alessandro from speaking to the press on this issue. In case any of the directors missed it, he was recently quoted in the Globe and Mail as saying:

"Last year wasn’t a good year for me. The only shares I’ve ever sold in this company I haven’t even sold – I’ve given to charity. I’ve reinvested 15 years of incentives in stock, and the decrement last year was $130 million."

We all appreciate how committed to Manulife and the community Mr. D’Alessandro has been, but when he talks about how hard done by he is, the media and shareholders may take it the wrong way. They may focus on how much we have actually paid him over the last 15 years. They may also notice that his loses due to our risk management errors were roughly proportional to those of our public shareholders.

5. As your advisor on corporate governance matters, I am serving notice that as of May 1st I will be increasing my hourly rate. I’m sure the directors will agree, my job just got a lot harder.

I can only think of three words to add to the consultant’s note to the Manulife Board – ARE YOU NUTS?

Asset Allocation and Hindsight Bias

Wed, 25 Mar 2009 18:06:41 PDT

I received an email from a reader who suggested that someone should offer a balanced fund that is more focused on preserving capital. Rather than being stuck on a set asset mix, as most balanced funds are, the fund would have the scope to move between fixed income and equities. As he described it, “[The fund’s] fixed income portion would vary from 50 to 75% as markets change. When equity markets are undervalued, the manager would step up the equity percentage to 50%. Conversely when equity markets seem overvalued, the cautious thing to do is to rebalance to lower levels of equity investment.”

The reader was fortunate enough to anticipate the downturn and had re-balanced his own portfolio. Other people he knew had done the same. He feels that professionals should have seen it too and acted more decisively to preserve their clients’ capital.

In responding, let me first say that I am sympathetic to the view that most funds are too constrained by rules and limitations, and firms are unwilling to have the performance deviate from what similar funds are doing. As a result, even conservative balanced funds get caught up in the performance game and are slow to batten down the hatches.

And I’m in agreement that we should be willing to shift our asset mix in the context of market conditions. Indeed, we have set up Steadyhand with the express notion of addressing this issue. Our fund managers have few constraints on them and can move decisively to where they see value. And while they are aiming to beat the indexes and competition in the long term, they pay them little heed in the short term.

But, and there is a but, we have to be careful in thinking that we can be so confident in our market view as to consistently get our asset mix shifts right. Given what has happened, it’s easy to think that our current predicament was foreseeable by everyone. At times like this, we are prone to suffer from hindsight bias, which is “the inclination to see events that have occurred as more predictable than they in fact were before they took place.”

Our reader is to be congratulated for his sound judgment and good fortune, but he has to realize he beat the odds. What he did is hard to do because it involves making a correct call on the future outlook as well as assessing how much of that outlook is priced into the market. And then those two things have to be done again when the shift is reversed.

I’m not trying to be defeatist here, nor am I suggesting that every decision has to be perfect to enhance returns, but we need to go into it knowing how complex and challenging it is to be an asset mix shifter.

At Steadyhand, our approach to asset allocation is simple, and I’m sure somewhat unsatisfying to many investors. It goes like this:

The key is having a long-term (strategic) mix – i.e. if you’re young, you own lots of equities; if you’re older and drawing on your portfolio, you own mostly fixed income; and a few variations in between.
For most investors, asset shifts should be as automatic as possible– i.e. periodic rebalancing back to the long-term mix. The goal is to take emotion and market-timing out of the equation.
More experienced investors, or ones that rely on an experienced advisor such as Steadyhand, can ‘shade’ their mix towards their view of the world and market valuation. By ‘shading’ as opposed to ‘shifting’, they will benefit from good decisions, but not be blown away by bad ones.

Steadyhand.com Moved to a New Host

Wed, 25 Mar 2009 17:51:29 PDT

We’ve moved our website to a new host. While you may notice some small changes, including an improved comment feature on the Blog, the site and all its functionality should largely look and work the same. If you notice any oddities or are having any problems accessing your favorite pages, please send us an email or give us a call at 1-888-888-3147 and we’ll get to the bottom of it.

Take Baby Steps When Moving Back Into Stocks

Wed, 25 Mar 2009 13:49:16 PDT

The Globe and Mail, Report on Business
Published March 21, 2009

It is hard to find an individual investor who thinks that now is the right time to buy into the stock market. People that are holding cash are happy and have no intention of parting with their GICs any time soon. Those that are more fully invested and have lost money are traumatized. They don't want to lose any more, so they too are sitting tight.

Most investors know they should be buying stocks when prices are down and people are fearful, but they need to see signs of recovery before they'll move.

In a recent letter entitled Reinvesting When Terrified, Jeremy Grantham, co-founder and chairman of investment management firm GMO, focused on this topic. He said: "Every decline will enhance the beauty of cash until, as some of us experienced in 1974, 'terminal paralysis' sets in." He went further to say, "Those with a lot of cash will miss a very large chunk of the market recovery."

Mr. Grantham is one of the few who correctly predicted in 2007 that there were bubbles everywhere. But stock markets have halved and he and his colleagues now feel that the S&P 500 is 30 per cent undervalued.

In light of Mr. Grantham's view and my impressions, it's interesting to look at what professional investors are doing today. It's dangerous to generalize from the informal discussions I've had with analysts and portfolio managers, but a few trends do emerge.

I can definitively say that the pros are feeling just as beaten up as individual investors. I haven't talked to anyone who isn't going through the worst time in their career. Everyone is losing money and sleep.

Having said that, some managers are genuinely excited about the opportunities being presented to them and are in a buying mode. One manager said to me: "I'm long-term greedy." He's buying companies where he's "confident that earnings five years out will be significantly higher." He also is finding defensive stocks at low valuations. "It's the best of both worlds."

Edinburgh Partners, the manager of our Global Equity Fund, has decisively moved from defence to offence by reducing the cash reserve significantly (to 6 per cent of the fund currently from 18 per cent in the middle of last year) and shifting into stocks that are likely to do better in a market recovery.

But enthusiasm like this is rare. Generally, I'm finding that managers remain cautious and are moving slowly to deploy any available cash. They are wary of being caught in another downdraft with no ammunition left, and some have to worry about future redemptions.

The words I'm hearing most are "nibbling," "topping up" and "liquid companies." Rob McConnachie at Dixon Mitchell Investment Counsel told me that they have moved their clients about half way back to their maximum equity weighting. The stocks they're buying are the ones that were hardest hit, like the financials. "We're not buying the utilities or consumer staples."

Rick Howson's team at Saxon Mutual Funds is focused on companies with "a strong liquidity position." They're not interested in the less well-financed ones that look cheap.

Over the long haul, studies have consistently shown that individuals do worse than the funds they invest in. This is due primarily to performance chasing (i.e. buying last year's star) and too much trading. Every study I've seen reveals a substantial shortfall in client returns.

Over the past year or so, however, I would suggest that the amateurs have done better than the professionals. More individual investors (but certainly not most) got out of the market, reduced their equity weighting significantly or at least delayed investing new money. On the other hand, portfolio managers were more limited as to how much cash they could hold, even when they did see the downturn coming. For example, equity managers still have to own some stocks.

But I think that by the end of this cycle, the situation will have returned to its natural order.

The professionals are more likely to take advantage of the opportunities available and will be more fully invested when the recovery comes.

To deal with the paralysis and uncertainty, Mr. Grantham recommends that people have a plan for investing their cash, or rebalancing their portfolio. Otherwise, they just won't do anything.

I've been advising our clients to take a similar tack. For people who have a large cash position - perhaps they sold a property or transferred cash into their account - we encourage them to immediately move at least a third of the way (and preferably half) toward their long-term equity target.

We don't know whether the bottom is behind us or ahead of us, but markets now look to be undervalued. We want our clients' portfolios to reflect the fact that the reward versus risk balance is again in their favour.

In the current economic context, we can't expect clients to move from paralysis to greed in one move, but we urge them to take a step in that direction. And then another step. And another step.

Because as Mr. Grantham so eloquently puts it: "If you invest too little after talking about handsome potential returns and the market rallies, you deserve to be shot."

Relative to What

Wed, 25 Mar 2009 13:49:15 PDT

By Tom Bradley

In the investment business, valuation comparisons are very important. How one security stacks up against another in terms of price to earnings ratio, cash flow multiple or yield is at the core of what we do. CP Rail is cheaper than CN because it has a lower price to earnings ratio. A BMO bond is attractive because its yield is higher than a similar RBC issue.

One of the most common points of comparison that we use is the yield on government bonds, which is often considered a proxy for the risk-free rate. In this space, it's been said often that corporate bonds are an attractive investment because their yields are 3-4% above Government of Canada bonds. In making the case that now is the time to start buying equities, we've pointed out that the stock market's dividend yield is running well above the yield on Canada bonds - the TSX Composite Index is yielding 3.8% and the international markets are even higher at 5.0% (the EAFE Index).

I'm not backing off from that stance, but do think we have to be careful when using the Government bond as a comparison. In any such assessment, we must evaluate both sides of the equation. In this case, we have to temper our view as to how cheap corporate credit and stocks are by the fact that Government bonds may be overvalued. Yields of 0.5% to 3.5% (depending on the term) look inadequate to compensate for the potential of rising inflation in the medium term. As noted in a recent posting, Warren Buffett goes so far as to say that U.S. Treasuries may be the next bubble.

Note: I'm not suggesting that investors won't get their money back when their Government bonds mature, but rather that with miniscule yields and the potential for higher inflation, holders may experience negative returns along the way. In other words, there is an opportunity cost to holding Canada's and Treasuries.

If we are right that safety is expensive and risk is cheap, then there are a number of ways this situation can work itself out. Changes can happen on both sides of the comparisons.

Bond spreads will narrow by (1) corporate yields coming down (good) and/or (2) government bond yields going up (bad).
The gap between dividend yields and bond yields will decrease when (1) stocks go up (Yahoo!), (2) bond yields rise (bad), and/or (3) dividends are cut (bad).
It is quite likely that all of those things will happen to some degree.

As investors, we sometimes get sloppy in our analysis. We assume something is a given (government bond yields, China's growth, oil shortages) and work from there. In reality, the given is every bit as variable as the thing we're comparing it to.

Podcast: Warren Buffett's 2008 Annual Letter

Mon, 20 Apr 2009 09:41:46 PDT

In this podcast, we discuss Warren Buffett's recently published annual letter to the shareholders of Berkshire Hathaway. We posted a series of blogs last week on Buffett's recap of Berkshire's operations in 2008, and Tom's Globe and Mail column on the weekend highlighted some of the valuable perspectives and insights that make the letter unique.

In this, our last posting on the topic (we promise), Tom explains what draws him to Buffett and why he commends his calmness, candidness and common sense approach toward investing. He also expands on Buffett's view that the investment world has gone from underpricing risk to overpricing it, among other observations.

Listen now (the file may take a minute or two to download), or subscribe to our podcasts via iTunes or RSS.

When Others Lose Their Heads, Buffett Keeps His Focus

Wed, 25 Mar 2009 13:49:15 PDT

The Globe and Mail, Report on Business
Published March 7, 2009

The news media have been remarkably quiet about the Berkshire Hathaway Inc. newsletter this year. And yet, as we go through this historic time, we need its calm, common sense and optimism more than ever.

Warren Buffett's annual letter to shareholders, released last week, is like an old friend. Every year it has the same format and font. It is reasoned and understandable. And there is always some humour and plenty of optimism.

This year, Mr. Buffett had valuable perspectives on private equity (it's more about reducing equity), psychology ("beware of investment activity that produces applause"), mortgage lending (it can be done right), risk (underpriced) and safety (U.S. Treasuries are a potential bubble).

Beyond the usual insights, however, there are other things that make Mr. Buffett, Berkshire Hathaway and the letter unique.

The first is the calm. Mr. Buffett opens with some comments on the current crisis, but he keeps it brief. There is no hysteria or hyperbole, even though his company had one of its worst years on record. The letter provides a thorough and dispassionate review of what and how the company is doing, including the hits (steady earnings from MidAmerican Energy Holdings) and the misses (buying ConocoPhillips at the oil peak).

The second is Mr. Buffett's language, which is unique for the investment industry. There are no references to "sector weightings" or being "over" or "underweighted." Words such as "management guidance" or "earnings expectations" never creep into the commentary. It is just unrelenting common sense.

The letter is a sharp contrast to how the investment industry communicates with clients. The way we discuss (or rather don't discuss) strategies, fees, risk and alignment of interests is inadequate and won't cut it in the years ahead. We all need to take a page from the Berkshire annual report.

While Mr. Buffett's wealth and celebrity give him every opportunity to drift away from his disciplines and principles, he never does. He is looking to take risks when the odds are stacked in his favour. While others run for cover, he just goes about his business buying companies and looking for mispriced securities.

In 2008, Berkshire entered a new business - it started insuring municipal bonds when the existing players ran into trouble - and increased its exposure to some much-maligned derivative contracts (including credit default swaps).

Some people will be surprised to know that Mr. Buffett is an active and willing investor in derivatives. In this regard, he appears to be straying from his philosophy, but he's not. As always, he keeps it simple and he knows the territory well.

Indeed, he spent five years unwinding the messy derivatives book at insurer General Re Corp. after he bought the company in 1998 (there were 23,218 contracts and 884 counterparties to work through).

With respect to his current holdings, he said: "I both initiated these [derivative] positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the chief risk officer as well. If we lose money on our derivatives, it will be my fault."

As I go through the letter, I am reminded that Berkshire Hathaway is one of the great hedge funds of all time. I'm not referring to the high fees and lack of transparency that hedge funds are known for, but rather the open and unconstrained way in which Mr. Buffett, Charlie Munger and their senior managers invest.

With no client or consultant expectations to worry about, they will look anywhere for undervalued assets and when they find them, they are often the first to get there. While Mr. Buffett clearly states his preference for owning private businesses - "We like buying underpriced securities, but we like buying fairly-priced operating businesses even more" - he's also willing to invest (short or long) in public companies, commodities, currencies, convertibles and unusual insurance contracts. Depending on the situation, he'll be a passive outsider or an involved insider.

It's reassuring that the 2008 version reads like all the others. Mr. Buffett continues to invest where the potential reward is disproportionate to the risk he is taking. The only thing that's different this time is he's more optimistic about the opportunities available to him.

The Buffett Letter #4 - Mae West, Snow White and Lots of Yawns

Wed, 25 Mar 2009 13:49:15 PDT

By Tom Bradley

It would be an oversight to do a series of postings on Warren Buffett’s 2008 Letter to the Shareholders of Berkshire Hathaway and not review some of the great quotes and analogies.

On the current investing environment: “Things also went well on the capital-allocation front last year. Berkshire is always a buyer of both businesses and securities, and the disarray in markets gave us a tailwind in our purchases. When investing, pessimism is your friend, euphoria the enemy.”

On their derivative strategies: “The ups and downs neither cheer nor bother Charlie and me. Indeed, the 'downs' can be helpful in that they give us an opportunity to expand a position on favorable terms.”

On the mortgage mess: “Writing about the period...I described it as involving borrowers who shouldn’t have borrowed being financed by lenders who shouldn’t have lent.”

On the mono-line insurers that moved away from their core business of insuring tax-exempt municipal bonds: “By yearend 2007, the half dozen or so companies that had been the major players in this business had all fallen into big trouble. The cause of their problems was captured long ago by Mae West: “I was Snow White, but I drifted.”

On investing psychology: “Approval...is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

The Buffett Letter #3 - Safety is Overpriced; Risk is Underpriced

Wed, 25 Mar 2009 13:49:14 PDT

In this, our third posting on Warren Buffett’s 2008 Letter to the Shareholders of Berkshire Hathaway, there is no introduction or additional explanation required. This is his comment on the current investing environment.

“The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

The Buffett Letter #2 - Strong get Stronger

Wed, 01 Apr 2009 14:21:21 PDT

By Tom Bradley

One of the recent themes of this blog has been the notion that this economic crisis will cause the ‘strong to get stronger’. Well-financed companies will have unprecedented opportunities to buy assets and attract talent through this period, and will come out of it with fewer and/or weaker competitors. We recently wrote about Cisco (Thank You Mr. Market) to illustrate our point.

As you read Warren Buffett’s 2008 Letter to the Shareholders of Berkshire Hathaway that was published last Saturday, it is obvious that his company will be one of those players. The company has already jumped on some new opportunities – entering the business of insuring tax-exempt bonds, buying high yielding securities from Wrigley, Goldman Sachs and General Electric – and there will be more to come.

Interestingly, financial strength has proven to be a negative in some aspects of Berkshire’s business, specifically in areas where it is competing directly with the government-subsidized (owned?) banks. Warren explains:

"Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be. This unprecedented "spread" in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the "haves" and "have-nots." That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire. Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."

In defense of my ‘strong get stronger’ thesis, I don’t think this disadvantage will be a factor in most other businesses – the cost of funding is important for all companies, but is the dominant variable in financial services. If we again use Cisco as an example, it is unlikely that the government is going to bail out or subsidize a competitor like Nortel. And if it does, I like Cisco’s chances even more.

In the financial sector, government-backed banks will be able to write some great business in competition with the ‘unsubsidized’ players (let’s hope they do, otherwise they’ll never dig themselves out), but their hands will be tied in so many other ways. They won’t be able to do acquisitions and take advantage of other opportunities the way the stronger players will (think RBC, BNS and TD).

The Buffett Letter #1 - Competing Against Private Equity

Wed, 25 Mar 2009 13:49:14 PDT

By Tom Bradley

Warren Buffett’s 2008 Letter to the Shareholders of Berkshire Hathaway was published on Saturday. As usual, it brings a refreshing perspective on topics of current interest. Over the course of the week, we’ll highlight a few.

As he does every year, Warren talked about how Berkshire Hathaway is a preferred buyer for companies that want to sell. That’s because they leave existing management in place, give them the independence and support to continue growing, don’t burden them with debt, and importantly, have a long time horizon. (Berkshire has no deadline for which they need to monetize an investment by ‘re-selling’ it or taking it public. The preferred time frame is ‘forever’.)

When companies or assets become available, the other potential bidders are often financial buyers - ‘private equity’ funds or merchant bankers. Like Berkshire, they too want the business to grow, but they go about it the opposite way. Warren explains:

“Some years back our competitors were known as 'leveraged-buyout operators.' But LBO became a bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage.

Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private.”

On his last point, we should not expect private equity firms to act otherwise. In these distressed situations, they have assuredly lost what little equity they invested in the deal. So to put more money in (good money after bad?) would require that the already generous lenders take a haircut too and reduce the company’s debt. It’s only logical that before more equity capital goes in, the entity has to be worth at least as much as the debt outstanding.

In some instances there may be an equity injection (after extensive restructuring negotiations), but in many others the owner will simply hand the keys to the bondholders and walk away.

We have an all-too-familiar example of this playing out in Canada right now. Air Canada, which is on the brink of bankruptcy, is 75% owned by ACE Aviation Holdings. ACE is the holding company that resulted from a previous restructuring that was driven and supported by private equity interests. When ACE spun off part of the airline to public investors, it sent all the debt with it. So while ACE is floating in cash after selling its other businesses (including Aeroplan and Jazz) and the shareholders are quarrelling about how it is going to be paid out, the original foundation of the company is dying on the vine, unsupported by its owner.

It’s too bad for Canadian flyers, airline employees and bondholders that Air Canada is not the type of business that Berkshire Hathaway would ever invest in.

Q&A with Bill Gross

Wed, 25 Mar 2009 13:49:14 PDT

By Tom Bradley

With all of us wondering how we’re going to get out of this mess, I thought this month’s Investment Outlook by Bill Gross of Pimco was a good read. Mr. Gross is known as the ‘King of Bonds’ in the U.S. and has led Pimco to the top of the heap. The firm has roughly $750 billion in assets under management.

I am not one to worry about economic labels, but I nonetheless found his definition of recessions and depressions useful.

“Recessions are cyclical downturns of a relatively brief time frame, characterized by inventory corrections and addressed by low interest rates and mild doses of fiscal stimulus. Depressions are more extreme with double-digit levels of unemployment but defined more importantly by credit contraction and debt liquidation. The deflation that normally accompanies a depression is dangerous not because prices are going down, but because the “for sale” sign goes up on the credit markets which have always made capitalism possible.”

By that definition, we better start getting used to the ‘D’ word.

His comments about liquidity and the need for credit are also interesting. Like everyone, he would rather not have increased government involvement in the banking sector, but feels that it’s necessary to stabilize asset prices. Inevitably there will be consequences.

“The private system is the heart of capitalism and generates most of its productivity, so more government usually involves less prosperity and certainly more inflation.”

And on inflation...

“Will those checks [from government stimulus programs] create inflation? Let’s hope so provided it is low and stable over time. Policymakers are more than vocal about attempting to reflate the economy...”

These are a few excerpts that caught my attention, but to do it justice, you should read the full four pages. Like everything we read these days, it isn’t a ‘feel good’ piece. We’ve got serious issues that have serious consequences.

As investors, however, we need to take the next step which is to determine how much of the news/views/headlines are factored into the markets. With stocks trading at half of what they were 18 months ago and credit markets as bad as they’ve ever been, Mr. Market is not oblivious to what Mr. Gross is saying.

Hero to Goat...in a Heartbeat

Wed, 25 Mar 2009 13:49:13 PDT

By Tom Bradley

In the Globe and Mail today, Derek DeCloet wrote an article about the aftermath of Canada’s great ‘hollowing out’ that took place from 2005 to 2007 - the period when foreigners were swooping in to buy our companies. There was a great hue and cry about how us passive Canadians were missing the boat. Eminent people were speaking out and the government was being pressured to do something about it.

Derek’s piece resonated with me because I wrote a ‘lone voice’ article in the Globe on the same topic in April 2007 (The Flip-side of the Foreign Takeover Binge) and because there are some enduring lessons to be learned from it.

We are too cavalier with our hero worship. We’re too quick to put executives, money managers and athletes up on a pedestal. The poster boy for the binge period, Xstrata’s CEO Mick Davis, should have been lionized after his acquisition strategy generated great long-term returns, not during the feeding frenzy.
There are no certainties. During 2005-07 it was a ‘given’ that China would grow forever and the commodity cycle would be ‘different this time’. That was the overwhelming consensus because the arguments supporting the theory were well reasoned and the trend had been going on for a long time. When an ‘uncertainty’ becomes a ‘given’, it’s time to step back and think it through.
It is all about price. For the most part, the foreign predators bought good companies. They just paid too much – ‘takeover’ price-earnings multiples for peak earnings.

We are living through the other side of the hollowing out period now, but the lessons are still relevant. Just as it was then, the consensus is overwhelming and the assumptions have turned into givens.

My favourite Peter Bernstein quote is as appropriate as ever:

“...in calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, however, they become remarkably bold in their predictions: they act as though uncertainty has vanished and the outcome is beyond doubt.”

Tackling Uncertainty This RRSP Season

Wed, 25 Mar 2009 13:49:13 PDT

The Globe and Mail, Report on Business
Published February 21, 2009

As regular readers know, some of my best columns are written for the sole purpose of keeping peace at home. If Lori wants me to write about something, the best way to get her off the warpath is to do it. When I lamented about not having a topic for this week, she didn't hesitate. “You don't always have to write about some obscure part of the business. Do something on what people are thinking about – the RRSP season.”

Wisely, I decided to give it a try, although you should be warned that self-help articles are not my thing. Also be warned that the tips are aimed at changing the way people approach investing.

Stop looking backward

As I wrote in December, we need to pull ourselves out of the gloom and dispassionately evaluate the opportunities that are available to us. What matters now is how prospective the current environment is for building wealth over the next few years. By definition, future returns start today.

We now find ourselves in a situation where safety is expensive and risk is cheap. Secure investments such as government bonds provide minimal return and are vulnerable to any pickup in inflation. It is conceivable that a holder of a Government of Canada bond yielding less than 3 per cent could lose money for a number of years to come. Risky assets such as corporate bonds and stocks, on the other hand, now have healthy yields and are priced to generate double-digit returns over the next three to five years.

Behaviour change: Safe and predictable investments were a great place to be over the past year. Going forward, limit your holdings in government bonds, GICs and bear-resistant products to the minimum required by your personal situation.

Go up with more than you went down with

I learned this rule from Bob Hager, who was the master of keeping it simple. Unfortunately, the majority of Canadian investors will pay little heed to Bob's advice.

A recent report from Earl Bederman at Investor Economics shows that at the end of last year equities accounted for 35 per cent of the average Canadian's financial assets. That is well down from 2006 and 2007 when it was around 45 per cent. We have to go back to the beginning of 2003, which is when the last market surge began, to see that low a number.

Behaviour change: Don't try to be exact in timing the bottom. Recognize that the balance between reward and risk has shifted in your favour and your portfolio needs to reflect that. RRSP contributions should be used to move the equity weighting back to where it was a year or two ago.

Look at what you own first

Too often when we meet with prospective clients, we find portfolios littered with small positions in numerous mutual funds. We recently reviewed the accounts of a family that owned 36 unique funds.

Investors find themselves in this situation as a result of buying each RRSP season's latest and greatest. We can usually glance at a portfolio and accurately predict when each fund was purchased. The tech fund was 1998 or 1999. The energy fund probably came in 2006. And the principal-protected note was likely 2007.

Behaviour change: Before succumbing to new hope, look at what you already own. Everything is down, but if the reason for buying a security still exists, then consider investing more. If a fund is still run by the portfolio manager you liked last year, then add to it. If your thesis on a stock hasn't fundamentally changed, despite the recession, then perhaps it's worthy of further investment.

Don't move until you get better answers

The research I've seen suggests that an increasing number of investors want a change of scenery. They are looking for a new adviser and/or manager. We're hearing phrases like, “It's time to take control” and “I've got to pay more attention.” Some of the changes will be justified, but many will be strictly the result of ugly markets and a burning desire to do something.

Behaviour change: If you are going to be one of those bodies in motion, make sure the place you're going represents a serious uptick. You don't want more of the same. So in the interview, don't cut them any slack. Ask the questions you've been asking (or should be asking) your current provider.

“Will I know what I own and how I'm doing? What will it cost? How are you compensated? Will I talk to you or your assistant? How did you deal with your clients during 2008? The portfolio you're recommending today would have done well last year, but how will it do when the market recovers?”

Don't do what everyone else is doing

Too many regular RRSP contributors are going to give it a pass this year. Money is harder to come by and there doesn't appear to be any imperative to act right now. The markets continue to go down.

Behaviour change: If you're going to miss an RRSP season (which I don't recommend), do it when times are good and the money is pouring in – in years like 2000 and 2007. Don't skip the one that everybody else is missing.