Steadyhand Blog

Invest Like a Champion Today

Thu, 09 Feb 2012 11:15:55 PST

By Scott Ronalds

Warren Buffett’s perspectives on investing are worth their weight in gold (or better yet, stocks). Invest in things you understand. Wait for the right pitch. Don’t follow the herd. Buy things you’d be comfortable holding forever.

In a recent article in Fortune magazine, Buffett lays out his views on what he considers the three major categories of investment possibilities: fixed income (currency-based investments), assets that will never produce anything (gold), and productive assets (businesses, farms, real estate).

Not surprisingly, Warren thinks that the third category is the place to be: “I believe that over any extended period of time this category of investing [ownership of businesses] will prove to be the runaway winner among the three we've examined. More important, it will be by far the safest.”

He notes, “The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period.”

Consider Buffett’s views on gold. “Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be about $9.6 trillion. Call this cube pile A. Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”

There are lots of other unique perspectives in the article, which is an adaptation of his upcoming shareholder letter. Buffett fans may also be interested in watching a 12 minute segment that aired on CBS’s ‘Person to Person’ last night, in which he takes Charlie Rose and Lara Logan through his private office in Omaha.

For Money Managers, Small Can be Beautiful

Mon, 06 Feb 2012 09:09:57 PST

The Globe and Mail, Report on Business
Published February 4, 2012

By Tom Bradley

Boyd Erman wrote an article before Christmas titled “Squeeze Is On For Smaller Investment Firms.” When I saw the headline, I shuddered a little. Was he going to talk about firms that don’t have billions of dollars under management? Was he going to burst my bubble?

Well, after a couple of sentences I realized the article was about the “sell” side of the Street in these treacherous markets – the investment dealers that research, sell, trade and underwrite securities. Phew.

But what about the asset managers? How does the size challenge reveal itself on the buy side?

Let me say off the top that it’s not nearly as scary. Certainly, the smaller independent firms would like to have more scale in areas such as sales and marketing, compliance, processing and administration. But there are some significant differences that make the buy side a friendlier place for the small fry.

First and foremost, asset management is not a capital-intensive business. Investment firms that manage money for clients need enough capital to fund operations and satisfy regulatory requirements, but a large capital base is nothing more than a drag on profit margins.

As for what drives money management – investment research – the playing field was leveled in 2000 when Regulation FD came into effect in the U.S. Reg FD prevents the selective disclosure of nonpublic information. In other words, an analyst from a mega-firm can’t (or shouldn’t) hear something from a CFO that hasn’t already been disclosed to the public. Today, when corporations do their quarterly conference calls, small managers can listen in just like the big players.

But more importantly, the buy side is less threatened by large firm domination because it’s an anti-scale business – the bigger a manager gets, the more difficult it is perform. While this adage has generally proven out, each area of the business is affected differently.

In general, our relatively illiquid Canadian market is a challenge for large firms. Equity managers with a few billion dollars to invest are forced to concentrate on the largest 80 to 100 stocks.

Size is less of a constraint outside of Canada. The U.S. and overseas markets offer a broad array of companies to invest in. Indeed, it’s possible to be too small for international investing, as a minimum commitment is necessary to deal with the number of offerings, longer travel distances and different regulatory regimes. It can be done with a small, experienced team, but a global footprint helps overcome these hurdles.

A manager also needs critical mass for bonds. Canada’s corporate market is still relatively illiquid, but if managers are too small, they won’t see bond offerings until all the big guys have been filled (or have passed). Also, the market is getting more complex, which requires a serious research effort. Early in my career, small investment counsellors were stock pickers. If bonds were needed to balance out a client’s portfolio, the admin assistant phoned a broker and bought some Government of Canada bonds. Not so today.

Clearly, in some asset categories, having horsepower is an advantage, but there are tradeoffs. More people in more locations means the decision-making process is prone to slippage and compromise. Bigger engine, but clunkier transmission.

I can’t finish this comparison without mentioning fees. This is an area where the buy side has a greater ability to differentiate. On the sell side, trading commissions and underwriting fees are pretty standard across all dealers, but asset management fees can range from a few basis points for indexing to a 2-and-20 arrangement (2 per cent base plus 20 per cent of the return) for more specialized categories such as hedge funds. Small buy side firms that deliver a unique product can charge more and, as a result, be profitable on fewer assets.

Now don’t get me wrong, it’s no treat operating in the shadows of the big players. The banks and insurers are marketing machines and have plenty of advertising dollars to throw around. The large foreign firms have seemingly unlimited resources. But in the asset management business, their challenges are just as tough as the small firms’ – they have to manage their anti-scale.

Bruce: RRSP & TFSA Contributions

Wed, 01 Feb 2012 17:22:30 PST

We last spoke with Bruce in September, when he acted on our counsel to trim his weighting in bonds and add to equities.

Bruce and Courtney’s portfolio rose roughly 2% in 2011 (its aggregate value at year-end was approx. $346,500). While Bruce isn’t popping any champagne, he realizes that their portfolio fared quite well considering its bias towards equities (which had a weak year).

At the end of December, their asset mix was:

Savings Fund – 10%
Income Fund – 26%
Equity Fund – 26%
Global Equity Fund – 22%
Small-Cap Equity Fund – 16%

The couple contributed $10,000 each to their RSP accounts this week. They want to keep on track with their strategic asset mix (SAM), so they didn’t add anything to the Small-Cap Fund (which had drifted higher, from 12% to 16% of their portfolio). They each invested $5,000 in the Equity Fund, $2,500 in the Global Equity Fund and $2,500 in the Income Fund. They had a tough time adding to the Global Fund given the mess in Europe, but they realize its place in their portfolio. They also understand that valuations for global stocks look attractive.

Bruce and his wife also contributed $10,000 each to their Tax-free Savings Accounts (TFSAs). They didn’t get around to adding to their TFSAs in 2011, so they had extra contribution room this year (reminder: you can contribute $5,000 per year to a TFSA. Unused contribution room carries forward). They used the Savings Fund in their joint investment account as the source of funds for the contributions.

The contributions slightly increased the Equity Fund’s overall weight in their portfolio to 27%, while the weight of the Small-Cap Fund was reduced to 15%. Bruce and Courtney’s bond weighting remains at the low end of their SAM range, following our advice that stocks currently represent better value. The couple continues to hold roughly 10% of their portfolio in the Savings Fund. As a reminder, the purpose of this cash is two-fold: 1) as a source of funds for a vacation property; and 2) as a source of dry powder if the market experiences a notable decline.

With their investments front of mind, Bruce and Courtney took care of one last piece of housekeeping – they RSVP’d for our Annual Client Presentation. They’re interested in hearing Steadyhand’s assessment of the markets. And they really like our cookies.

Balanced Income Portfolio: A Performance Assessment

Thu, 26 Jan 2012 16:22:48 PST

By Scott Ronalds

Last week we published a report on how to assess your portfolio’s performance (How is Your Portfolio Doing?).

Today we’re releasing a supplementary report that uses the framework to assess the performance of the Steadyhand Balanced Income Portfolio, which is a hypothetical model portfolio (comprised of our funds) used by a large number of our clients.

Assessing performance can be an arduous and confusing task. Not anymore.

Here's to the Geeks

Wed, 25 Jan 2012 15:44:19 PST

By Scott Ronalds

I’ve read a few interesting books lately on some of the top technology visionaries of our time. They include Paul Allen (Microsoft), Larry Page & Sergey Brin (Google) and Steve Jobs (Apple). The books were all good reads (Idea Man, In the Plex, and Steve Jobs), although the Microsoft and Google tomes are a little too technical at times for those like me who know little about programming.

One thing jumped out at me about all of these trailblazers – they are/were extremely passionate about what they do. They’re geeks. They have an eccentric devotion to programming/creating/designing and are so engaged in their trade that nothing else matters to them. They don’t let traditional barriers get in their way, aren’t afraid of failure, and don’t compromise on what they believe in. Along the way, they’ve built some exceptionally cool stuff and changed the way we work and play. And there’s only more to come.

Google and Apple have been successful at developing software and products that are hugely complex at the back-end, yet simple and intuitive for the end user. This is a tremendous accomplishment. It’s something the wealth management industry should try to emulate every day.

Investing has its complexities at the back-end. Financial analysis is akin to the engineering that goes behind search algorithms or touch screen interfaces. Unlike Google and Apple, however, the industry does a poor job of making the user experience simple and efficient. There is no shortage of resources at the back-end (equity analysts, portfolio managers, etc.), but few firms put much thought or effort into making the customer experience simple and understandable.

Investing remains a complex activity to many people because the industry wants it to be perceived that way. It shouldn’t be. Investors don’t need hundreds of choices, undecipherable reporting and non-stop economic forecasts. They need a few sensible fund options, a clear investment approach, and plain-English reporting.

Allen, Page, Brin and Jobs threw out the old blueprint. They brought innovative thinking, fearlessness, simplicity, and a focus on the user experience to the table, with a touch of craziness. We could all use a little more geek in us.

Your Portfolio Performance Needs a Regular Check-up

Sat, 21 Jan 2012 11:25:38 PST

The Globe and Mail, Report on Business
Published January 21, 2012

By Tom Bradley

A meeting I had with a prospective client a few years ago has always stuck with me. She told me her adviser had done well for her in the previous five years, but had been letting her down more recently. After reviewing the data, we discovered the opposite was true. Her portfolio was actually holding up well in the current year relative to a weak market, but had performed poorly over the longer term – the return didn’t nearly reflect the strength of the post tech-wreck markets.

Most investors know how a few of their individual stocks have done, some may have a sense of whether a mutual fund has been good or bad, but a vast majority have no idea how their overall portfolio has performed. This knowledge gap, which is especially evident at this time of year when clients are opening their year-end statements, is a unique and disappointing element of wealth management.

How has it come to be? There is plenty of blame to go around. Investment companies spend time and money selling products with the promise of better returns, but rarely show returns on their statements. Buy side firms (investment counsellors) do a better job than sell side dealers (brokers and banks), but no one is where they need to be. And neither are the clients. Few investors maintain any kind of discipline around monitoring their portfolio, despite the fact that their financial health depends on it.

In the face of this sad state of affairs, our firm just updated a report that helps clients assess their returns. It covers a wide range of topics, but some key themes permeate throughout.

This is important!

With the decline of the defined benefit pension plan, responsibility for investing is increasingly falling to the individual. To make the necessary decisions about asset mix and security selection, investors need to know how they’re doing and what’s working for them. Without an accurate assessment of the past, making future decisions is challenging to say the least.

Context

As my story at the beginning illustrated, what’s most often lacking when clients assess their results is an understanding of the environment their portfolio is operating in. They don’t know if losing 2 per cent last year or earning 4 per cent over the last five years is good or bad.

Ideally, investors should construct personalized indexes. This default portfolio, or benchmark, would blend the returns from various market indexes in proportion to their particular long-term asset mixes (cash, GICs, bonds, Canadian stocks, foreign stocks). The investors then have something to compare their returns to, and assess how their strategies and hired help have done.

Unchanging criteria

Too often a fund is bought for long-term reasons and then judged by how it’s done for the short time it’s been in the portfolio. It doesn’t make sense. If a fund was selected using the four Ps – philosophy, process, people and performance (long-term) – then it should be consistently measured against those same criteria.

This is particularly important for investments that have been weak performers. After all, not all components of the portfolio do well at the same time (if they do, then the portfolio is not properly diversified). Staying focused on the initial selection criteria will help investors determine how likely it is that the laggards will one day take their turn carrying the load. And importantly, it will give them the confidence to allocate money to these areas of weakness when their plan calls for it.

I should note that it’s hard not to focus on the laggards when reviewing a portfolio, but it’s important to also look critically at the current winners. Short-term glory shouldn’t obscure the need for an ongoing assessment.

Action and inaction

In the end, a thorough portfolio review produces lots of grey. Black and white conclusions, such as consistently poor performance, personnel or philosophy changes, and excessive fees, are the exception, not the rule. Most performance gaps require more study and patience. On that note, I can say unequivocally after 28 years of observation and painful experience, the biggest weakness investors have is impatience. They don’t wait long enough for their strategies to play out and as a result, sell when the assets are most attractive. In my view, a proper performance assessment helps foster that much-needed patience.

How is Your Portfolio Doing? Version 2.0

Mon, 23 Jan 2012 08:55:17 PST

By Scott Ronalds

Early last year we published a report on how to assess your portfolio’s performance. The paper laid out a framework for evaluating your investments, focusing on five areas: gathering the facts, reviewing the market environment, analyzing the numbers, assessing the potential for future returns, and determining when to take action.

The report was well received by investors and won the Best Stewardship Initiative at the Canadian Investment Awards last month (read more).

Today we’re releasing an updated version of the report. All the market returns have been updated to December 31, 2011, and we’ve made a few small refinements.

We’ll also be publishing a supplementary report next week that uses the framework to assess the performance of the Steadyhand Balanced Income Portfolio, which is a hypothetical model portfolio used by a large number of our clients.

Assessing performance is a key element of investing. Our goal is to provide a practical framework to make the task less onerous.

ETF Sales - Underwhelming and Disappointing

Tue, 17 Jan 2012 17:35:12 PST

By Tom Bradley

This week the 2011 sales numbers came out for Canadian ETFs (exchange traded funds). For the year, $7.6 billion flowed into ETFs (net of outflows) and total assets in the 200 plus funds finished at $43 billion.

While the number of funds exploded in 2011, the ten largest still accounted for 87% of net sales. Seven of the top ten best sellers had an income orientation, including bonds, preferred shares and covered call strategies. Under that theme, the BMO Covered Call Canadian Bank ETF, which was new in 2011, garnered the second most dollars overall ($708 million).

To put these numbers in context, net sales of mutual funds in 2011 totaled about $20 billion. There would have also been money flowing into individual securities and investment counseling firms.

To me, the EFT sales numbers are both underwhelming and disappointing.

They’re underwhelming because ETFs have been the rage over the last few years. There has been a constant flow of new products and the media and bloggers have written about ETFs extensively and positively. In the context of a wealth management industry with over $1 trillion in client assets, $7 billion doesn’t represent much of a market share swing.

There are some reasons why ETFs are gaining ground more slowly than I expected. First of all, it was generally a tough year for new flows. Weak stock markets caused investors to park more of their assets in GICs and high-interest savings accounts.

The second reason is structural. In Canada, the bank branches don’t sell ETFs directly. This leaves the ETF firms on the outside looking in at a large and growing part of the market. As a result of this, the sales numbers understate the rate of ETF growth in the distribution channels where they are available.

I’m also disappointed because when I strip out the flows (and assets) related to professional investors – institutional managers using ETFs for asset mix shifts and liquidity; hedge funds and market timers actively trading them – I have to wonder what portion is being used by individual investors to implement low-cost, long-term strategies. I don’t know the number, but suspect it pales in comparison to the money that’s going into high-cost, index-like structured products.

I also find the numbers disappointing because it appears there was some serious performance chasing going on. I recognize that fixed income ETFs are an improvement over most other pooled products, but the assets in this category increased 44% in 2011, a year when the bond market was up 10%.

At Steadyhand, we compete actively against ETFs (we recently published a report comparing Steadyhand clients to ETF investors), but I still want these simple, low-cost products to have a bigger impact on the industry landscape. The wealth management industry is making too much money off the backs of Canadian investors. I expect and hope that better equity markets, along with Vanguard’s entry into the market, will amp up these numbers in the years to come.

Podcast: 2011 in Review

Thu, 12 Jan 2012 13:50:08 PST

By Scott Ronalds

2011 was a great year for bonds and a not-so-great year for stocks. Interest rates declined further (10-year Government of Canada bond yields ended the year below 2% for the first time in a century), leading to strong price gains in government bonds, and to a lesser extent corporate bonds. Debt concerns in Europe and political lollygagging weighed on investor confidence and most stock markets around the world had a poor year. Double-digit losses were common in Europe and Asia, while the Canadian market dropped 9%. The U.S. was a lone exception and eked out a small gain.

In this podcast, we review the performance of our funds and highlight some of the key messages from our Quarterly Report.

Download, subscribe via iTunes or RSS, or listen now:

Bradley's Brief - Q4 2011

Wed, 11 Jan 2012 16:26:29 PST

By Scott Ronalds

From our Quarterly Report:

It’s a remarkable time to be an investor. After decades of overspending in the Western world, we’re watching Europe melt down and the American empire decline faster than expected. The debt burden is slowing the world economy and accelerating the power shift from West to East. And while we watch with amazement, the fear factor grows.

When you look at your Steadyhand results, however, you might not think 2011 was so remarkable. Despite all the negative noise, political ineptitude and market volatility, our client returns weren’t far off of their long-term expected levels. Balanced portfolios were up between 2% and 5% (depending on the particular fund mix) ...

Read Tom’s full brief and the rest of our report here.

First Rant of 2012: RRSP Transfers

Tue, 10 Jan 2012 08:52:30 PST

By Tom Bradley

I just finished listening to Chris talk with a client about her RRSP transfer. He told her that the paperwork had been sent to the relinquishing institution and we would be monitoring its progress. Chris tried to set reasonable expectations, “Given our experience with this bank, you should expect it to take about 3 or 4 weeks. It may be sooner, but I don’t want to set any false expectations.”

This conversation follows one I heard last week. Sher was following up on a different transfer from one of the bank-owned discount brokers. By the end of the call, she was pulling her hair out. The forms had been faxed on December 2nd. The broker didn’t acknowledge receipt of the transfer until the 13th. Sher called on the 23rd and the transfer was still in process. She left messages on December 30th and January 5th (she couldn’t wait on hold any longer). When she got through, she was told they wouldn’t begin processing it until four weeks after receipt of the forms (the 13th). Who knows when the client will get their money invested in the Steadyhand funds?

Why is it that big, sophisticated institutions can put money into your RRSP in a millisecond, but take weeks to transfer it out? Taking money in is actually more complicated than sending it out. A new account may need to be set up, the ‘Know Your Client’ information has to be completed (or updated) and the money needs to be allocated across specific investments. The transfer out, on the other hand, is dead simple. The bank receives a transfer form from Steadyhand, the requested trade/withdrawal is processed, a cheque is cut and sent to 1747 West 3rd Avenue, Vancouver.

Canadian dealers are all over the map on RRSP transfers. Ironically, some of the highest fee firms are the slowest. For sure, the smaller independent firms are the best. At Steadyhand, we treat transfers ‘out’ the same way we treat transfers ‘in’. We process them in one day, just as a number of other investment counselors do, including my former firm, PH&N. Interestingly, if you ask any of these firms why they do it that way, they’ll tell you two things: it’s not hard to do and it’s in the best interests of the client.

These calls make me regret not putting timely RRSP transfers on my list for Santa. These industry practices are completely unacceptable.

Five Keys to Staying on the Long-term Track

Tue, 10 Jan 2012 08:46:44 PST

The Globe and Mail, Report on Business
Published January 7, 2011

By Tom Bradley

My holiday reading included two journal articles that challenge the notion that investing for the long term reduces risk.

The message: It’s all well and good to recommend that an investor take the long view and not worry about short-term market dips, but quite another for that investor to truly maintain the strategy over multiple decades. While it’s easy to be a long-term investor in good times, it’s quite a different matter in times of euphoria or panic. Most investors can’t resist the temptation to become short-term oriented at extreme points in the market cycle.

The researchers have plenty of evidence on their side. Academic studies consistently show that investors achieve poorer returns on average than the funds they invest in. This shortfall, which is called the behavioural gap, primarily results from too much trading and a tendency to buy what’s done well in the recent past.

Many other factors can also take investors off track and expand the gap. Sometimes a change in life circumstance – a new job, a divorce, a mid-life crisis – will lead to an untimely strategy shift. There’s always the promise of the cool new products that are focused on what’s popular at the time – technology, gold, China, food, covered calls and/or dividends. And then there’s the psychological imperative (most common in males) to just do something when markets are moving.

Clearly, it’s hard being a committed, consistent long-term investor, but it can be done. During my time on the buy side, I’ve met thousands of investors who have let the power of compounding work for them and done well as a result.

As we start a new year, it’s worth reviewing a few of the keys to staying on a long-term track. I’ve got five.

First, you need to recognize that investing is like no other product decision you make. It’s perverse. Your best moves will feel terrible when you’re making them. Your well-thought-out plan will appear to not be working for long stretches of time. And, like golf, there will always be someone telling you they’ve figured out a better way (usually someone who posts higher scores and lower returns than you).

Second, you should stop doing the obvious things that are causing the behavioural gap. Contribute less to the profitability of the financial services industry by trading less and avoiding high fees. And don’t screen potential investments based solely on how they’ve done in the last three years. Look forward, not back.

The third key: You need to work from a Strategic Asset Mix. This is a plan, a place you go when you’re confused, disappointed, frightened or over confident. Your SAM should be the basis from which all decisions are made. “How does this new product fit into my portfolio? Should I be buying or selling these lousy foreign stocks?” Your SAM won’t vary much from year to year and should never be changed drastically at extreme times. When markets are going wild, it’s time to lean on your plan, not change it.

Fourth, you need to eliminate the word “if” from your vocabulary and substitute “when.” You’re more likely to be surprised by ifs, as opposed to being prepared for whens. For example, when the stock market goes down 20 per cent, you’ll gradually add to your equity funds. When your foreign stocks smoke the rest of your portfolio, you’ll re-balance back to Canada. And when it seems you’re going against what everyone else is doing, you’ll smile and pour yourself a nice glass of wine.

Finally, to be a successful long-term investor you need someone to lean on. You need a veteran who has a better investing temperament than you and has experienced the end of the world a few times. We all need a touchstone (for years I’ve leaned on Bob Hager, Warren Buffett and Jeremy Grantham), although you shouldn’t expect them to be right all the time. Rather, you’re looking to benefit from their calmness, thought process and most importantly, their longer-term perspective.

It’s easy building a long-term portfolio. It’s tougher sticking to it. But it’s not rocket science. If you’re committed and consistent, the markets will present you with some wonderful opportunities and the process will be very rewarding.

Not Another Top 10 List

Thu, 05 Jan 2012 08:39:09 PST

By Scott Ronalds

As we start a fresh new year, there’s no shortage of Top 10 Lists (we’re guilty, too). They can get annoying and repetitive, even for a David Letterman fan. But some are worthy of passing on, even posting on the fridge. Here’s one you should staple to the front of your next investment statement.

Top 10 New Year’s Investing Resolutions (by Larry Swedroe).

Readers' Choice - Top Steadyhand Blog Postings of 2011

Wed, 04 Jan 2012 09:43:53 PST

By Scott Ronalds

Another year, another 120 blog postings. We had some thoughtful, informative, helpful, useless, controversial and scathing posts last year, based on the emails and comments we received.

Below is a list of our most popular posts in 2011, as judged by you, the readers (well, actually judged by Google Analytics according to which postings received the most views).

1. What Now – Part II (August 10th)
2. The F-Bomb (June 22nd)
3. Monthly Income Funds: Some Useful Math (January 12th)
4. When Fear Rules the Markets, It’s Time to Say Buy (August 20th)
5. My TFSA Strategy (February 14th)
6. Investing Certainties in an Era of Economic Doubt (October 1st)
7. Steadyhand vs. ETFs (November 7th)
8. What to do About Japan – Part II (March 17th)
9. How is Your Portfolio Doing? (January 20th)
10. Hocus Pocus But no Magic (March 7th)

Thanks to all our loyal readers! We look forward to keeping you well informed in 2012.

(As a reminder, you can subscribe to our blog via email or RSS)

A Gift From Risky Markets

Thu, 29 Dec 2011 11:39:34 PST

By Scott Ronalds

Michael Nairne, president of Tacita Capital, wrote a good piece in the Financial Post last weekend, titled A Gift From Risky Markets, which looks at historical stock market returns and valuations (dating back to 1825) and provides some perspective on the level of long-term returns investors can expect going forward.

If you got stiffed this holiday season or are looking for a little cheer as the bills come rolling in, this short article may be just the elixir you need.

A List to Santa That'll Make the Investing World a Better Place

Fri, 23 Dec 2011 15:52:48 PST

The Globe and Mail, Report on Business
Published December 23, 2011

By Tom Bradley

I came out of the “me” generation (have I told you about my latest injury?), so even though this time of year is about giving, I’m mostly into receiving. In our household, my wife Lori goes for quantity at Christmas, while I’m all about quality. When I wrote Santa this year, I asked for both.

Better markets

Dear Santa, I’m running a small, growing investment firm and need better markets. I’m not asking for another 2009. That would be too greedy, even for me. Your help with my U.S. stocks last year was much appreciated and it would be great if you focused on my value plays in Japan and Europe for 2012. I know they aren’t growing very fast and have a few warts, but they won’t break your budget. They’re really cheap.

In the past I’ve asked for lower interest rates, but you can stop now. Indeed, they’re hammering the pension plan I serve on, not to mention our retired clients, and my readers are starting to doubt my view that rates are going back up. Your lovely present has turned into a lump of coal.

Santa, I’d like a book, or some divine insight, that helps explain why the reasons for buying gold don’t change, no matter whether the price is $800, $1,600 or $2,600. Doesn’t valuation factor into my decision somehow?

Boxing Day prices

It’s not all about me Santa. I also want you to help my young friends chill out and become less petrified of stocks. They need to embrace the opportunity they’ve been given by politicians in Washington and Brussels. Investors with a time horizon of more than 10 years, let alone 30, should be trying to scratch together as much money as possible to invest. I know they’re scratching now, but it’s for a down payment to buy an overpriced house. My generation hasn’t been too good at managing the fear/greed thing, but there’s hope for our children.

Strained regulators

I want provincial governments to give more funding to their regulators. (Did I just say that?) There is so much to do and more urgency than ever. Investors desperately need proper performance and fee reporting. They need to know how they’re doing and what they’re paying for advice and investment management. The current state of affairs is beyond ridiculous, but most companies won’t act until they’re forced to. Please Santa, use your charm to halt the perpetual public consultations, and get the regulators to just ram the rules down the industry’s throat. It’s time.

(I’m not usually this blunt Santa, but I feel I can talk to you.)

Stewardship

Investors are screaming for someone they can trust – investment-oriented firms that have clients’ best interests at heart. Santa, can you deliver to these disillusioned investors the stewardship grades that Morningstar has worked so hard to create? Their research is the best measure we have of alignment between client and manager, but nobody is paying any attention to it, including the media and bloggers. It’s been shown that, in general, firms that rate highly on stewardship generate better long-term returns.

Stocking stuffers

Santa, there are a few little things I need. I’d like more stocks, less bonds. More Vanguard, less closed-end funds. More no-load, less load. I desperately need more Wealthy Barbers and fewer economists. More Lang, less O’Leary. And more dividends, less “Premium Enhanced Protected Tax-Efficient Deceptively Expensive Dividend Income” funds.

And finally Santa, if you have any time and energy left, I have one more request, although it’s a toughie. I want you to make “small” cool again. How about working your magic so people remember what it was like when their investment firms were personal and investment driven. Santa, it’s not that much of a stretch. Scale makes it harder for fund managers to do their thing, so when it comes to managing a portfolio, help spread the word: “Small is the new big.”

If you’re not able to deliver on all this stuff, I’ll understand. More than anything, I want Canadian investors to be excited about the opportunities ahead and the options they have. And Santa, when you’ve planted these sugar plums in their heads, make sure you use my strategy, not Lori’s – quality over quantity.

National Regulator? Bah, Humbug!

Thu, 22 Dec 2011 14:49:43 PST

From today’s Globe and Mail: “Finance Minister Jim Flaherty says Canada will not move ahead with its proposed Securities Act in light of the Supreme Court of Canada's decision to declare it unconstitutional … The Supreme Court unanimously declared the proposed Act unconstitutional, siding with provinces that insisted the day-to-day regulation of securities markets does not belong in federal hands.”

It’s bureaucracy like this that prevents smaller firms (like Steadyhand) from offering their funds nationwide. Canada is one of few countries that doesn’t have a national securities body, which has been cited as a weakness in our system by many observers. Instead, investment firms have to deal with 13 different regulators (one for each province and territory).

The cost of filing a prospectus, and the associated regulatory expenses of dealing with each province individually, is extremely expensive. It’s the key reason why we only offer our funds in five provinces. As we grow, we hope to make our offering available in every province, but at this stage in our development, the costs are too prohibitive.

As a young business, it’s disheartening to turn down interested investors in Quebec, the Maritimes and the Territories (where the inquiries have been growing steadily). Unfortunately, the news today suggests we’re not going to see a national regulator anytime soon. Bah, humbug.

Different This Time?

Mon, 19 Dec 2011 10:00:15 PST

By Tom Bradley

“Tom, I agree with your view on stocks, and boy, you’re so right about how negative people are, but ... I can’t help but wonder if it’s different this time.”

It’s different this time. I’ve been trained to never utter these words. They’re the most dangerous four words in investing.

So when I hear my friends, clients, readers, competitors and, in some cases, idols, telling me they don’t like what they see, I’m torn. I know how bad the global economic/debt situation is. I know there will be dislocation, shocks, volatility, perpetually gloomy headlines and earnings misses. And I know we’re navigating all of this without a (government) net. But it’s not that simple because:

Mr. Market knows all this. He figured it out in April and has been worried ever since.
The corporations we’re investing in have never been in a better position to take advantage of economic and competitive dislocations. They’re the antithesis of weak, overstretched, running-out-of-options governments.
Recessions are all about cleansing and adjustments. The gloomy outlook does not take into account the fact that consumers, companies, cities and countries are adjusting to the new reality. The U.S. is learning to live without a real estate market. The resource industries are adjusting to shortages by spending record amounts on developing additional supply. Huge investments are also being made on more efficient power grids, solar panels, networks, air conditioners, cars, buses, aircraft, billing systems, medical procedures and the list goes on. The pace of progress on many fronts is accelerating, which means when the turn comes, it will be faster than expected.
When negative sentiment is so firmly planted on the fear side of the fear/greed meter, the downside risk is significantly reduced. Stocks could still go down, but it’s less likely and the magnitude of decline is likely less.

It feels like we’ve entered the ‘it’s different this time’ zone again. Certainly there’s a lot that will be different over the next 5, 10 and 25 years, but I’m not convinced stock market behavior is one of them. The market will continue to over-react to short-term news, trade well below (and above) the intrinsic value of underlying companies and it won’t wait for complete resolution or perfect information to turn around. If the market doesn’t do these things, it will indeed be different this time.

The Steadyhand Holiday letter

Thu, 15 Dec 2011 10:25:22 PST

By Scott Ronalds

Is it over yet? It was a rough year for the stock markets, as ugly economic headlines, debt problems, and political gridlock instilled fear in many investors. Bonds were once again the asset class of choice, despite their scrooge-like yields.

Here at Steadyhand, we’re feeling a little merrier than the average investor – and it’s not just because of Bradley’s secret nog. Most of our funds have fared much better than the overall market, and we achieved some notable accomplishments over the year.

In this year’s Holiday Letter, we reflect back on some of the 2011 highlights.

Happy Holidays!

In a World of Negatives, Search for What Could go Right

Sat, 10 Dec 2011 13:45:39 PST

The Globe and Mail, Report on Business
Published December 10, 2011

By Tom Bradley

It’s a remarkable time to be an investor and investment professional. After decades of overspending, we’re watching Europe melt down and the American empire decline faster than anyone expected. The debt burden has accelerated the power shift from West to East.

It’s also remarkable because it feels like there are a lot of one-way streets out there. I’m referring to strategies, trades and trends where everyone is headed in the same direction. Being a natural contrarian, I feel uneasy when I see a seemingly unchallenged consensus. “This stock can’t miss!” “You can never go wrong with real estate.” “I can’t see what could possibly take the market higher (lower).”

My points of uneasiness today are not the same as they were a year ago when the list included gold ("sky’s the limit"), U.S. ("don’t touch it") and China ("our salvation"). Gold is up 25 per cent over the last year, but the stampede has slowed and the commentary is more balanced today. There’s still a hate-on for the U.S., but more Canadians are perking up to the real estate and stock bargains there. As for China, the steady stream of positive press has turned. The scale of capital misallocation and use of debt is being brought to light (it looks eerily similar to post-Bush/Greenspan America).

There are other extremes to keep an eye on now.

In my 28 years in the business, I’ve never seen a time when people’s views are so universally negative. Certainly, it’s understandable given the macro events of the day and the extreme market volatility, not to mention the fact that baby boomers are starting to retire with 2008 fresh in their memory. The fear/greed meter is firmly planted on the fear side.

I’ve written a lot about our artificially low interest rates because they’re a remarkable feature of the landscape. It’s a wonderful time to be a creditworthy borrower – everyone is competing for your business – while it’s a lousy time to be a lender (bondholder). Savers are seriously subsidizing spenders.

Finally, large corporations are as well positioned and poorly appreciated as I can ever remember. With their strong balance sheets, steady cash flow, regular dividends and ability to finance cheaply, they’re the antithesis of governments. They’re able to use their scale to cash in on the trends toward globalization and industry consolidation. The strong are getting stronger, and yet their valuations are going lower.

So what should you do about fear, low rates and strong corporations? Well, first of all, you should remember that markets have a propensity to overreact to short-term news, so a strong consensus creates opportunities. Although the fear is understandable and very real, it’s no less valuable for investors. Therefore, it’s important to maintain a balanced perspective. I recommend reading, or rereading, a Warren Buffett book and seeking out all the information you can about what could go right in the next few years (the negative stuff will find you, the positive won’t).

You need to stay in close touch with where valuations are. The big mistake made by investors who missed the 2009-10 rally was focusing exclusively on the bad economic news and losing sight of the compelling valuations on stocks and corporate bonds. You want to hold assets that look to be undervalued, or at least fairly valued, with respect to their long-term fundamentals. Conversely, you want limited exposure to assets that have become overvalued due to short-term factors.

I put equities in the former category. When people ask where they should invest, I tell them what they don’t want to hear – “Stocks.” In my view, equities will generate the best returns over the next three to five years.

On the overvalued side are assets that are dependent on low interest rates – bonds and real estate. Rates may stay near current levels for a few years yet, but it’s not ordained that a weak economy means low rates (ask Europeans about that). The safety premium on U.S. Treasuries will go away one day and Canadians will be faced with lower bond prices and higher borrowing costs. Cheap financing is transitory, but paying too much for an asset stays with you forever.

So my recommendations for 2012 are: Warren Buffett, high quality stocks and corporate bonds, a modest cash reserve and two-way streets.

Taking Stewardship Initiative

Tue, 06 Dec 2011 09:17:42 PST

As readers will know, Steadyhand has ranked highly on Morningstar's annual Stewardship Grades. That status was reinforced last night when we won the Best Stewardship Initiative Award at the Canadian Investment Awards. (update: after accepting the award, David Toyne was interviewed by Morningstar's Ashley Redmond. You can watch the interview here.)

It was the first ever award of this type and we won it specifically for the report we published in January, How Is My Portfolio Doing? And What Should I Do About It? A Framework For Assessing Investment Performance (the pdf is available for download here). In announcing the winner, David O'Leary, Director of Fund Analysis, Canada, said:

"This year's winner is a small firm that proves you don't need a huge communications or marketing department to provide excellent educational material for investors. With just a handful of people on staff, this firm published a 17 page document that clearly illustrates how investors can tackle the complex task of evaluating their portfolio performance, an area that the firm correctly identified as needing room for improvement across the industry. The document gives a thorough explanation in language that is accessible to even unsophisticated investors, and can even be a handy reference for those investors who deal with advisors."

I should note that we are planning to issue a revised version of the report in mid-January. There will be a few refinements, but the main thing is that we'll update all the market returns to December 31st, 2011.

Now That's Ironic – Part II

Mon, 12 Dec 2011 11:16:32 PST

While Scott finds it ironic that the low-fee fund firms come out of high-cost Vancouver (see Now That's Ironic), I find it equally ironic that two of the highest fee firms in the industry come out of my home town. Winnipeg, which is known as the wholesale capital of Canada, has produced two large firms, Investors Group and Assante, and both are at the top end of the fee chart. Go figure.

Year-end Distributions

Mon, 28 Nov 2011 09:24:35 PST

By Scott Ronalds

The year-end distributions for all our funds (with the exception of the Savings Fund) will be declared on December 15th and paid on December 16th. The Savings Fund will pay its regularly-scheduled monthly distribution on December 31st.

As a reminder, distributions represent the mechanism whereby mutual funds transfer to unitholders any interest and dividend income and realized capital gains they have accrued over the course of the year. Most investors choose to re-invest distributions into additional fund units, but clients can also opt to receive them in cash.

Remember that immediately following a distribution, the price of a fund drops by an amount equivalent to the payment. However, you will receive additional units in the fund which are equivalent in value to the amount of the distribution. The end result is that the value of your investment doesn’t change, but you own more units in the fund at a lower unit price.

For example, assume you own 100 units in a fund that is valued at $10.00/unit (your investment is worth $1,000). If the fund pays a distribution of $0.10/unit, its price will drop to $9.90 following the distribution. However, if you follow the common practice of re-investing your distributions, you will receive an additional 1.01 units in the fund ($0.10/$9.90), so the value of your investment remains unchanged (101.01 units x $9.90/unit = $1,000).

The estimated distributions for our funds are as follows:

Income Fund: $0.19/unit
Equity Fund: $0.05/unit
Global Equity Fund: $0.06/unit
Small-Cap Equity Fund: $0.95/unit

Please note that these are only estimates and are subject to change.

Important: The estimated distribution for the Small-Cap Equity Fund is higher than normal, as the fund generated more capital gains than in previous years. The amount may be reduced in the coming weeks, but investors considering purchasing additional units in the fund in non-registered accounts may wish to delay any purchases until after the distribution has been declared on December 15th.

If you have any questions about distributions, feel free to give us a call at 1-888-888-3147.

Check Your Emotions at the Border, the U.S. Looks Good

Sat, 26 Nov 2011 12:26:49 PST

The Globe and Mail, Report on Business
Published November 26, 2011

By Tom Bradley

A year ago, I wrote a column inspired by a holiday in Arizona (my in-laws have that effect on me). The piece attempted to level a rather tilted picture of the United States, one that was firmly focused on dismal economic and political news. I suggested that from an investor’s point of view, the U.S. didn’t look so bad. Canadians were being given the chance to buy cheap assets with a richly valued currency (the loonie).

From the comments I received, I found out how intensely Canadian investors dislike the U.S., and how strongly they disagreed with my view. Well, I’m nothing if not stubborn, so I headed south again this year to continue my research. After 10 days in Florida and the Republican desert, I’ve returned with a higher golf handicap, five years worth of Nordstrom sweaters and a renewed desire to buy southern real estate.

Before revealing my other findings, it’s useful to look at what’s happened since last year’s column. The politics in Washington have gotten more bizarre (I call it entrenched denial), the economy is still hanging on by a thread and the government debt grew by another trillion dollars or so. As for the housing market, prices were down slightly year over year and are 30 per cent below their 2006 peak.

The results were different, however, in the stock and currency markets. The S&P 500 was up 8 per cent for the 12 months to Oct. 31, while the S&P/TSX composite was down 1 per cent. The exchange rate has bounced around, but now shows the greenback a couple of pennies stronger against the loonie.

How did this happen? Well first of all, let’s remember that one-year returns are pretty flaky, even bordering on random. The numbers could reverse with a two-week run of the gold and energy stocks. But beyond that, these results are a reminder of just how big a role sentiment (emotion) plays in short-term returns. A strong consensus often creates an opportunity to go in the opposite direction. The return gap is also a reminder of how important valuation is. Cheap assets priced in an undervalued currency help to offset many ills.

Having taken a fresh look at the U.S. (on foot and at my desk), my investment conclusion remains the same – Canadian investors need to be open to opportunities south of the border. Stocks and real estate are still cheap relative to what’s available in Canada and the American economic outlook has improved relative to ours. The Americans are well along in adjusting to their new reality, while we’ve yet to have our comeuppance. The following factors illustrate what I mean.

The U.S. economy is growing almost as fast Canada, but with zero help from the housing sector, which is flat on its back. In Canada, real estate is contributing mightily to economic activity.

Government deficits in the U.S. are worse and the accumulated debt now exceeds Canada’s (as a percentage of GDP), but we’re running large deficits too (embarrassingly so given the health of our housing and resource sectors), and our consumer debt burden is now heavier.

There’s no question that the U.S., with its cheaper land, labour and currency, is now more competitive than Canada and the gap is widening. Last week it was reported that U.S. productivity gains are running well ahead of ours. This week Chrysler chief Sergio Marchionne opened contract negotiations with Canadian workers by saying, “You cannot have all things. You cannot have a strong currency, you cannot have an uncompetitive wage rate and then expect Chrysler or all the other car makers to keep on making cars in this country and be disadvantaged.”

The point is that investment managers are always looking for changes at the margin. Improvements that are unappreciated by the market. A poor situation that’s turning around. They’re not always looking for good, just better. If the sentiment toward the U.S. improves and concerns about insolvency abate, then the attractiveness of U.S. stocks will become apparent.

As investors, we need to check our emotions at the door and critically assess each opportunity on its fundamentals and valuation, regardless of head office location. Which reminds me, now I’ve got to wangle a golf trip to Europe.

Now That's Ironic

Thu, 24 Nov 2011 08:34:14 PST

By Scott Ronalds

With the holidays around the corner, shopping is in the spotlight. It got me thinking …

We’re used to high price tags on the wet coast. We’ve got the most expensive housing market in Canada (if not the world, based on some measures). A bottle of wine typically costs more than in any other province (Tom insists, the world). Gas prices often rival the highest in the country. And high-priced yoga wear and lavish lattes fly off the shelf.

Yet, Vancouver is home to some of the lowest cost mutual funds in the country. Steadyhand, PH&N and Leith Wheeler are commonly recognized as low-fee leaders for active management (while also providing advice). Sky high real estate and low cost mutual funds makes for an interesting dichotomy. Must be something in the water.

Another Lump in the Rug

Mon, 21 Nov 2011 11:04:05 PST

By Scott Ronalds

A dirty little secret in this business: when a fund has an ugly performance record, it can be buried by merging it into another fund.

Fund mergers occur all the time (see Fund Company Calls the Cleaner). The latest track records to be swept under the rug belong to a handful of under-performing Investors Group funds (see below).

Given Investors Group’s dizzying array of over 500 products (in numerous classes and series), these mergers will largely go unnoticed by investors.

Morningstar Stewardship Grades 2011

Wed, 16 Nov 2011 09:13:27 PST

By Scott Ronalds

Morningstar Canada published its updated Stewardship Grades for 26 fund companies yesterday. The grades are designed to help investors further research, identify, and compare fund companies that do a good job – or a poor job – of aligning their interests with those of fund shareholders.

Stewardship Grades were first introduced in 2004 in the U.S., and a study published earlier this year found that funds with top grades were more likely to survive and deliver competitive risk-adjusted returns.

Morningstar introduced their Stewardship Grades in Canada last spring (see our blog on the topic), and Steadyhand scored favourably. In fact, we were the only company to receive a perfect score (8 out of 8) along with an “A” grade.

We’re proud to announce that we received an overall A grade once again. Of the 26 companies graded, four received the top mark (click here for the full list).

There are four components considered in the grading process: Corporate Culture, Manager Incentives, Fees, and Regulatory History. Morningstar made some slight changes to their process this year, motivated in part to better align the Canadian methodology with the approach employed by their U.S. fund analysts. The firm now assigns more weight to the Corporate Culture and Manager Incentives components. Steadyhand scored A’s on Culture and Incentives.

We’re unhappy that we scored a B on Fees this year, although we do understand that some other 'direct’ companies have lower fees before our fee rebate program kicks in.

Morningstar notes, “The Stewardship Grade goes beyond the usual analysis of strategy, risk, and return. It helps investors to assess a fund based on the degree to which the fund's parent – the management company offering the fund – has its interests aligned with those of fund shareholders. The methodology also examines whether shareholders can expect their interests to be protected from potentially conflicting interests of the management company.”

We pay little heed to industry ratings and awards that focus on short-term performance, but the Stewardship Grades address important intangibles that are not captured in a review of past performance alone.

Old News

Mon, 14 Nov 2011 09:26:06 PST

By Tom Bradley

“I think the future of equities will be roughly the same as their past; in particular, common-stock purchases will prove satisfactory when made at appropriated price levels. It may be objected that it is far too cursory and superficial a conclusion; that it fails to take into account the new factors and problems that have entered the economic picture in recent years – especially those of ... the movement towards less consumption and zero growth. Perhaps I should add to my list the widespread public mistrust of Wall Street as a whole, engendered by its well-nigh scandalous behavior during recent years in the areas of ethics, financial practices of all sorts, and plain business sense.”

Was this a quote from me responding to readers and clients who can’t believe I’d recommend a full allocation to stocks at this time of economic peril? No, it’s from a speech by Benjamin Graham, the father of value investing, which was printed in the Financial Analyst Journal’s 1974 September/October issue. At time of publication, the S&P 500 was down 48% from January, 1973. In 1975, the index was up 37%.

Stocks aren’t down nearly as far as they were during the oil crisis in 1974 (and I’m certainly not looking for a 1975 recovery), but the penchant for investors to disengage from company fundamentals and stock valuations, and instead act on political and economic news is rivaling some of the previous market lows.

(Thanks to Southeastern Asset Management for reprinting Mr. Graham’s quote in its third quarter report.)

When Dividend Investing Doesn't Pay Dividends

Mon, 14 Nov 2011 09:27:28 PST

The Globe and Mail, Report on Business
Published November 12, 2011

By Tom Bradley

I recently watched a promotional video that outlined the reasons for owning dividend-paying stocks – tax-efficient income, lower volatility and you get paid to wait for markets to recover. I agreed with all the fund manager’s points, but he failed to mention that investors tend to get sloppy when it comes to income and dividends. The level of analysis and discipline that goes into buying tech or industrial stocks isn’t always evident when higher-yielding stocks (and structured products) are involved. Too many decisions are made for the wrong reasons. Here are a few of them.

Yield

For income investors, one number takes on disproportionate importance – yield. If I invest X dollars, how much regular income will I receive? Is it 4 per cent, 5 per cent, 6 per cent?

It’s perfectly appropriate to build a portfolio from a subset of securities that have a yield above a certain level, but once a stock qualifies on that basis, it’s time to determine what it’s worth. Is the price reflective of the company’s assets and growth prospects? Can the underlying business support the dividend payments over the long run?

The early days of income trusts provide a great example of when current yields unduly influenced purchase decisions. Trusts were a burgeoning area of the market and, as a result, the analysts tended to be less experienced. Too many of them were valuing trusts based on the yield spread above government bonds, instead of determining what the businesses were worth. Incredibly, interest rates were perceived to be a bigger risk factor than revenues and profits.

Return of capital

Today, the wealth management industry has embraced an exciting not-so-new tax deferral strategy. It’s called “return of capital” and it works like this. A product has an advertised yield of 6 per cent, but is earning only 3 per cent from interest, dividends and capital gains (after fees). The investors’ capital is used to cover the rest of the distribution. It’s a marketer’s dream. The client makes up the shortfall and it’s positioned as a selling feature. “Buy now and you’ll receive a tax-efficient 6 per cent yield.”

There are investment products where return of capital is part of the design and is communicated as such. There are too many others, however, that aren’t quite so forthcoming.

Diversification

I have a friend whose parents live in Ireland. For years they invested most of their savings in Irish banks and insurers. When the financial crisis hit in 2008, they lost virtually everything. I tell this story because Canadian investors love their banks too. Layered throughout their portfolios are bonds, preferreds and common shares issued by the Big Five.

Now, I’m not here to bash the banks. They’re some of the best in the world and play a significant role in my portfolio. But that doesn’t get around the fact that they’re highly leveraged businesses and are all driven by the same economic factors. Income investing isn’t an excuse to not be diversified across different types of companies and asset classes.

Opportunity cost

In poor markets, it’s easier to hold on to a stock that’s paying an attractive dividend. As long as the income stream is secure, it’s a good thing. Conversely, that same dividend can cause an investor to hold onto a stock when it gets expensive. “I don’t care if it goes down … I’ll get my dividend.”

But consider the following example. You hold 100 shares of Company A priced at $10. It’s yielding 4 per cent, but your adviser thinks it’s getting overpriced. You decide to sell A and buy 100 shares of Company B, which is also $10, but looks considerably cheaper. Over the next year, A goes down to $8, while B rises to $12. At that point, you reverse the trade and find yourself with 50 per cent more shares in A and 50 per cent more income.

This trade is a favourable example for sure (and transaction costs and taxes have not been accounted for), but it’s meant to reinforce the point that there’s a cost to holding an overpriced stock, dividend or no dividend.

When it comes to income investing, yield and tax efficiency are important, but they have to take a back seat to diversification and valuation. Sometimes the best strategy is to accept a lower current yield and own a broader range of securities.

Generation Riskless

Wed, 09 Nov 2011 09:23:35 PST

By Scott Ronalds

I feel for the twentysomething generation. Good jobs are tough to come by, home ownership is out of reach for many (in Vancouver and Toronto, at least), skinny jeans are deemed fashionable for men, and a weekend camping now means pitching a tent downtown.

What’s more, young investors are avoiding risk at an alarming rate. A recent article in the Wall Street Journal (The Young and the Riskless) highlights a survey which showed that 52% of investors in their 20s agreed with the statement: “I will never feel comfortable investing in the stock market.” (only 29% of investors of all ages agreed with the statement)

The piece suggests: “Investors who eschew risk at such a young age might be setting themselves up for disappointment. Without the compounding effects that come with investing in equities for a long time, stock-less investors might find it nearly impossible to accumulate a big enough nest egg to retire at all, let alone in their 60s.”

We’re all aware that the stock market has been turbulent over the past several years, and that the economic headlines aren’t exactly rosy. But investors in their 20s who intend to avoid stocks altogether are making a mistake. A big one. Over a 30-40 year investment horizon, stocks will almost certainly outperform cash and bonds. This is especially true using today as a starting point – stock valuations are attractive on many measures and bond yields are close to historically low levels. Big short-term swings in the market are hard to stomach and can be particularly damaging for older investors, but the twentysomethings should use volatility to their benefit.

Young investors, no doubt traumatized by the events of the past few years, need to step up and take some risk (i.e., invest in stocks) if they want a phat portfolio down the road.

Steadyhand vs. ETFs

Mon, 07 Nov 2011 09:06:50 PST

By Scott Ronalds

Exchange-traded funds (ETFs) are growing in popularity and with good reason. They’re simple, low cost, transparent and provide market-like returns. But … they’re not for everyone.

In a newly published paper, we compare the experience of an ETF investor (Jake) to that of a Steadyhand client (Julie). We focus on four areas: administration, communication, advice and most importantly, returns.

We’re doing the comparison because nobody else has evaluated or compared the two investor experiences and we think it’s important as ETFs become a more prominent fixture in the investment landscape.

For investors who are frustrated with the returns and business practices of the traditional wealth management companies, ETFs are a good option. For many of the frustrated, however, Steadyhand is a better fit.

Robert Hager, 1937-2011

Fri, 04 Nov 2011 15:02:50 PDT

Special to the Globe and Mail
by Tom Bradley and Lori Lothian

His Market Savvy and Concern for Clients Helped Build a West Coast Powerhouse

Few icons of the investment industry are celebrated outside the confines of Bay Street, but Bob Hager is one.

Bob, who died on Oct. 7, was a driving force in building one of Canada’s most successful asset managers. In 1965, he (centre of picture) and partners Art Phillips (left) and Rudy North (right), started a fledgling firm called Phillips, Hager & North. By the time he retired in 2001, PH&N’s family of mutual funds had given thousands of Canadian investors access to direct, low-cost investing and the firm had become the largest independent manager in Canada. When it was sold to Royal Bank in 2008, assets under management were $69 billion.

There were many people who contributed to the firm’s success, but it was built in Bob’s image and on his personal values. Like Bob, the company was quiet and understated, growing without advertising, acquisitions or sales commissions. The values of the firm were grounded in the best interest of the clients.

Robert Stewart Hager was West Coast to the core, born in Vancouver in 1937 and raised in the Kerrisdale area. He went to high school at Magee, and received a commerce degree from nearby UBC. After marrying Judy, his long time sweetheart, he ventured south to earn his MBA at the University of California at Berkley, then returned to begin working with Phillips and North.

PH&N was unique in the early years. The young partners, along with Dick Bradshaw (who just missed getting his name on the door), used to brag that the company was the largest investment counselor in Western Canada. Truth told, it was essentially the only investment counselor in Western Canada.

In the early days, it relied heavily on Art’s financial resources and track record. He was the oldest of the four and had already tasted success while running the All-Canadian Fund.

PH&N didn’t truly catch fire until it won an important pension client in Eastern Canada in 1972. By then, it had established an outstanding record and was in position to benefit from an emerging trend that saw pension plans shift their assets away from the traditional providers – trust and insurance companies – to independent asset managers.

Bob didn’t have a sales bone in his body, but his values and sensibility were the best marketing tools a firm could have. Clients took to PH&N because it was humble about its successes, and brutally honest about its mistakes. No matter how good the results were, Bob often led off client presentations with what went wrong. There were meetings where the client had to remind him that the returns were actually very good.

Clients and consultants also liked that the company’s ownership was spread widely amongst employees. Bob and the other senior shareholders were generous in this regard. He always said that he didn’t mind selling shares to a new partner, as long as he or she helped build the business. He was happy to own a smaller piece of a more successful firm.

While PH&N was primarily a pension manager in the early days, Bob and his partners had the foresight to create a family of mutual funds, partly in response to pension trustees and executives who wanted to put their personal money with the company. It was telling that Bob never viewed the funds’ low fees as a marketing ploy or missed profit opportunity. To him, they just seemed appropriate.

Not only did his gentle nature appeal to clients, it also set the tone inside the firm. Executive rank or shareholding meant nothing to him. He bonded with people at all levels of the organization.

Whether he was President and CEO (1973-87) or Chairman (1987-2001), he was subject to the same ridicule as everyone else when his picks in the basketball pool went bad. After stepping back in 1987 to focus on his clients, he subsequently worked for three CEOs: Bradshaw, Tony Gage and me. He grumbled from time to time, but his support was unwavering.

Bob’s warm personality hid an intense, competitive fire. He couldn’t stand mediocrity and took it hard when the firm wasn’t performing well. As Dick says, “Bob worried so much that the rest of us didn’t have to.”

As the firm grew, Bob’s dedication to clients, common sense approach to investing and decisiveness in troubled times, continued to influence the analysts, portfolio managers and support staff he worked with. He never mailed in a client meeting, even though his experience and stature would have allowed it. He prepared extensively, to the point where he was no fun traveling to a meeting.

Flights home, on the other hand, were enjoyable. Bob was an engaging and interesting seatmate. He always had stories to tell of the early days and was a wealth of knowledge on sports, golf courses, Four Seasons Hotels and Air Canada’s fleet.

At his core, he was an investor, and his simple approach helped ground more than a few young analysts. He reminded them that bottom-line profits drove stock prices, not the more fashionable EBITDA numbers (earnings before interest, taxes, depreciation and amortization). He was not seduced by fancy wrapping on investment products.

Bob’s most lasting lessons came in weak markets. While he worried incessantly about his clients, it never prevented him from acting. Indeed, that’s when he was at his best.

Some words of wisdom:

“With every bear market, there are always unknowable concerns, and every time we’re told that this bear market is different.”
“Make sure you go up with more than you went down with.”
“My best trades turned out to be the ones when my hand was shaking as I gave [the equity trader] the blue ticket.”

One particularly memorable moment came in September of 1998. The S&P/TSX Composite Index had dropped more than 20 per cent in August and the research team was shaken. Bob’s not-so-gentle nudge moved them to start buying stocks.

“We will be buying into these companies as the market declines,” he said.

Bob and his wife lived in the same home for 38 years, but traveled extensively throughout their 57 years together. Their philanthropic interests were many and varied, but they took a special interest in helping young people achieve their potential.

Bob’s retirement passions were rugby, fishing, gardening, travel, his daughters Leslie and Shelley and their families, including six grandchildren.

His family and friends will miss his stories, his laugh, his irreverence, his grumpiness, his kindness and his wise counsel.

Canada lost a great investment executive at a time when he’s needed the most. “Bob was our keel,” Bradshaw says. “He kept us focused on our goal of achieving the best possible results for our clients.” He was the conscience of a firm that was known for its conscience.

Further Creeping

Thu, 03 Nov 2011 13:59:46 PDT

By Tom Bradley

As a follow-up to my ‘Creep’ column last week (The Dangerous Rise of an Obsession with Safety), we’ve come up with a few more items for the list. As a reminder, we defined creep as a ‘slow and stealthy movement’. One you don’t notice while it’s happening, but later when you do, you go “Wow!”

Length of a song – In the 60’s they were two minutes long. Now the standard is four, even though most songs don’t have the meat to go that long.

Length of an NFL game – Thank God for my PVR, otherwise I’d never watch a game.

Litter – Where has it gone? Low and behold, we’re so much better at picking up after ourselves.

Size of a serving of Coke – Today’s standard size was family size twenty years ago.

Conflicts of interest at financial institutions – It’s deteriorated to the point where sell-side traders compete against their buy-side clients and banks underwrite their own bond and share issues.

Parents fund-raising for schools – An historical note to young parents: Our taxes used to cover books and gym equipment.

Cost of the best bike, concert ticket or stereo receiver – Businesses have figured out that the top 0.001% of the population will pay almost anything for the best.

The Planet’s population – 7 billion and counting.

Do you see other creep out there, investment related or otherwise?

Growth Please

Tue, 01 Nov 2011 09:24:47 PDT

By Tom Bradley

In his letter this month, Bill Gross of Pimco talks about the cure to all our ills – growth. As he says, “No country has enough of it.”

In discussing the prospects for economic growth, Mr. Gross does a good job of capturing the challenges we face.

“The lack of growth ... is structural as opposed to cyclical, and therefore relatively immune to interest rate or consumption stimulative fiscal policies. 1) Globalization, 2) technological innovation, and 3) an aging global demographic have all combined to dampen policy adjustment post Lehman and will inexorably continue to work their black magic going forward.”

He goes on to point out that another structural impediment, high debt levels, is also a barrier to growth.

Our managers (and I) aren’t spending a minute trying to figure out whether we’re heading into another recession or not, but we are factoring into our forecasts a slower, bumpier economy.

Background on the Fee Increase

Mon, 31 Oct 2011 15:56:48 PDT

By Tom Bradley

We painfully announced last week that we’re raising the fee on four of our funds (see Press Release). This post provides some background.

As our clients know, we have a unique and attractive fee structure. Our ‘One Simple Fee’ captures everything that we charge, including taxes - there are no additional administration fees or commissions. This structure means, however, that when there are changes to our operating costs, the firm either benefits when costs decline or is hurt when costs rise. In 2008, Steadyhand’s profit margins improved due to the decrease in GST, but during our 4½ year history it has mostly been a one-way street in the other direction. We were prepared for the ever increasing regulatory burden and other unforeseen costs, but the introduction of HST truly hammered us.

HST

The harmonized sales tax, which was introduced in Ontario and B.C. on July 1st, 2010, applies to mutual fund fees, just as GST does. The tax was easily passed on to the investors by most firms, because virtually all mutual funds are priced on a ‘plus taxes’ basis (When the audited numbers for 2011 come out, we’ll see the full impact of HST on fund MERs).

We decided not to adjust our fee scale in 2010 because there was too much uncertainty at the time. Because the tax is patently unfair to managed investment products (see HST Will Hurt Investors and Their Nest Eggs), we were hoping the government might provide some relief (NOT). Also, the always volatile political scene in B.C. was thrown for a loop when Premier Campbell and the opposition leader both resigned and former Premier Vander Zalm started a vigorous campaign against HST. From a bottom line point of view, it was expensive to wait and watch, but we felt it was prudent.

Since then, the political landscape in B.C. hasn’t cleared up much, but the citizens did vote to get rid of HST. The government is currently working on a plan to phase it out.

Options

At the end of the day, sticking to our existing fee scale was not an option. Steadyhand is designed to be a low margin firm, but not a ‘no margin’ firm. So in weighing our options, we considered four key factors – fairness, long-term cost effectiveness, simplicity and flexibility.

After working through all the issues, it essentially boiled down to two alternatives. One was to raise the fees (as we’ve announced) and the other was to create a new class of fund units to be used only by clients in HST provinces (in our five-province world, that means Ontario).

The fee increase option scored high on simplicity and costs. We wouldn’t have to make our fee schedule more complicated or incur additional costs related to custody, record keeping, communications and client service. The downside, however, is that while the impact is small, this option is not as equitable – clients in the non-HST provinces are helping pay for Ontario’s additional tax.

Setting up an additional class of units is something that is done all the time in the mutual fund industry. Most funds have multiple classes, each designed for a different distribution channel. Most funds also have much higher fees. For us, this would have been the fairest way to deal with HST. We would have shifted our Ontario clients into an ‘HST’ class, while our other clients stayed in the existing ‘A’ class. This option would have also given us more flexibility in the event that any of the other provinces went the HST route.

Tradeoffs

We agonized over this decision (many meetings over two years), but decided on the first option. The desire to keep our offering simple and the overall costs down carried the day. Obviously, the fairness issue weighs heavily on us, although it is hard to know where to draw the line. Every client has a different cost structure depending on their needs, complexity and location.

I should note that we will continue to absorb part of the HST impact. If we were to fully flow it through, the fee increases would have been higher.

It should also be noted that we’re not alone in going this way. There are only four firms that created an HST class of units, and in recognition of the added costs, only one firm did it for all their funds.

The Dangerous Rise of an Obsession with Safety

Mon, 31 Oct 2011 14:41:39 PDT

The Globe and Mail, Report on Business
Published October 29, 2011

By Tom Bradley

“Creep.” The dictionary defines it as a “slow and stealthy movement.” To me, it’s something you don’t notice while it’s happening, but later when you do, you go “Wow!”

If you think about our lifestyle, we’ve slowly moved to a place where jeans are appropriate everywhere (almost), we drink a milkshake every day (otherwise known as a latte), we’ve allowed BlackBerrys and ball caps to erode our manners, and we’ve radically altered our definition of a small apartment and large home.

As for investing, there’s been plenty of creep, some of it due to poor stock returns in recent years, and the rest related to the market’s extreme volatility. Investors are slowly and stealthily moving away from their strategy of holding a diversified portfolio of long-term securities.

Caution creep

Today every investment discussion and sales pitch is laden with words like caution, capital preservation and downside protection. In the context of recent markets, this is understandable for retirees, but it’s also part of the conversation for investors who have 10, 20 or more years until retirement. As a result, investors own fewer assets with the potential to generate a return in excess of the risk-free rate.

Caution creep has taken many forms. Sometimes it’s purposeful – new money goes into a GIC instead of an investment portfolio. Other times, it’s oblivious – money is moved slowly from one account to another, or cash is left to accumulate in a bank account over a number of months. In either case, the result is the same – the overall portfolio has a lower equity weighting than the long-term plan calls for.

When changes are made, they’re often toward a more-conservative investment. Instead of an equity fund or broadly diversified Balanced Fund, it’s a Monthly Income Fund that’s focused on dividend-oriented stocks or a structured product with capital guarantees.

In a recent column, I projected stock returns of 7 to 10 per cent per annum over the next five to 10 years. I can be accused of being too optimistic, but I have a lot of room to be wrong when compared to investors who are protecting themselves all the way down to a return of 2 to 4 per cent.

Parochial prudence

Foreign stocks are a big reason Canadian investors are unhappy with their returns. Over the last 10 years, the MSCI World Index had a return of minus 0.5 per cent (in Canadian dollars). There are explanations for this lost decade – the loonie going from 70 cents (U.S.) to par; the U.S. going from glory to despair and Europe just going – but they don’t matter. Investors, who were maxing out on U.S. and international stocks a decade ago when leading companies were trading at 30 times earnings, now have minimal holdings outside of Canada when multiples are 8 to 12 times.

It’s worth noting that the most popular balanced products, the above-mentioned Monthly Income Funds, have little or no foreign content.

Hedged to the hilt

Increasingly, the foreign investments that remain in portfolios are currency-hedged. A number of fund companies offer hedged versions of their U.S. and international equity funds and virtually all foreign-equity ETFs are hedged. A volatile dollar and love for everything Canadian has moved investors away from currency diversification, just when the loonie has achieved par with the greenback.

Economists everywhere

With today’s volatility, the consequences of buying a stock or equity fund at the wrong time have been magnified. A new purchase can be down (or up) 5 to 10 per cent in a heartbeat. As a result, investors are becoming more short-term-oriented. Even fund managers who are good at analyzing companies and doing valuation work are being sucked into the macro game. I’ve talked to a number of them who’ve deferred purchase of well-priced stocks (according to their models) because they need more clarity on central bank and government policy. Yikes, stock managers are becoming economists along with the rest of us.

As investors, it’s important that our portfolios are the result of a calm, objective, valuation-based analysis, not creep. In my view, we’ve crept to a place that reflects what happened in the last 10 years, not the next 10. Market volatility has obscured the attractiveness of common stocks and past performance has put Canada on too high a pedestal.

Crystal Clear

Fri, 28 Oct 2011 13:31:59 PDT

By Tom Bradley

Oracle, which is a holding in the Equity Fund, announced a takeover bid for RightNow Technologies this week. In the past, Oracle has proven to be an effective and disciplined acquirer, but there is talk on this one that they paid too much – over 5 times sales and 50 times 2012 earnings according to the Financial Times.

I don’t think anybody would doubt Oracle, however, if they read the description of RightNow in the regulatory filings. The company sells a "comprehensive customer experience solution for consumer-centric organizations to enable interactions across web, social and contact centre touch points." It’s easy to see what Larry Ellison saw in RightNow.

China Deconstructed

Mon, 24 Oct 2011 11:18:52 PDT

By Tom Bradley

I came across a talk by China-based professor Michael Pettis on Paul Kedrosky’s ‘Infectious Greed’ blog. For those who are interested in China and where it’s headed, I highly recommend these 38 minutes. It’s heavy duty economics, but the points are made clearly and methodically.

Mr. Pettis’ comments are a cautionary tale. China’s growth has been impressive, but has created distortions in the economy. The country is highly dependent on investment spending for its growth (factories, mills, roads, bridges, airports, trains). In turn, it has increasingly become dependent on available credit. Debt levels overall are still manageable, but Mr. Pettis points out that the pace of loan growth is unsustainable. He also talks about the impediments getting in the way of the Chinese consumer becoming a bigger factor in the economy, something that the country desperately needs.

False Comfort

Fri, 21 Oct 2011 11:40:15 PDT

By Tom Bradley

In the economic discourse of today, the camp that says we’re going into the tank has lots of ammunition. You don’t have to go past the front page of the newspaper to know we’ve got issues. For those arguing that we’ll be OK, or at least not have a severe recession, it’s tougher sledding. They have some good points to make (emerging economies will carry us, inventories are down, Japan is bouncing back, the U.S. housing market has nowhere to go but up, corporate balance sheets are strong, etc.), but these points are being overwhelmed by the negative headlines.

I like to cheer for the underdog, but I don’t like the fact that the ‘we’ll be OK’ camp is regularly justifying its position by referencing what’s going on now. We’re not going into recession because:

“Demand is good right now. Order books are still solid.”

“Corporate profits are outstanding this quarter. They’re coming in ahead of expectations.”

“With rates so low, real estate is still moving.”

As consumers of financial information, we have to be careful to not get caught up in the ‘right now’ arguments. Right now doesn’t matter when it comes to capital markets. Mr. Market is always looking ahead. He could care less about conditions today.

I’m more in the ‘we’ll be OK’ camp than that other one, but I take no comfort from the fact that right now car sales are good, iPads are flying off the shelf and restaurants are busy.

Job Opportunity: Mutual Funds Administrator (Part-time)

Fri, 21 Oct 2011 11:34:54 PDT

We are currently seeking a Mutual Funds Administrator to work with us through the 2012 RRSP season. This is a temporary, part-time position that will last from November to March. Work hours will be roughly 9:00 AM to 1:00 PM, with some flexibility.

For further details on the position and its responsibilities, click here.

If you are interested in applying for this position, please contact us via email only at jobs@steadyhand.com.

Emerging Markets - A Slam Dunk?

Tue, 18 Oct 2011 11:22:48 PDT

By Tom Bradley

China, India and the other emerging economies will grow considerably faster than the developed world over the next ten years. That statement appears to be as close to an economic certainty as anything we can say today.

Does it follow then that any reasonable investment strategy should be heavily stacked towards securities from these countries? Presumably, they will grow faster and deliver better returns to their shareholders over the long run.

The answer is yes, portfolios should have meaningful exposure to emerging markets. Should they be heavily stacked? Read on.

Emerging market stocks are a great example of where the price paid has to match up with the potential. In the past couple of decades, there’s been money to be made, but investors’ timing and skittishness has resulted in disappointing returns.

In his latest letter, Howard Marks, the Chairman of Oaktree Capital Management, addresses this point.

“I don’t mean in the least to suggest that the outlook for China, India and the rest of the emerging markets is less than bright. In fact, I’m sure they’ll out-grow the developed world over the remainder of the century. The problem, however, is that simplistic, mania-following investors elevated emerging markets to the pedestal of the “sure thing” where nothing can go wrong. And when prices incorporate unlimited virtue, the eventual result is bound to be disappointment, disillusionment and depreciation. Even favourable developments can lead to losses when they fail to measure up to expectations. That’s been the case in the emerging markets.”

Staying with Mr. Marks for a moment, it seems appropriate to bring out one of his well-traveled quotes.

“No asset can be considered a good idea (or a bad idea) without reference to its price.”

In the Steadyhand equity funds, we’ve been gradually increasing our exposure to emerging markets over the last year. It’s come in two forms – directly in companies located in the emerging market countries and indirectly through western-based firms that have meaningful and growing emerging market revenues. Stocks we’ve bought or added to include Unilever (Netherlands), Asia Pacific Breweries (Singapore), China Mobile (China), Dongfeng Motor Corp. (China), HSBC (UK), Samsung Electronics (Korea), Mead Johnson (U.S.), Dairy Farm International (Hong Kong), Bridgestone (Japan), SK Telecom (Korea) and Singapore Telecommunications (Singapore).

All of our managers are aware of the potential that emerging markets offer. They are looking for the best vehicles to tap into that potential and are carefully considering the price.

Resolving the Conflict Between Good Advice and Running a Business

Mon, 17 Oct 2011 08:31:38 PDT

The Globe and Mail, Report on Business
Published October 15, 2011

By Tom Bradley

I’ve written in the past about the tension between the investment profession and the investment business. As asset managers, we need to find a balance between managing portfolios to achieve the best return for our clients, and making a profit for our firms’ shareholders. In a recent paper published in the Financial Analysts Journal, Charley Ellis says the industry has failed to find that balance. “We are losing the struggle to put our professional values and responsibilities first and our business objectives second.”

Mr. Ellis is a thoughtful, well-connected industry observer. He’s consulted to investment firms for decades and written a number of books, including an industry standard, Winning the Loser’s Game: Timeless Strategies for Successful Investing. In his article, entitled “The Winners Game,” he outlines three errors that are leading to this inappropriate balance between values and business objectives.

First, we’re defining our mission incorrectly. It’s no longer reasonable to tell clients that our focus is on beating the market. Evidence shows that it’s hard for active managers to outperform the indexes because there are so many skilled, well-informed people competing against each other. As Mr. Ellis said to me recently, “The more smart people there are trying to beat the market, the less likely it is to happen.”

The second error cuts to the heart of the profession-business balance. Mr. Ellis says we have our priorities wrong. “As investment management organizations have been getting larger, it is not surprising that business managers have increasingly displaced investment professionals in the senior leadership positions or that business disciplines have increasingly dominated the old professional disciplines.” He goes on to say, “When business dominates, it is not the friend of the investment profession.”

I could write at length about these two errors of commission, but it’s the third error, one of omission, where Mr. Ellis’s perspective is the freshest. He calls it, “the largest problem and the best opportunity for our profession going forward.” While we’ve been trying to beat the market, outsmart each other with innovative products and feverishly gather assets, we’ve given short shrift to something that will help our clients more than anything else – effective investment counselling.

In conversation with Mr. Ellis, it becomes clear that he doesn’t consider investment advice to be rocket science, but rather basic blocking and tackling. From my perspective, it involves putting a plan in place with a prescribed long-term asset mix. It means executing the plan in a simple and consistent way. It means looking ahead and preparing for the down periods as being inevitable as opposed to being a surprise. And most assuredly, sound counsel means spending more time with clients when markets and emotions are at extremes, not less.

The industry’s biggest failure is not its products and services per se, but how clients use them. It’s been well documented that, in aggregate, investors suffer from a behavioural gap – their portfolios don’t do as well as the funds and products they invest in. That’s because they trade too much, chase past performance and generally stray from their plan. Don’t get me wrong, there are plenty of bad investment products out there, but the gap comes largely from misuse.

Unfortunately, the industry is doing more to widen the gap than narrow it by advertising last year’s best performers and introducing a constant stream of new products. Pumping a hot fund through multiple distribution channels is hugely profitable, but ensuring that it’s used correctly by the appropriate clients is not. Investment counselling is bad for business in the short term – it takes time, costs money and is not very scalable.

Mr. Ellis’s article may serve as an indictment of the industry, but as the title implies, there is plenty to be positive about. If we recalibrate our priorities a little, be more ruthless about eliminating products and business practices that hurt clients, and think more about client returns as opposed to fund returns, we’d be taking a big step in the right direction. All of this might hurt profitability (and I’m not even sure about that), but as Mr. Ellis points out, it’s certain to be successful. That’s the kind of risk/reward tradeoff all investment professionals are looking for – possible short-term pain, certain long-term gain.

It Was an Ugly One

Wed, 12 Oct 2011 12:03:06 PDT

By Scott Ronalds

In preparing our Quarterly Report, I compiled some numbers that speak for themselves:

Global stock markets had their worst quarter since Q4 2008
Greece was down 42%. Italy, France and Germany were all down 25%. Canada was down 12%. Japan was down 11% (all in local currency terms)
Almost every major European market has a P/E below 10 and dividend yields are commonly north of 4%
The loonie hit $1.06 US in July and ended the quarter at $0.95
Oil fell 17%
Base metals fell by more than 20%
The Government of Canada 10-year bond yield dropped from 3.1% to 2.1%
The US Treasury 10-year bond yield dropped from 3.2% to 1.9%
The DEX Universe Bond Index was up 5.1% - its highest quarterly return since 1996
North American sovereign bond yields are at levels not seen since the 1940s

For stock investors, it was an ugly quarter. Bond investors, on the other hand, had a heyday. Looking ahead, it seems pretty evident where the opportunities lie. Hint: it’s not government bonds.

Podcast: Third Quarter Review

Tue, 11 Oct 2011 09:19:47 PDT

By Scott Ronalds

It was an ugly quarter for stocks, with most major markets suffering double-digit declines. The bond market, on the other hand, had its strongest showing in 15 years (government bond yields now stand at levels not seen since the 1940s).

Our funds declined, but held up better than the market. Their focus on high-quality, non-speculative companies helped dampen negative returns.

In this podcast, we review the quarter in further detail and highlight some of the key takeaways from our Quarterly Report.

Download, subscribe via iTunes or RSS, or listen now:

Getting Sentimental

Fri, 07 Oct 2011 08:45:26 PDT

By Tom Bradley

We write a lot in this space about investor sentiment. Art Phillips, the founder of Phillips, Hager & North, taught me to pay attention to the mood of other investors. Like every tool, sentiment is not a failsafe indicator, nor is it a precise timing tool. It is, however, a good check against getting too carried away in one direction or another. If everyone is bullish, it’s time to get more cautious. Everyone else knows the good news too. If the consensus is firmly in the bearish camp, it’s time to focus the research efforts (and trading tickets) on the buy side.

The Canadian Couch Potato posted a good piece this week on where investor sentiment is today. He referred to a survey of 200 institutional money managers carried out by Morgan Stanley. The managers were asked, “What best describes your attitude to global stocks right now?” The results showed that they were pretty evenly divided across four distinct categories:

“I’m buying stocks now” (20%)
“I’m waiting for an entry point after the policymakers get their act together” (30%)
“I’m continuing to sell” (25%)
“I’m confused” (25%)

I don’t know where this mishmash would come out on Art’s sentiment indicators, but it’s cautious and confused enough to tell me that it’s a better time to buy than sell.

Enough Blame to go Around

Mon, 03 Oct 2011 16:07:08 PDT

By Tom Bradley

Dan Hallett published an article today about mutual fund fees and how they compare to the U.S. It puts some meat on a topic that so far has been laden with hyperbole. Management expense ratios (MERs) are a lot higher in Canada, but as Dan points out, the comparison isn’t apples-to-apples. Generally, Canadian MERs include a charge for financial advice, whereas U.S. MERs don’t. He refines the comparison by adjusting for advice and taxes.

The bottom line is that Canadians pay too much for wealth management. Higher management fees contribute to the difference, but there are other issues at work. Poor transparency has led to a situation whereby most people don’t know what they're paying, who it’s going to and what it’s for. That is turn means too many investors are paying for advice but not getting it.

As Dan says, the mutual fund industry “has its share of blemishes”, but the distributors, who keep almost half of those high Canadian MERs, also need to be held up to scrutiny.

Investing Certainties in an Era of Economic Doubt

Mon, 03 Oct 2011 08:20:50 PDT

The Globe and Mail, Report on Business
Published October 1, 2011

By Tom Bradley

“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.”

These words are from the late Peter Bernstein – analyst, strategist and author of Against the Gods: The Remarkable Story of Risk.

When we look at today’s investing landscape, there’s a lot we shouldn’t be certain about in the political, economic and business arenas. But at the risk of ignoring Mr. Bernstein’s counsel, the current market fray does make me more confident about some things.

Bond returns will be poor

With a further decline in yields, the math for bondholders is even more dismal than it was just a few months ago. If yields stay at these low levels, investors are going to earn 2 per cent before commissions, fees and taxes. If rates rise, they’ll eventually achieve better returns, but not before experiencing capital losses on their existing bond holdings.

Expect more from stocks

Stock prices always take a more winding path than do the company fundamentals that underpin them. With a recession looming, the outlook for corporate profits in the short (and perhaps medium) term has worsened. But true to form, stocks have more than reflected that and price-to-earnings multiples are now down to attractive levels. This has occurred despite the fact that only a small part of any stock’s value is derived from near-term earnings.

At client presentations in January, I suggested that stock returns over the next five-plus years would be between 5 and 8 per cent. I arrived at that intentionally wide range (I’m uncertain) by adding dividends (2 to 3 per cent) to corporate profit growth (3 to 4 per cent) and assuming no change in valuation multiples. (Note: The growth number is well below the historical pace of 6 per cent). Today, however, my range is 7 to 10 per cent. To get there, I’ve left the first two variables unchanged (although dividend yields are higher now) and built in an improvement for future valuations, which will produce higher returns.

Relax, everyone is bearish

An investor was recently heard to say, “The market may not have bottomed yet, but I have.” I’ll resist quoting Warren Buffett, but suffice to say that when everyone is beaten up, discouraged and fearful, risk in the market is substantially reduced and opportunity is greater. That’s because when people are negative, most of the selling has been done and the bad news is largely factored into security prices. A bearish consensus is a prerequisite for a market bottom and sets the stage for above-average returns on the way back up.

Moving from market generalities to portfolio specifics, there are a few other things I’m more certain about. First, investors in the accumulation phase who have a long time to invest are being given a gift. At current prices, they can buy more shares with the same amount of money.

Second, investors who haven’t yet rebalanced their portfolios have a lower percentage in stocks than they did when the market started its decline six months ago. If they want to ride the market back up with as much as they went down with, then it’s a mathematical certainty they’ll need to do some buying.

And finally, this is a time when investors should lean on their long-term plan, not rewrite it. It’s tempting to make changes that match the magnitude of the market declines, but what’s called for are small, incremental moves (that is, rebalancing). With emotions running high, the chance of a major overhaul going seriously wrong is also high.

Mr. Bernstein says market bottoms are defined by a “switch from doubt to certainty.” On that measure, I don’t know if we’ve seen the lows yet. Certainly, I’m guilty of being more confident about some things, but be assured my list doesn’t include what’s going to happen to Spain, interest rates, gold, Swiss francs, credit spreads, correlations, GDP growth, copper, volatility, the U.S. dollar, profit margins, China’s real estate market, natural gas or where the market will be next month.

Black Hole Rip-off Zone

Wed, 28 Sep 2011 14:30:55 PDT

By Tom Bradley

Below is an internal email from Chris Stephenson today. It wasn’t meant for public consumption (it’s an email, not a blog), but Chris is OK with me doing this.

With David’s experience with the [un-named fund company] rip-off, the Globe article about $1,305 in transfer fees and a couple experiences I had yesterday, it occurred to me that the industry’s transfer process is seriously letting down clients.

Not only the hefty fees, but the time it takes and the concurrent market risk. Because it’s paper based, forms are prone to hang out on an advisor’s desk or get caught up in bureaucracy. And don’t get me started on the lack of transparency / status updates.

The OSC’s discussions about implementing Fiduciary standards are nice and everything but how can the industry ever consider itself fiduciaries without addressing this giant black hole rip-off zone?

The Usual Suspects

Mon, 26 Sep 2011 09:09:36 PDT

By Tom Bradley

"The risks are the usual: what you don’t know; what you’re not thinking about; probably the biggest risk is what you are 100% sure about.”

Bruce Berkowitz, Fairholme Capital Management, in a speech at Columbia University earlier this year.

Hollow Reassurance

Thu, 22 Sep 2011 14:44:30 PDT

By Tom Bradley

The CBC woke me up this morning with rain warnings (Is summer really over?), big stock market declines and the voice of Finance Minister Jim Flaherty. The rain and markets didn’t get me too worked up, but I found the minister’s attempt at optimism to be disconcerting. Even in my semi-conscious state, his statements were too sanguine for my liking.

In the commentary below, I’ve paraphrased what Mr. Flaherty said and then added some perspective. I’m not doom and gloom on Canada, but I do think his comments need a counterpoint.

Canada’s economy is in much better shape than the rest of the Western world.

This is true, but he’s talking about present day. Reassurances about the future based on what’s happening today are … well … useless at best and irresponsible at worst. One of Federal Reserve Chairman Ben Bernanke’s most infamous lines came in the spring of 2006 when he tried to provide reassurance about the U.S. housing market. He said, "it looks to be a very orderly and moderate kind of cooling at this point." (An Orderly Decline of the Housing Market? Not.) With finance ministers, central bankers and economists, always be careful when they justify predictions about the future with facts from the present.

Canada has more room to move if things slow down.

I suppose that compared to Europe and the U.S., Canada has a little more firepower to fight a recession, but he glossed over two important points. First, we may have more in the cupboard, but it’s mostly crumbs. We’ve been running a $40 billion deficit while the economy has been strong and our resource and housing industries have been humming. Mr. Flaherty’s government has already used up most of its fiscal stimulant.

And as for interest rates, I don’t think we can say that a 1% bank rate (vs. 0.25% in the U.S.) is a huge advantage. From these levels, lower interest rates won’t do anything. It’s only crumbs here too.

In summary, we’ve got almost no ability to soften the impact of a global recession. To think otherwise is misguided.

From conversations with business people, the thing that’s holding back the economy is the uncertainty. Businesses need to recognize that Canada is in good shape and get on with it.

Certainly, we’d all like to see the business community forge ahead and take advantage of the current dislocations in the world. Their reticence, however, is understandable for a couple of reasons. Canadian businesses are highly dependent on exports and yet, they’re not feeling very competitive these days. As one portfolio manager said to me recently, “Canada isn’t low cost at anything it does and is high cost at a lot of things it does.” The second reason is that their two big customers – the U.S. and China – aren’t what they used to be. The U.S. outlook is uncertain and there are cracks starting to show in the China machine. So while our world-beating stock market hasn’t necessarily reflected it, our economy is what industry professionals describe as ‘high beta’. In other words, it will be more volatile than the global economy overall.

Maybe I just got up on the wrong side of bed, or the rain and markets have me in a foul mood, but I don’t think Minister Flaherty’s hollow pep talk is what we need right now.