Steadyhand Blog

Housing Stocks Make me Squeamish; I'm Glad We've Got a New One

Wed, 04 Nov 2009 13:11:42 PST

By Scott Ronalds

Housing stocks make me squeamish. It was painful to watch them fall like a rock over the last couple of years as the U.S. real estate market imploded. A number of companies faced bankruptcy or saw their share prices slashed due to stretched balance sheets, huge unsold inventories and weak consumer demand.

Our global equity manager, Edinburgh Partners Limited (EPL), took their lumps on Pulte Homes, a Florida-based builder, which they sold last year after their worst-case-scenario estimates on the company’s book value and earnings were realized. Although the position was fairly small, Pulte was a clear loser for unitholders of the fund (including yours truly; the fund represents 25% of my portfolio). EPL made some strategic moves when the markets were bottoming and has since regained much lost ground, but Pulte sticks with me for whatever reason.

The U.S. housing market is still a pretty ugly place. Especially in places like Arizona, California and Nevada, where speculative activity was the highest during the days of mad flipping. Yet, as the economy pulls itself out of recession, opportunities are emerging. While there are still plenty of foreclosures, there are signs of a floor being reached in many markets, and unsold inventories are winding down. For those with a very high tolerance for risk, an investment property in Scottsdale, San Diego or Vegas may turn out to be a big winner a few years from now.

For more conservative investors, taking a longer term view on homebuilders could prove to be a good bet. As the economic storm passes, the best of the group will return to profitability in a world with fewer competitors and more end-users (i.e., those looking to buy a home to live in, rather than trying to sell it for a quick buck). Edinburgh Partners feels the risk/reward tradeoff is enticing enough to revisit the sector, and they’ve found what they believe to be a good opportunity in DR Horton, a Texas-based homebuilder. They like Horton because the stock satisfies all of their requirements from a valuation perspective (e.g., it’s cheap on a number of measures). The company is also one of the largest homebuilders in the U.S. and their focus is on the lower end of the market with respect to price point. In other words, their homes are affordable and appealing to first-time buyers.

Pulling the trigger on a housing stock right now may not feel overly comforting. Yet, the best investments are often made when you feel the least comfortable. Tom referenced this notion in a recent Globe column where he quoted the late Peter Bernstein, “If you are comfortable with everything you own, you’re not properly diversified.”

I felt pretty uncomfortable eight to twelve months ago when EPL was buying bank stocks, Chinese internet companies and Hong Kong land developers, but those investments have since proven to be very wise. This is what we pay them for. They take emotion out of the game as best they can and buy undervalued stocks, wherever they may be found. And their experience and longer-term track record speaks for itself.

So go ahead, make me squeam.

Be Wary of Candy-coated Mutual Funds

Sun, 01 Nov 2009 10:47:38 PST

The Globe and Mail, Report on Business
Published October 31, 2009

When you're trick or treating, keep an eye out for mutual funds dressed up as closed-end funds.

The latest innovation to take hold in the Canadian wealth management industry is “closed-until-open” funds. There has been a wave of new offerings that start out as closed-end funds, but promise to convert into mutual funds (open-ended) after one or two years.

Before looking at the merits of this trend, it's worth reviewing what a closed-end fund is.

Essentially it's a pool of capital that's sold to the public through a formal issue process and then closed to new investment after that. Units trade on the stock exchange, which means that for every seller there must be a buyer.

A key advantage of closed-end funds is that they let the investment managers take a longer-term view, knowing that the assets won't be subject to redemptions. This allows them to invest in securities that can't easily be liquidated such as private companies, infrastructure projects and real estate. It also allows them to use leverage and pursue more exotic derivative strategies.

Closed-end funds generally have lower ongoing management fees than other investment products, but there are tradeoffs. The biggest one is the upfront cost. The initial buyers pay for bringing a fund to market, so after all legal, regulatory, underwriting and marketing costs, as well as sales commissions, only 93 cents of every dollar is available for investment.

The other downside is that liquidity is unpredictable and also comes with a cost – explicitly through a commission and implicitly through a discounted price to net asset value (which is typically the case).

The key takeaway here is that closed-end funds are specialized vehicles designed to fill particular niches. Unfortunately, they have evolved from being permanent pools of capital aimed at non-benchmark investments to front-end load mutual funds in costume. They now have trailer fees, redemption features and are even reopened to new investors from time to time.

The current closed-until-open versions are little more than launching pads for new mutual funds and exchange-traded funds – a way to quickly bring a hot theme or celebrity manager to market. They simply transfer the cost from the fund company to the unitholder.

While the conversion is presented as a selling feature, it effectively destroys the economics for an initial purchaser. To buy an initial public offering (IPO), you need to be convinced it is so unique that it will beat the alternatives by 7 per cent over the next one or two years (to offset the IPO costs) and won't be available at a discount a few weeks after issue.

Many of the new offerings have half a warrant attached, which entitles holders to purchase more units at the same price at a future date. The warrants are also being held out as a key attribute, but there is no free lunch here. If the warrant is in the money and is worth something, then the price of the fund will reflect the future dilution (i.e. trade lower). In that case, unitholders are forced to protect themselves from that dilution by either selling the warrants, or coming up with more money and exercising them.

So while there is no value being created for the investor, the warrants are an attractive feature for the issuer, who is guaranteed to have 50 per cent more assets flow into the fund if the price rises (based on a half warrant).

Compared with the mundane world of mutual funds, closed-end funds are like the Wild West. That may sound a touch cynical, and self serving, but I have my reasons for saying it.

First and foremost, discussions about closed-end funds always have a “squirm factor.” I can't find an investment professional who says the initial buyer is getting a good deal.

Second, besides the issuers, there are others riding on the back of those IPO buyers. Hedge funds (and other traders) have strategies in which they buy units at a discount, hedge their market exposure, add some leverage, and make a nice profit when they unwind the trade on the redemption date. To me, there is something wrong with a product on which professionals can repeatedly and systematically take advantage of the amateur.

And I say wild because we get to witness some corporate intrigue on occasion. This year the unitholders of the Citadel funds found themselves in the middle of a courtroom battle over management of the funds. As it played out, they were no doubt left wondering who was managing their money and how distracted they were.

Also this year, the unitholders of the Sentry Select Diversified Income Fund were asked to forgive a loan to the issuer (Sentry Select) as part of a closed-to-open conversion. While a vigorous debate revolved around elements of the restructuring, a bigger question was overlooked. Did the experienced and talented Sandy McIntryre, manager of the fund, really want a prime-rate loan to his own company to be his largest holding?

For these reasons, and the overhyped selling features discussed earlier, investors need to clearly understand why they are buying a new closed-end fund. If there aren't compelling reasons, then it's best to let someone else be the first to reach for the candy. Hang back and go for the raisins instead.

The Scariest Investments of 2009

Fri, 30 Oct 2009 10:52:28 PDT

By Scott Ronalds

We could’ve had some fun with a list of the scariest Halloween costumes this year. Bernie Madoff, Allen Stanford and Jon & Kate come to mind. But we thought it would be more educational, and just as fun, to highlight some of this year’s scariest investments. Queue the Monster Mash.

Leveraged ETFs
These products, which double-up your exposure to the daily performance of an underlying investment (often a commodity, currency or market index), have scared the #*&! out of investors who bought them without doing their homework. This is because they track the daily performance of the underlying investment, not the annual performance. They are designed for short-term speculators and professional money managers, not the average investor. Take the Horizons Beta-Pro NYMEX Crude Oil Bull Plus ETF, and its sister, the Bear Plus ETF. The former is a bet on the price of oil (futures contracts) rising; the latter on oil falling. As of the end of September, the underlying investment that the ETF tracks (the NYMEX Light Sweet Crude Oil Futures Contract) was down roughly 5% on the year. Yet, the Bull Plus ETF was down 36%, and the Bear Plus product was down 42%. Yikes!

Money Market Funds
The Bank of Canada’s key lending rate sits at 0.25%. The good news is that it’s extremely cheap to borrow money if you’ve got a sparkling credit record. The bad news is that you’re looking at earning very little on lending your money to those with sparkling credit records (i.e., the big banks and corporations). After fees, investors can expect next to nothing on money market funds until the central banks raise short-term rates. Spooky prospects indeed.

Maple Leafs Seasons Tickets
1-7-2. Need we say more.

Guaranteed Target Date Funds
Marketing-driven, fee-laden, and deceptively complex is how the boss referred to these products in an earlier blog. Target date funds (also known as life-cycle funds) are managed for a particular demographic (i.e., investors retiring in the year 2010, 2020, or 2030) and the manager adjusts the asset mix as the retirement date approaches. Not a bad idea in concept. But it’s the guarantee that comes with these products that really throws them off the rails (not all target date funds come with guarantees). When the markets turned sour last year, the asset mix on several of these funds was ‘shifted’ to ensure the guarantee could be paid out and the issuer wouldn’t lose any money. The problem is that many of these funds are now invested 100% in bonds but the target end-date is 10 or more years into the future. Investors are thus faced with minimal future growth prospects and may have to hold on to the product for 10 or more years for the guarantee to kick in. Simply terrifying.

The U.S. Dollar
The greenback has had a rough year so far against most major currencies. It’s fallen roughly 15% against the loonie and is down significantly on the euro as well. With parity closer by, however, it may be an opportune time to revisit your asset mix. If it’s off balance, you may want to creep up your U.S. exposure. Or at the least, your dollar should go farther in your cross-border fireworks shopping this year.

A Latter-Day Charles Dickens?

Thu, 29 Oct 2009 15:50:20 PDT

By Scott Ronalds

In a recent article written about Steadyhand titled Mischievous Strangers and a Steadyhand, Karin Mizgala draws a connection between Tom Bradley and Charles Dickens. Very flattering. Especially when compared to some of the other comparisons thrown around the shop.

Karin, a fee-only financial planner and co-founder of the Women’s Financial Learning Centre, is referring to Tom’s frequent writing on the problem of relying on “mischievous strangers” (i.e., economists and financial analysts) to do our thinking and investing for us. In Dickens’ novel Hard Times, he similarly comes down hard on the bankers and other financial experts of the day and “rages against their dubious use of statistics to confound and befuddle the common man.”

Karin mentions Steadyhand’s commitment to educating the public about the investment industry from an “insiders” perspective and how we (Tom) are not afraid to express controversial views. She also has some kind words about Steadyhand’s investment philosophy and transparency in her article, which of course makes it a must-read.

We couldn’t have said it better ourselves – that’s what this blog is all about. And for those of you ladies who are interested in quality financial education programs which speak to women, check out the WFLC’s website (a little back-scratching, in the interest of transparency).

A Pop Quiz

Wed, 28 Oct 2009 08:49:05 PDT

By Tom Bradley

Quick. It’s February 28th, 2010. The Olympics are just ending and you have to make a last minute RRSP contribution. What would you do?

Five seconds.
Four.
Three.
Two.
One.

Time is up. OK. If you answered:

Put it in the Money Market Fund and think about it later;
Go with whatever your advisor is talking about;
Look at what’s been doing well; or
I don’t have a clue,

...then you’re not where you need to be. Forget about February 28th. You don’t know where you’re going now. You don’t have a plan...a framework...a road map.

The correct answer?

Look at every investment, existing or new, in the context of my investment plan;
Don’t let the RRSP deadline determine when I buy or what my mix will be;
Add to my existing holdings in the proportions that I currently have; or
If necessary, use the money to re-balance my portfolio so it’s back in line with my long-term asset mix.

Just testing.

Preaching to the Converted...Absolutely

Tue, 27 Oct 2009 15:25:41 PDT

By Tom Bradley

The preacher: Tim Price, Director of Investment at PFP Wealth Management in the U.K.

The converted: Steadyhand, Manager of the ‘undex’ funds.

As noted in previous posts, I enjoy reading Mr. Price’s weekly note. He challenges the conventional thinking that permeates the headlines and market commentaries. In his October 12th piece, he writes about absolute return investing, how appropriate it is (particularly for the wealthy) and how hard it is to do (psychologically).

Here are three separate but related excerpts from the note.

“The pursuit of absolute as opposed to market-relative returns is complicated by at least three factors, all psychological. One of them is greed. One of them is short-termism. And one of them is the role of irrepressible cheerleader played by the investment media.”

“During bull markets, investors typically crave market-relative returns – they want to beat the market, or at least come close to matching it. Everyone else is making money, they perceive, and they don’t want to miss the boat. That problem is compounded by the self-interested herd-following that passes for professional investment management. During bear markets, on the other hand, investors typically crave security and preservation of capital.”

“Market practitioners and investors of a certain vintage will see the problem inherent in the pursuit of relative returns during bull markets and absolute returns during bear markets. This presumes that market timing can be practiced consistently, diligently and efficiently. I know of no investor on the planet who can time the markets with any form of precision or consistency.”

More Navel Gazing on Balanced Funds

Thu, 22 Oct 2009 10:41:20 PDT

By Tom Bradley

I’ve had lots of feedback on a posting I did on Balanced Funds – some as comments on the blog and other as feedback to me directly.

A comment from a reader aptly named You Missed The Point said, “A good balanced fund with low fees and experienced with active asset allocation would be a great addition to your fund line up. Most people get asset selection wrong...liquidating at market lows or buying at market highs.” Industry consultant Dan Hallett built on the theme by pointing out that for the average investor the behavioral benefits of Balanced Funds may outweigh their other shortcomings.

I’ve said numerous times that we’re pleased with how our clients hung in at the bottom (only a few didn’t) and indeed, did some re-balancing towards equities (it was hard to do, but many did). But these readers have a point. If all our clients had been in a balanced fund (hypothetically), and the fund followed our advice (which it would by design), then on average they would have done better. Everyone would have gone up with more risk than they went down with, instead of just some.

These comments have got me thinking. At this stage, and for the type of client we have (engaged, interested, long term), a lineup without a ‘one-size fits all’ balanced fund or Wrap product is appropriate. They are capable of building their own using our funds and advice. But through that advice and our communications, we have to work harder at eliminating the slippage between what our clients should do and what they actually do. The less sliding the better.

Podcast: Tom Talks with Larry Lunn

Tue, 20 Oct 2009 10:14:57 PDT

By Scott Ronalds

Tom recently sat down with Larry Lunn, the Chairman and founder of Connor, Clark & Lunn (CC&L), to talk shop.

At the front end of the podcast, Larry discusses where we are in the economic recovery and his view on [the hot topic of] inflation. He then addresses some of the strategies that CC&L is pursuing in the Income Fund, and where they are seeing the best value in the bond market.

And we’d be remiss if we didn’t close the podcast by asking the veteran money manager where he sees returns headed over the next 5 or so years, given the extraordinary circumstances we’ve been through over the past 12 months.

If you’ve got 20 minutes to spare, there’s a lot of wisdom to take away. If you’d rather tune in by topic, here’s a breakdown of the conversation:

0 – 2:40. Introduction.
2:40 – 5:12. Where we are in the economic recovery.
5:12 – 8:35. Inflation.
8:35 – 11:35. Strategies in the Income Fund that have paid off recently.
11:35 – 13:10. Bank bonds and other areas of opportunity.
13:10 – 14:12. Corporate bond exposure going forward.
14:12 – 15:15. The U.S. high yield market.
15:15 – 17:25. Strategy with respect to income-equities.
17:25 – 19:02. Medium-term outlook for the markets and the Income Fund.

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

BNN Interview - Canada vs Foreign

Sun, 18 Oct 2009 11:54:47 PDT

Tom was on Business News Network (BNN) on Friday talking about finding a balance between domestic and foreign investments (his Saturday Globe column focuses on the same topic). Canadian investors have an emphasis on Canadian securities, which has served them well over the last few years. But with the loonie nearing par, Canadian corporations are getting less competitive and the prices of foreign investments are becoming more attractive.

Throughout the interview Tom resists the temptation to make short-term currency or market calls, but near the end he falls off the wagon and makes some comments on the economy. It smacked of market timing. What was he thinking? Looks like we’ll have to make some time for media training this week.

If a Country is Too Good to be True...Then Diversify

Sun, 18 Oct 2009 11:12:16 PDT

The Globe and Mail, Report on Business
Published October 17, 2009

Oh Canada! In the constant debate about whether this rally is for real or not, there is an underlying subtext. It relates to how much emphasis investors should put on Canada. In the discussion, there are many who are asking the question, why bother putting any money outside our borders?

The Canadian stock market has been the star of the show over the past decade. With the help of a strong currency, the S&P/TSX composite index has beat the S&P 500 in eight of the past 10 years (in Canadian dollar terms), and nine out of 11 when 2009 is included. And there are persuasive arguments why this will continue.

A report by Scotia Capital entitled "Why you want to own Canada" nicely summarizes them. It points out that Canada's main attributes are: 1) emerging-market exposure with lower volatility; 2) cheaper valuations relative to the MSCI World Index; 3) stronger domestic fundamentals; 4) Canadian dollar strength relative to the U.S. dollar and British pound; 5) proximity to the U.S. economy; and 6) above-average market capitalization companies in financials, materials, technology and industrials.

In a recent Globe column, David Rosenberg referred to Canada as a "low beta [less volatile] way to play the emerging markets via commodity exposure." He went so far as to say, "this period when the Canadian market outperforms its southern peers is barely halfway done."

Individual investors seem to agree. Today, they are generally tilted more toward Canada than even the most bullish strategists are recommending. I regularly see portfolios that have little or no foreign exposure. The arguments for staying at home are compelling, but investors need to understand the strategy they're pursuing when they go all-Canada all the time.

It is important to make a clear distinction between the outlook for the Canadian economy and the arguments for investing in the Canadian stock market. For one thing, the stock market has more exposure to emerging markets than the country does. In the real economy, Canada has done a poor job of penetrating the high-growth, developing markets, outside of the resource sectors. For manufacturers, China isn't a large, growing market, but rather an intense competitor. These companies aren't China plays, but rather "high beta" bets on the U.S. economy. The fact that our resource-rich country is now running a trade deficit illustrates the point.

From an investment point of view, however, manufacturing hardly registers in the market index, so the "Buy Canada" arguments are more applicable.

Of course, going all-Canada is not only a vote of confidence in our dollar and socioeconomic standing, it also means betting heavily on financial companies (31 per cent of the index), energy (28 per cent) and materials (19 per cent).

It means having little or no exposure to consumer products, technology (outside of Research In Motion) and health care, all of which are large, profitable industries with world-leading companies. It could be argued that the best "low beta" plays on emerging markets are these franchise companies that have a global reach, the likes of Procter & Gamble, Coca-Cola and General Electric.

When the current run started in 1999, our market had lagged the U.S. for eight of the previous 10 years (sound familiar?). Canadians were scrambling to increase their exposure to foreign stocks and new investment products were being created daily to help skirt the 30-per-cent foreign content limit on registered retirement savings plan accounts (remember clone funds?). The pendulum of investor sentiment has now swung completely the other way.

To my way of thinking, the long-term mix of an all-equity portfolio should be in the range of a 50/50 domestic and foreign. (I'm comfortable with the diversification that comes from holding a variety of currencies, but for investors who aren't, there are products that remove currency from the equation.) If such a portfolio is reflective of the indexes, which most are, the energy and materials weightings would be reduced to a still significant 20 and 13 per cent, respectively. Financials would drop a little to 26 per cent, while consumer, technology and health care stocks would start to play a meaningful role at 14, 8 and 5 per cent. The portfolio would still have a heavy bias toward Canada's favourite sectors.

At times like this, I can't resist dredging up my favourite quote from the late Peter Bernstein who said: "If you are comfortable with everything you own, you're not properly diversified." Commodity stocks were in the uncomfortable category in 2000, as were government bonds in 2007 and equities in general just eight months ago. Today, anything outside our borders feels uncomfortable.

Perhaps Mr. Rosenberg and crew will be right, but nine years of outperformance over the past 11 doesn't feel like halfway there to me. No matter which way it goes, however, betting on the home team still needs to be done in the context of a diversified portfolio.

Podcast: Third Quarter Review

Fri, 09 Oct 2009 12:10:09 PDT

By Scott Ronalds

In this podcast, Tom and I review the third quarter of 2009.

It was another strong period for equities. U.S. stocks posted their best quarter in a decade, while the TSX and many overseas markets turned in double-digit returns. A rising loonie negatively impacted foreign returns (for Canadian investors), but overall, it was a bright summer for equity investors. Fixed income investors also had much to cheer about, as improving liquidity conditions and sentiment led to further declines in corporate bond yields.

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

Are Balanced Funds Overrated?

Fri, 09 Oct 2009 07:13:41 PDT

By Tom Bradley

In her Mutual Fund column in the October MoneySense magazine, Suzane Abboud looked at what balanced funds did through the market crisis, specifically how they managed their asset mix. A big part of the reason for owning a balanced fund is the expectation that the manager will make changes to the mix to fit the market environment and opportunity set.

Suzane’s research focused on the largest 15 balanced funds, which account for $37 billion, or 44% of the category’s total assets. It revealed that on average the funds’ mix changed little from June, 2008 to March, 2009 – the weighting in cash (15%), government bonds (21%) and stocks (46%) were all about the same, while corporate bonds were higher (15% vs. 13%) and the ‘other’ category was lower. Her conclusion: “the data strongly suggest that balanced fund managers added hardly any value during the crisis. Contrary to public perception, those managers did not actively manage their asset allocation by moving from one investment category to another based on market factors.”

She goes on to say that most funds she looked at have a strategy of sticking to a stable asset allocation, which is OK except that investors don’t need to pay big fees for that.

I agree with Suzane’s view and would add just a few comments:

Balanced funds are one of the most bloated categories when it comes to fees. Too many of them have equity-like MERs, even though they hold a large component of fixed income securities. Anything over 2% is too high.
We also believe that a fixed asset mix is a good strategy for most clients. It brings a discipline to the investing process (i.e. regular re-balancing) and takes emotion out of the equation. If that is the approach a balanced fund is taking, however, it needs to be transparent about it.
As for the managers’ actions, the fact that the funds held the same amount of equities at the bottom, and more corporate bonds, means that they did do a substantial amount of buying. Obviously, clients would have preferred (in hindsight) that the funds had more risk at the bottom than the top, but the managers were taking action.
Indeed, I would contend that balanced funds managed through the crisis better than the average individual investor. The reality is, a vast majority of Canadians went up with a lot less risk than they went down with. I have come across very few investors that held more equities in March than they did the previous June.

At Steadyhand, we don’t have a balanced fund in our line-up. There were a number of reasons for that. First, a ‘one-size fits all’ fund fits some, but not most. Second, we wanted our clients to make a proactive choice as to what their strategic asset mix (read: long term) should be. We didn’t want any automatic defaults. And third, we wanted our clients to be engaged enough to monitor their mix occasionally and re-balance when necessary.

Third-quarter Data Will Expose the Good, Bad and Ugly

Wed, 07 Oct 2009 08:19:46 PDT

The Globe and Mail, Report on Business
Published October 3, 2009

One of the really fun events on the Street is the “Up the Down Market” dinner held annually in Vancouver, Calgary, Toronto and Montreal in support of the Down Syndrome Research Foundation. The focus of the evening is a game based on a stock market simulation developed by professors and students at the Sauder School of Business (University of British Columbia). It is a life-like experience, with prices determined by the buy and sell orders, and it provides a good illustration of how security prices can occasionally get detached from their true value.

At one stage in the game, a stock my Steadyhand team and I had been accumulating (Jack's Energy Shack) dropped to $10, down from its starting price of $25. While it appeared that Mr. Market had delivered bad news, the opposite was true. The price decline had given us an opportunity to buy more, such that we now had a large holding at a low price. We didn't know when Jack's would recover or, indeed, if it would at all, but we'd done what we wanted to do – build a portfolio where the reward/risk balance was heavily in our favour.

In the trenches of the buy side, there are times when we get a chance to buy a company or entire sector that we like at a depressed price. When that happens, we're delighted. It's what we live for. But the excitement wears off the longer the price stays down. After a few rounds of buying (perhaps at a lower price each time), the position gets maxed out – it isn't prudent to own more, no matter how cheap it is. So our down-and-out stock is now a large holding that doesn't have any friends. But in real life it's not like the dinner game where we only had to wait one glass of wine to find out if we were right or not. In the real world, a fundamentally sound stock can stay out of favour for two or three years.

If we stick it out and the stock eventually doubles or triples, clients will regard us as being disciplined and patient. If it doesn't, we're just plain stubborn.

As it turns out, we sold Jack's Energy Shack at $60 and went on to finish second in the game (out of 31 tables). We left the room oozing discipline and patience.

Because of the extreme market swings over the past two years, all portfolio managers have had a period when they were seriously offside. The funds that performed admirably in 2008 and the first part of this year (i.e. went down less than the rest) have lagged seriously behind in the past six months. That's because the less cyclical, conservatively financed companies that held up well during the market crisis didn't get a full liftoff when the “Dash for Trash” started in March.

As the performance numbers come in for the third quarter, the data are going to be rich with information. In the Globefund tables and the institutional performance surveys, we're almost certain to see that last year's leaders are this year's laggards. There will be exceptions – funds that did well or poorly in both periods – but they will be rare. That's because the managers that got the first part right would have needed to completely overhaul their portfolios to keep up with the leaders on the way back up. That's hard to do at the best of times, let alone when we were all gasping for air amid the unprecedented volatility.

The value of the data will not come from the recent results – last quarter's performance is a great predictor of, well, last quarter's performance – but rather what it reveals about the managers' actions and medium-term returns, and how that matches up with their marketing brochures. More than any other period I've seen, their wares are exposed for all to see.

I'll be looking to see if a fund's volatility was in keeping with its objectives and approach. All funds went down more than expected, but there is still information to be gained from the relative pecking order. I want to see if a fund's recovery is reflective of its decline. Markets haven't nearly returned to where they were two years ago, but the funds that were hit the hardest should have had the most octane on the way back up. We now have a fuller picture as to what the round trip will look like.

Just like any one round in the game, the Sept. 30 results are just a snapshot at a point in time. Indeed, it's a group shot where some of the funds look better than they really are while other funds' beauty just doesn't show through. How they look that day is not as important as how they got there and what they're going to look like in future pictures.

Who's Managing Your Fund?

Wed, 07 Oct 2009 08:19:04 PDT

By Tom Bradley

In a recent posting (Complacency: A Major Misstep of Mutual Fund Investors), I talked about how commonplace fund mergers and manager changes have become in our industry. I referred to manager changes at Trimark, fund mergers at Ethical and Northwest Mutual Funds, structural shifts at Bank of Nova Scotia, and the likelihood that Manulife's purchase of AIC would result in numerous changes.

Manulife issued a press release today announcing that the acquisition had closed and providing some clarity as to how the funds are going to be affected. It looks like I understated the impact a little. Here are a few excerpts from the note:

“In October, MFC Global Investment Management will assume portfolio management duties from Portland Investment Counsel (formerly AIC Investment Services Inc.) of the following funds:

AIC Trust Funds:

AIC Canadian Equity Fund1
AIC Value Fund2
AIC Canadian Balanced Fund1
AIC Global Balanced Fund2
AIC Dividend Income Fund1
AIC Global Premium Dividend Income Fund2
AIC Bond Fund1
AIC Global Bond Fund2
AIC Money Market Fund1
AIC U.S. Money Market Fund1
Value Leaders Income Portfolio2
Value Leaders Balanced Income Portfolio2
Value Leaders Balanced Growth Portfolio2
Value Leaders Growth Portfolio2
Value Leaders Maximum Growth Portfolio2
Copernican International Dividend Income Fund2

AIC Corporate Funds:

AIC Value Corporate Class2
AIC Canadian Balanced Corporate Class1
AIC Global Premium Dividend Income Corporate Class2
AIC Total Yield Corporate Class2
AIC Money Market Corporate Class1

AIC Segregated Funds:

AIC Canadian Balanced Segregated Fund 3
AIC Global Premium Dividend Income Segregated Fund 3
AIC Money Market Segregated Fund 3

Effective on or about January 11, 2010, Ariel Investments will no longer act as sub-advisor for the AIC American Small to Mid Cap Fund, AIC American Focused Fund and AIC American Focused Corporate Class. Effective on or about January 11, 2010, Loomis Sayles will no longer act as sub-advisor for the AIC Global Fixed Income Fund. MFC Global Investment Management will retain sole responsibility for portfolio management of these funds.”

In my posting, I encouraged investors to pay attention when others are making changes to their portfolios. In this case, advisors and clients have some work to do, because the press release makes it clear what Manulife’s decision making criteria are and what’s driving the transaction. It isn’t client returns.

“The acquisition of AIC funds creates significant scale and presence for Manulife in the Canadian retail investment fund market.”

Stuck in the Middle?

Tue, 29 Sep 2009 09:17:30 PDT

By Tom Bradley

I don’t believe in trying to precisely time the market. For our clients’ portfolios, and my own, I strive to be approximately right, as opposed to exactly wrong.

Having said that, last fall and early this year we were as aggressive as we’ll ever be in pushing clients to do some buying, either by re-balancing or making an RRSP contribution. We felt strongly that the market declines were overdone and values were compelling.

So after a huge rise in the equity and credit markets, where are we today? Before I try to dodge the question, let me provide some perspective.

This crisis was caused by excessive use of debt. The process of correcting that problem has not yet started in any meaningful way. Consumers are still being encouraged to borrow and spend (which they are) and governments are levering up their balance sheets at an unprecedented rate.
Corporate earnings are down, but there are still two directions they can go from here. They could show improvement compared to last fall’s reduced levels, which would please the markets, or they could head lower as the companies run out of room to cut costs and the slow economy grinds on. We shouldn’t be surprised by either outcome.
15,000 on the S&P/TSX Composite Index (July, 2008) is not a number we should get anchored on. The last two years revealed that level to be a debt-inflated bubble which couldn’t be justified by business and economic fundamentals. We also shouldn’t get anchored on 7,600 (March, 2009). It was an equally false low, this time fueled by concerns of a capital markets meltdown. Comparing today’s market level (roughly 11,400) to either number is not very useful, whether it’s to say, “I’m buying because we’re still well below the old highs” or, “We’re up more than 50% from the lows...I’m bailing out”.
There is lots of talk that investors have a renewed appetite for risk, but I don’t agree. I think professional and amateur investors are still wary of the economy and the potential for a return to volatile markets (read: down). I think investors were just starved (under-invested) and had to eat something.
There will be lots of surprises over the next couple of years. Perhaps China will disappoint as it deals with the hangover from its spending binge. Or the downtrodden U.S. and/or Europe will show more life than people think.

Investors have plenty to consider in trying to figure out which way the market is going from here.

Stocks have moved up from extremely cheap levels, but valuations don’t look overdone. Some stocks are no longer bargains, but the portfolio managers I talk to are finding others with price-earning ratios of 12-13 times. To me, high quality stocks still look to be under-priced – a view shared by most of our fund managers and our favourite analyst, Jeremy Grantham at GMO.

As for corporate bonds, yields have come down a long way (which has translated into great returns), but the gap versus government bonds is still well above historic norms. Further spread reductions would translate into capital gains, but we don’t need that to happen for the returns to be attractive – i.e. we can justify holding corporate bonds based on their yield (5.5-8.0%).

At this point, it feels a lot to me like the Stealers Wheel song from the early 70’s - we’re Stuck in the Middle (With You). We’re in the middle of possible economic outcomes, the middle of the valuation ranges, and somewhere near the middle on the ‘Greed versus Fear’ meter. That’s not to say we couldn’t have some meaningful moves from here. In a market that is still over-leveraged, the range of possible outcomes for equities is still wide (+/- 20%).

If we learned anything from the last six months, it should be that markets are totally unpredictable and impossible to call in the short run. So while there are “clowns to the left of me and jokers to the right” who are making pronouncements about where we are going from here, we’re happy to have our clients in the middle of their long-term asset mix range, focusing firmly on the longer term.

Steadyhand - As Seen on TV

Fri, 25 Sep 2009 08:39:50 PDT

By Tom Bradley

A Steadyhand advertising campaign is starting today. It’s pretty extensive, but not all of you will see it. That’s because the magazine, newspaper, television and on-line ads are targeted at Southern Ontario (more on that later).

I never thought we’d be advertising in the conventional sense, and many of our clients and readers didn’t either, so some background is in order.

The reasoning goes like this:

We are passionate about what we are doing and want to be successful enough to change the landscape in the industry...for the better.
After two and a half years, we have enough experience and feedback to know that what we’re doing is of value to investors.
Despite the great support from our clients and fans, only 0.0001% of the Canadian population know we exist. We want that to be higher.

As you’d expect from us, the campaign is a little cheeky (see preview) and hits hard on the issues we care about, namely over-diversification, closet indexing, transparency and fees. Along with the ads, you’ll see that our home page has been updated, incorporating the creative from the campaign. While some of you will miss Koda and my fidgeting, it was time to move on.

Because we don’t have a ‘Big 5 bank’ budget, we had to focus our efforts. We chose to start with Toronto and the surrounding area because (1) it’s the biggest market in Canada, (2) we’ve had success there already, (3) my Globe & Mail articles give us added profile there and (4) it’s where we get the biggest bang for our buck with the media. Depending on how successful the campaign is, it is our hope that we can roll it out to our other targeted markets – our home town (where we’re not well enough known yet), Calgary and Winnipeg.

This is an important step for us and we haven’t taken it lightly. Our business plan always called for a more active promotional effort, but we’ve advanced it by a year or two in light of the market volatility, the industry’s continued excesses (read: opportunity) and investors’ need for a steady hand.

For those of you who see the ads, we’d love to hear your feedback...good and bad. It will help shape how and where we go from here.

Pillar #3 - Business Practices

Mon, 21 Sep 2009 09:10:52 PDT

By Tom Bradley

In the Globe column we posted on Saturday, I referred to building an investment firm on three pillars – investment philosophy, people and business practices. If you have a consistent investment approach and a stable, high-quality team, you have something clients can latch on to. If they come to the firm for those three reasons, and they receive good long-term returns, the firm will be successful.

The one pillar I didn’t elaborate on was ‘business philosophy’. While it wasn’t relevant to the piece, it is very important.

In the column, I referenced my time as an institutional portfolio manager at PH&N. We became one of the largest pension fund managers because of our investment approach and people, but we also won a ton of business, and retained it, because of how we ran our business. Clients appreciated the way we worked with them and were attracted by the fact that the firm was employee-owned.

At Steadyhand, our business practices are also at the core of what we’re all about. The way we operate is significantly different from what our clients can get elsewhere.

In a nutshell, it all comes down to a few self-centered questions. Is this the way we want our money managed? Is this who we want doing it? Is this the way we want to be serviced, charged and communicated to?

Call us selfish, but the answers to those questions shape how we run our business.

A significant percentage of our wealth (80%) is invested in the funds and the firm.
We offer a simple, streamlined line-up of funds.
We charge low fees, which we reduce based on loyalty and portfolio size.
We report clearly on performance and fees, and communicate candidly about all aspects of our business.
And the most important thing we do is offer our clients a steady hand by way of our advice, fund management and communications.

Our business practices are a little old school, and yet surprisingly, they’re unique in the wealth management industry. That’s because we’re independent, empathetic and most importantly, we’re investors.

Complacency: A Major Misstep of Mutual Fund Investors

Tue, 29 Sep 2009 09:18:09 PDT

The Globe and Mail, Report on Business
Published September 19, 2009

Individual investors (and their advisers) are far too patient when it comes to dealing with changes in their mutual funds. They're quick to make moves based on short-term trends and performance, but slow to recognize the impact of fundamental shifts in personnel or investment approach.

I bring this up because fund mergers and manager changes have become a constant in our industry. In recent weeks, we've seen Trimark change managers on a few of its major funds. Ethical and Northwest Mutual Funds are going ahead with 18 fund mergers. Bank of Nova Scotia is making organizational changes throughout its asset management platform. And there are certain to be numerous changes that come out of Manulife's purchase of AIC.

Volatile markets, slower asset growth and industry consolidation have contributed to the current wave of activity, but the reality is, the industry's marketing machine has left us with too many funds in Canada.

But before I address the patience question, let me provide some background.

When I moved to the buy side in 1991, I started in an institutional role. The clients I served were pension plans, endowments and corporations. Each had a formal process for picking and monitoring their money managers and they were usually assisted by a consultant who scrutinized performance, style and organizational changes. They were hyper-sensitive to any shifts in philosophy or personnel.

I learned early on that we had to be very clear about what we were offering – investment philosophy, people and business practices – and stick to it. Obviously performance was of paramount importance, but if we took care of those three things, we could build a sustainable business. If, on the other hand, clients came to us solely in pursuit of past performance, then we would eventually lose them when our approach was out of favour and returns were lagging.

The philosophy, people and practices criteria are still relevant to me in building a private wealth business at Steadyhand, and they should be important to all buyers of investment services. A fund's performance will ebb and flow, but its principles and people should not.

So, why do I say investors are too patient? Because too many of the changes they are subjected to don't stand up to the three criteria.

Consider the following example. You receive notice that your international equity fund is being merged into a global dividend fund. You're told the new fund has performed better and has the same fee. (Note: This is not an extreme example – over the past five years a slew of conventional equity funds became “dividend” funds.) So what has changed? Well first, the mandate of the fund has been altered by expanding the geography (global includes the U.S., international doesn't) and restricting the investment approach. The fund is now constrained to dividend-paying stocks, so it's unlikely that technology, resources or emerging markets will be included. And you have a new portfolio manager.

What looks like a simple name change on your statement represents a dramatic change of personnel, approach and role the fund will play in your portfolio. And in some cases, by merging a poor performer into one that is in a hotter category, the fund company is doing exactly what it doesn't want you to do – chase performance.

Measuring your funds against the philosophy, people and practices is not easy. The portfolio manager and investment philosophy are intertwined and sometimes they're inextricably linked. Indeed, it's hard to separate the two when it comes to investors like Eric Sprott, Frances Chou or Frank Mersch. They are the philosophy.

If you own a fund because of a particular manager, and that person goes elsewhere, the decision is easy. It's time to move on. I can think of two striking examples of this in recent years – Alan Jacobs' move to Sprott and Kim Shannon's shift to Brandes. In both cases, Sceptre and CI replaced their stars with capable managers, but nonetheless, the client's reason for owning the fund had been taken away.

Sometimes the investment approach has a history and is more enduring than any one individual. At Burgundy and Beutel Goodman for instance, the investment teams are fine-tuned from time to time, but the approach never changes. The “who” is important, but not as much as the “how.”

So every change is different and they don't all necessitate the client taking action. But like my old institutional clients did when there was a significant shift in investment philosophy, people or business practices, you should at least put the fund on a watch list. In a well-constructed portfolio that holds between five to eight funds, every slot has a purpose. If someone else is making changes to it, you need to pay attention.

Turn off the Tap

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

I read that the recession is over. Both Ben Bernanke, the U.S. Federal Reserve Chairman, and Mark Carney, the Bank of Canada Governor, have said so.

I also read that out here on the wet coast, our provincial government has been dragging its feet on contributing its share to capital projects being funded by the Federal government’s stimulus package. The City of Vancouver and other jurisdictions are waiting anxiously to find out whether they can go ahead with their projects.

Which raises an interesting question. If the recession is over and the housing market and auto markets are surprisingly robust, why is it that we, as taxpayers, are blowing our brains out pouring money into stimulus programs?

Now I, like most others, think this recovery is going to be sluggish and bumpy. It will feel a lot like the recession. But as long as we are not in a deep, life-threatening recession, the economy should be allowed to work itself out. We need to take our medicine as we go through the de-levering process. If we don’t, we’ll find ourselves back in intensive care in the near future.

Over the last year we’ve been forced to borrow some growth and prosperity from future years (and generations), just so we could get through this mess. There was no way around that. But to inefficiently pump money into the economy now, so our growth rate is slightly higher and unemployment rate slightly lower is insanity.

Please Mr. Harper. Change your mind. Turn off the tap. It will give you something to campaign on in the issue-less election we’re about to have.

Nokia - The Next Episode

Sat, 19 Sep 2009 14:44:00 PDT

By Scott Ronalds

Nokia is an interesting story. To many North Americans, the company is viewed as a has-been. While its cell phones may have been all the rage a decade ago, its star has fallen considerably as Apple and RIM have taken over as the market leaders thanks to their innovative, and very cool, smart phones. In fact, Nokia’s market share of handset sales in the U.S. has fallen to a paltry 7%.

What’s more, the company also recently ventured into the highly-competitive, low margin laptop market with the launch of its first netbook, which will sell for about $800 US. As well, Nokia launched a music and gaming platform earlier in the summer called “Ovi” to try to compete with the grand-daddy of the business (iTunes). To some observers and analysts, Nokia has lost its focus and shine; it’s yesterday’s story. The stock, while reasonably valued at around 13-14 times earnings, has little appeal.

In Europe, Asia and much of the rest of the world, however, it’s a different story. The Nokia brand has much greater appeal and market share. While it may come as a surprise to some, the company is the #1 cell-phone maker in the world, with a market share of nearly 40% and over 1 billion users. In fact, Nokia sells more cell phones worldwide than its next three competitors combined.

In the developing world, Nokia is king. As an article in the September issue of Fast Company Magazine points out (to which the above numbers are attributed), the company’s success in areas such as Asia and Africa is due to the fact that “Nokia has worked hard to develop a deep understanding of all the cultures in which it operates. It runs 10 research labs worldwide, each based on an Open Innovation philosophy and affiliated with a local university.”

The article goes on to illustrate how Nokia’s researchers “immerse themselves in locales that cover the widest spectrum of the human condition...so while Apple, RIM and Palm offer singular products that target an elite, niche market, Nokia builds devices to satisfy every budget and appetite for information, making it indispensable all over Africa and Asia.” While on the topic, an interesting book titled Brand New World (which I read earlier in the summer) highlights some of Nokia’s innovative marketing initiatives in India. For those interested in product branding in the BRIC nations (Brazil, Russia, India and China), it’s a worthy read.

But I digress. The point here is that Nokia is not a dying brand, at least outside of North America. The Fast Company article expands on the company’s initiatives and projects in the entertainment media industry (through the Ovi platform mentioned above) and while the author may paint a rosy picture, it’s hard to deny the attractiveness of the opportunities that exist for a company with a billion users and a strong global brand.

As an investment opportunity, the story gets even more interesting. Nokia’s stock isn’t an “automatic” holding in every global equity portfolio (like it was a decade ago), as say Royal Bank is for every Canadian equity fund. Analysts can crunch the company’s numbers every which way and fuss over its valuation incessantly. But it’s the bigger picture that matters more. Will the company’s research efforts and initiatives in the developing world turn into a multi billion-dollar revenue stream? Can it strengthen its position in North America and challenge Apple and RIM in the smart phone market here? Will its foray into the entertainment world be profitable? It’s the longer term answers to these questions that will prove a portfolio manager right or wrong.

What does our global equity manager think? Edinburgh Partners likes the Nokia story. They’re attracted to the company’s strong market leadership position and its long-term secular growth prospects. As well, they feel the balance sheet is duly strong and the business generates an immense amount of cash. The stock is among the Global Fund’s top 15 holdings.

Equity Fund Update

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

On my recent trip to Toronto, I spent some time at the CGOV office, meeting with Gord O’Reilly, the manager of the Equity Fund, as well as other partners of the firm.

Out of all the conversations, pizza and beer came very little that was new – even though they’re a fun group, their management approach is boring. Indeed, there are few changes to report, although the strength of the market rally has changed their outlook slightly.

They added one new name to the list (I can’t mention it because they are still buying) and sold Tim Hortons on recent strength. With few exceptions, the market position and competitiveness of the 24 companies in the fund have improved over the year. The hostile operating environment exposed the weaknesses of Manulife (unhedged market exposure) and Birchcliff Energy (balance sheet), both of which were forced to raise capital at low prices, but the other companies will come out of the recession in a better position.

Gord is still making sure the portfolio has some balance to it, including companies that will do well in a slow or bumpy recovery – drug store chains Shoppers Drug Mart and CVS Caremark, Diageo (booze) and Ritchie Bros. (auctioneers). This part of the portfolio has held back performance during the rally, but could prove beneficial when growth is harder to come by.

The fund has had a nice recovery (up 12% for the year to August 31st and 33% from its low), but hasn’t kept up with the rocket ship called the S&P/TSX Composite Index (up 24% so far in 2009). There are a few reasons for this: (1) The quality of the companies gives the fund less recovery potential – this rally has been described as the ‘Dash for Trash’ and there is no trash here; (2) The fund has healthy exposure to resources and banks (this year’s market leaders), but not as much as the TSX does; and (3) The returns from the U.S. and international stocks have been dampened by the strong loonie, even though stock selection has been quite favourable.

As for the outlook, the Tim Horton’s sale is indicative of what Gord and the team are thinking. They sold the stock on strength and haven’t re-invested the proceeds yet. Their bottom-up analysis shows that stock valuations are still attractive, but the market has come a long way and has been carried along by momentum in a number of sectors. They are inclined to keep some powder dry and be ready for any opportunities the fall may bring. The Tim’s sale has increased the cash level from 4% to 7% of the fund.

Correction: Steadyhand Savings Fund Performance

Sat, 19 Sep 2009 14:44:00 PDT

The Globe and Mail ran an article yesterday on how money market funds are holding up given the historically low interest rate environment (The Best and Worst Places to Park Your Cash).

The article highlighted our Savings Fund as the top performing fund over the first seven months of the year, with a year-to-date return of 1.10%. We would like to point out, however, that this figure is incorrect. The actual year-to-date return of the fund (as of July 31) was 0.5%. While this still places the fund among the best performers, it is not at the top of the heap.

As a reminder, we temporarily reduced the fee on the fund back in April from 0.65% to 0.30% to help maintain a positive yield for investors.

No One's Cornered the Market on the Best Strategy

Sat, 19 Sep 2009 14:44:00 PDT

The Globe and Mail, Report on Business
Published September 5, 2009

I feel like I'm really up to speed right now. With the lousy weather in Ontario and Manitoba cottage country, there's been more time for reading. And while I still can't tell you what “quantitative easing” is, I've firmed up my view on all kinds of other topics.

I'm convinced that to get out of this debt crisis, we have to come up with a strategy that doesn't involve people borrowing more money. China is not the star that everyone says it is – it's easy to look good when the government is spending like a drunken sailor and the credit tap is wide open. And perhaps our first step toward a greener economy should be the better use of all the natural gas we have.

I love thinking about the big-picture stuff as much as the next investment geek, but the problem is, I don't know how I'm going to make money from it. At the end of the day, I'm still a believer that the most reliable way to add value to an indexed portfolio is to work from the bottom up. In other words, build a concentrated portfolio that doesn't look like the index, one security at a time. Each time, attempt to buy something that is worth considerably more than it trades at in the market.

But I read something this week that threw me for a loop. In his latest musing, Ira Gluskin, the soon-to-retire but never retiring president of Gluskin Sheff, was outlining why his firm is putting an increased emphasis on asset mix and had added economist, strategist and industry rock star David Rosenberg to their team. Mr. Gluskin said: “There are the holdouts who claim that they just select the best stocks around the world, regardless of industry [or country]. They are true antiques.”

My first reaction to his statement was one of indignation. Hmmph. Mr. Gluskin goes over to the dark side and suddenly all his old philosophical buddies are misguided and out-of-date. Relics we are!

But after I got my fragile ego back in check, I thought I'd better give Mr. Gluskin's view careful consideration, because he is one of the leading thinkers and thought provokers on Bay Street, and was writing great stuff when Mr. Rosenberg was still in school. He is of the view that short-term volatility will be with us for a while and just picking good stocks is not enough. “We wanted better strategic advice on where events are heading.”

Let's take a step back. In reality, investing involves a combination of the “bottom up” and “top down” approaches. Even pure stock pickers have a general awareness of the overall business environment when they're doing their company research and valuation work. And after the macro investors choose their direction, they still have to select securities to execute their strategies (unless they're indexing).

Nevertheless, the approaches are profoundly different. The “high elevation” investors focus on economics and broad market factors, including valuation. Their big-picture conclusions determine which sectors and/or countries they will invest in. The security selection falls out of the macro work.

That's opposed to the managers skulking along the bottom (dare I say dinosaurs), who let their fundamental analysis and valuation work determine when to buy, hold or sell a stock. The country and industry weightings in their portfolios are the result of where they find the most undervalued stocks.

Too often other issues get mixed in with the top-versus-bottom discussion, specifically the merits of “buy and hold” strategies and the importance of asset mix. That's unfortunate. Equating bottom-up to “buy and hold” is just not appropriate. Certainly some stock pickers have low turnover, but others actively trade their portfolios. Top-downers vary greatly on this measure as well.

As for asset mix (stocks versus bonds versus cash), neither side will dispute that getting the strategic or long-term mix right is the most important thing an investor does. Where the big gulf between the enlightened and the prehistoric lies is in how actively that mix is managed, and how far they are willing to stray from the long-term targets to pursue shorter-term tactics. It's in most top-downers' DNA to be more active and make bigger bets, which prompts a number of questions. Is it possible, with the likes of Mr. Rosenberg, Jeff Rubin or Patti Croft at my side, to get it right consistently enough to add value? Does all that work lead to too much tinkering? Will it distract me from finding undervalued securities and prevent me from buying them? And can I use my budget for risk more effectively elsewhere in the portfolio?

I'll keep noodling on the issue since, in my experience, ignoring what Mr. Gluskin says is usually at one's peril. In the meantime, my fellow antiques and I will continue to make sure our clients' strategic asset mix fits with their objectives. We'll devote most of our resources to finding undervalued bonds and stocks. And we'll try to get the big picture by watching long-term term trends and ignoring anything to do with the next three months.

Now can we go back and start the summer again...please?

Everyone is an Economist III

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

In postings on March 31st and May 14th, I mused that the financial crisis and market meltdown had turned everybody into an economist. We all have a view on how deep the recession will be, where the dollar is headed and when the recovery will come.

In last Friday’s Report on Business, Robert Buckland, chief global equity strategist at Citigroup, shed some light on how this trend has played out in the ranks of professional investors (see Is Good Stock Picking About to Make a Comeback?).

He said, “We still meet too many fund managers who, two years ago, were diehard stock pickers and would never see a strategist. Now they are all over the latest moves in the Shanghai market or the ISM (Institute for Supply Management) index. The bear market has bullied them into becoming much more top down, and their view on the market/economy is often the reason why they are reluctant to get on board the rally in riskier or more cyclical stocks.”

As investors, we all have to be mindful of moving away from what we do best. A top-down approach to investing has always been a tough way to go, but when untrained investors or died-in-the-wool stock-pickers are attempting it, the degree of difficulty goes up.

Clearly, we need to be aware, and wary of, the business environment around us, but our focus must be firmly on buying undervalued businesses.

Again, Mr. Buckland: “Just when the bear market (and subsequent rebound) has bullied us all into being very macro is the time when a good contrarian should be moving micro. At the very least, equity managers should get out of the office and see some companies...and come up with some interesting bottom-up themes instead. It’s time to move on.”

Who's Guaranteeing Who?

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

Be warned. I write this after a long day, a glass of wine and having just read an article on ‘Target Date’ funds in Monday’s Report on Business (Target-date Funds Miss Their Mark). Shirley Won’s piece on these packaged, marketing-driven, fee-laden, deceptively complex, misrepresented products has got me stirred up.

First some background. These funds are part of a group of products called ‘life cycle’ funds. The original idea was to design and manage each fund for a particular demographic (i.e. investors retiring in the year 2010, 2020 or 2030). The manager would adjust the asset mix as the retirement date approached. For instance, a 2030 fund would be invested mostly in equities right now, but would be more conservatively managed 10-12 years from now. As it nears its 2030 target date, it would largely be invested in stable income-oriented securities.

When offered as a simple mutual fund, there is nothing wrong with these products, although there are cheaper, more flexible ways for investors to accomplish the same goal. They went off the rails when marketing and investment banking departments tried to enhance sales appeal and profitability by adding features, such as guaranteeing the highest net asset value.

Every fancy add-on sounds appealing and makes the product easier to sell, but it eats into the long-term return, increases the number of possible unanticipated outcomes (see below) and puts the manager in a conflict of interest. With a guarantee for instance, the fund’s first priority is to make sure the bank doesn’t lose any money. The client’s interests come second.

Consider one of Shirley’s examples, ‘Guaranteed’ funds with target dates that are more than ten years into the future. Many of these funds are now invested 100% in bonds because the asset mix was shifted to ‘guarantee’ the banks’ profitability. When a rational investor should be taking advantage of lower prices, depressed valuations and a less risky market, these managers were forced to sell their stocks and buy bonds.

As investors, we all have the misfortune of sometimes buying high and selling low, but to do it intentionally and without fail just doesn’t make sense.

The target date funds are not the only products that encourage the manager to act against the clients’ best interests. Over the last five years, we have seen a whole generation of products develop that force a similar behavior. Some products use leverage in a counter-intuitive way – i.e. increasing it when markets are going up and decreasing it when they fall. Again, it sounds good, but what it means is that investors go up with less leverage than they go down with.

The wealth management industry’s marketing imperative and urgency to get new products out the door is leading to the sale of billions of dollars worth of flawed, misleading and sometimes abusive products. Perhaps it should do what the software industry does – ask the product designers, marketers and executives of the bank to 'beta test' these products before they’re made available for broad distribution. Let them work out the bugs and live with the fees, illiquidity and unexpected consequences for a few years.

In the meantime, it’s time for that second glass of wine and an episode of The Family Guy. That will settle me down.

Podcast: Wrong for the Right Reasons

Sat, 19 Sep 2009 14:44:00 PDT

By Scott Ronalds

In this podcast, Tom expands on his latest Globe and Mail column, which focuses on the traits that he looks for in a money manager. More specifically, he highlights two things that he watches for and studies very intently: 1) the temperament of the manager, and 2) their investment process (is it repeatable and does it stand up in times of stress?).

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

Temperament, not Technique, is Key for Managers

Sat, 19 Sep 2009 14:44:00 PDT

The Globe and Mail, Report on Business
Published August 22, 2009

Being an analyst or portfolio manager means you are destined to make lots of mistakes.

They say the great ones are right 60 per cent of the time, which means they're wrong 40 per cent of the time. There aren't too many professions where you're allowed to miss that often. Baseball or basketball players, perhaps, but if you're an air traffic controller, heart surgeon or goalie, you won't last long at 60/40.

When I'm hiring a portfolio manager, or monitoring one, more than anything else, I'm studying their temperament and investment process. That's because I assume that all candidates have the technical skills and experience, but the ability to deal with failure and keep to a discipline in good and bad times is a rare trait.

Temperament covers a lot of ground. It means having the confidence to stick to your convictions in the face of noise and distraction from clients, media and other industry players. It's difficult to prevent extraneous information from obscuring the important variables in a decision. For instance, if poor short-term earnings or management changes are negatively affecting a stock, it may be an opportunity to buy at a lower price rather than a reason to abandon a long-term investment thesis.

A manager with the right temperament has the ability to buy stocks while others are panicking and sell when they're euphoric. It's easy to say that the best opportunities occur when the consensus is strongest, but at such times of great certainty, it takes a special person to go the other way. The analysis might point toward bold action, but when it comes to moving on it, there's no support or reinforcement from others. The manager feels as though he or she is totally on his or her own.

To get a sense of a manager's temperament, it's important to look at how she's dealt with adversity in the past. I'm referring to periods when returns were negative and/or performance was poor relative to the indexes and other competition. Did she stick to her philosophy and decision-making process at a time of maximum stress? Or did she make matters worse by bending her own rules or implementing major changes at the bottom?

The great managers don't let a bad patch freeze them up. They know that if they're going to have good calls in the future, they have to continue making calls. If they get too focused on trying to eliminate the bad, they miss the good.

In addition to temperament, I want managers that know how they are going to succeed. There are plenty of ways to skin a cat and a manager needs to know how he is going to do it. Essentially, I'm looking to see if he is analyzing his own business and personal franchise with the same skill and intensity he brings to his portfolios. It's always been surprising to me how many managers dive headlong into annual reports and spreadsheets and forget to assess what their competitive advantages are, in which sandbox they want to play and how they are going to win at the game.

That was particularly evident to me when I interviewed firms to manage the Steadyhand funds three years ago. Two of the short-listed candidates for the global equity fund used the same stock (Tesco, a British grocer) to demonstrate their investment process. In both cases, the work was impressive and thorough, but it was a stark reminder that there are a whole bunch of smart people out there doing the same thing. It's hard to consistently out-analyze, out-spreadsheet or out-interview the competition, especially when it comes to large, well-covered companies.

Since last fall, I've been asked many times what I'm watching for in our fund managers. As always, results are important, but the analysis has to go further, especially in extreme markets such as the one we've been going through.

I'm looking to see if the investment process is being followed - is it still bottom up, stock by stock, or are economics and technical analysis suddenly having greater influence? In light of the fact that everyone in the industry is beaten up, I'm watching to see if our managers have lost their nerve - is their assessment of value reflected in the trades they're making and the positioning of their fund? And, specific to the recent period, I was watching to see if they had more risk in their portfolio after the meltdown (when there was less risk in the market).

In this always perverse profession, managers are going to get many things right, but they'll make lots of mistakes in getting there. That's why the right temperament and an entrenched investment process are so important. For my money, the next best thing to being right for the right reasons is being wrong for the right reasons.

Small-Cap Equity Fund Update

Sat, 19 Sep 2009 14:44:00 PDT

The Steadyhand Small-Cap Equity Fund has been one of the top funds in its category since it started in early 2007. But in getting there, the fund has traced quite a different path compared to that of the market and other small-cap funds. That's because the manager, Wil Wutherich, pays no attention to the indexes. He is truly a buyer of businesses and while he's very cognizant of being properly diversified, the fund looks nothing like the small-cap index, or any other index for that matter.

The Small-Cap Fund's different performance pattern was evident right out of the gate when it had a significant run up in its early days, which was a time when the overall market was relatively flat. In the back half of 2008, it was hit hard by the market meltdown, but wasn't down nearly as much as other funds. And so far in 2009, the fund has significantly lagged the indexes, both small and large cap, during the market rebound. It is up 1.6% year-to-date, while the S&P/TSX Composite Index is up 19% and the BMO Small-Cap Index is up almost 30%.

Why the current lag? It's always hard to attach a theme to this fund's performance. Because it holds a small number of stocks (15 currently), it only takes a few stars or laggards to significantly impact its short-term return. So far this year the fund has had its stars (Major Drilling, Calian Technologies, Canadian Helicopters), but not enough of them to keep it running with the pack. There have been some dogs (Glacier Media and Badger Income Fund particularly), but in the context of a small-cap fund, nothing remarkable.

I can make two general comments. First, the fund's lack of exposure to energy and resource stocks has hurt. These sectors have seen a dramatic turnaround so far this year. And second, not knowing how powerful this market rally was going to be, Wil has been running with more cash than he would have liked (10-13%). Any cash has been too much.

I talked to Wil today and we ran through the portfolio. As always, he knows why he owns each stock and at present, there are none that he is uncomfortable with. He is watching two of them for an opportunity to increase the position while focusing his research on a handful of U.S. names. Currently, the top 5 holdings are Stantec, Vecima Networks, North West Company, Evertz Technologies and Canadian Helicopters, all names that are familiar to long-term holders of the fund.

As I said in the Second Quarter Report, we should expect Wil to be out of synch with the market and look to take advantage of the ‘out-of-sync bad' times to set up the ‘out-of-sync good' times. Over the course of Wil's history, that has proved to be wise strategy.

They Consolidate, We Smile

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

I walked into the office this morning to the news that AIC, the troubled fund company owned by Michael Lee-Chin, has been sold to Manulife. I smiled.

I always smile when I hear that more consolidation has occurred in the wealth management industry. That’s because there are too many players and too much identical product. Mergers help eliminate some of the duplication and they create a little more space for firms like Steadyhand to emerge.

Most people, including the commentators in the media, react differently. It seems that each consolidation lends credibility and urgency to the ‘bigger is better’ view. As the argument goes, it’s getting harder for the small guys to play in a world of giants.

Here’s why I smile rather than shudder:

Not all investors want to have their assets with the mega-firms (banks, insurers, global conglomerates). Many want other options. And we know from experience that not all the clients of firms that have been taken over go along with the transition – examples being Altamira, Synergy, KBSH, PH&N, Saxon and Mavrix.
While the acquired firms may intend to bring their unique culture to the bigger institution, it never works out that way. The big firms have a history of doing acquisitions and their formula calls for a complete integration into the mother ship. Wealth management, which is now an important part of these firms, is no exception.
As for the acquired mutual funds, some are left as they are, some are merged into existing funds and some have the management switched over to one of the buyer’s more successful portfolio managers. As a competitor, it warms my heart to see more funds and assets being put on the plate of the talented ones. It’s another step away from being right-sized.

The conventional view on consolidation overlooks one important fact - when it comes to investing, small is beautiful. Scale is good for lowering costs in the areas of administration, compliance and marketing, but more assets make the job of a fund manager more difficult.

I fully acknowledge that my reaction is self-serving, but it should be noted that I’ve always smiled at this type of news, even when I ran a $50 billion organization.

Some industries go through a life cycle whereby the small fry grow to be medium fry and then get merged into large fry. In the meantime, more small fry pop up to keep the cycle going. This predictable evolution occurs in industries like asset management where smarts are more important than scale and access to capital. Other great examples of this include the oil patch in Alberta and the tech sector.

So while consolidation helps perpetuate the cycle (smile), the most important factors driving it are still (1) smart people creating unique firms and (2) fertile ground to let them grow. A highly-concentrated landscape in Canada is plenty fertile for Steadyhand and other small fry.

Clients Should Take the Reins in Setting Bonus Payments

Sat, 19 Sep 2009 14:44:00 PDT

The Globe and Mail, Report on Business
Published August 8, 2009

It may not be politically correct to admit it, but I have mixed feelings on the billions of dollars worth of bonuses being paid out on Wall Street.

I'm always wary of hysterical, highly politicized issues that have only one side to them. But in this case, I've actually lived the other, less obvious side. For years, I managed people on the sell and buy sides of the Street, so I can appreciate the bind Wall Street executives are in. While overall corporate performance is abysmal, they need to keep their good people in place – the individuals, teams and departments that didn't screw up or rip off clients, but instead performed well and delivered much-needed profit to the bottom line. If they don't pay these top performers, there is sure to be another company that will.

When discussing the bonus issue, it's important to distinguish between the directors and senior executives who are responsible for the overall organization and their high-priced help. Compensation for top executives must be aligned with the accomplishments of the firm. Losses and government bailouts mean no bonuses, period.

But in the case of the high-priced help, the top guns, a difficult balance needs to be struck between corporate results and paying for individual performance. In the fairy tale world of Wall Street, that means seven-figure cheques for some.

Why the mixed feelings then? Because even after a near-death experience, the investment industry is still disconnected from reality, and many of the bonus decisions are ridiculous. In general, the industry's compensation model is taking too large a chunk out of client returns. And make no mistake, we need to look at it in those terms. Every dollar paid for a service is a dollar not available to make pension payments or RRSP withdrawals.

Rather than legislating executive compensation and trotting everyone to Washington, I have another solution.

I hereby propose that investors, whether they be individuals, corporations, pension plans or governments, be more discriminating when purchasing financial services. Be it resolved that they will ask questions, explore lower-cost options and be willing to say no more often.

When it comes to asset management, investors should expect to pay a premium for some services. They should be willing to pony up for a highly regarded portfolio manager who can only handle a limited number of assets. This particularly applies in asset classes where there is potential for higher returns but a limited supply of investments. At Steadyhand, we charge our highest fee on the small-capitalization equity fund (1.7 per cent), primarily because it has a predetermined limit on its size.

In areas where the cost of fund management is higher – such as real estate, infrastructure and other types of private equity – fees have to be higher. There is considerably more legwork and administration involved in making the investments.

But there are still far too many instances where clients overpay needlessly to have their assets managed. Canadian investors are still paying 2.5 per cent to own mutual funds that do little more than mirror the index.

Investment returns can be broken down into two components: the market return, or “beta,” as it's referred to; and the added value derived from active management or “alpha.” Beta is cheap. Market exposure can be bought through an exchange-traded fund (ETF) for a fraction of 1 per cent. Alpha is more expensive, but if the manager isn't actively pursuing it, then the fund is a commodity and should be priced as such. Alpha-like fees for beta-like products contribute mightily to bonus pools.

In performance-based fee arrangements, investors often accept too generous a base or minimum fee. Asset managers who want a piece of the upside should have to share in the downside too. In the hedge fund world where these arrangements are most common, the standard is a 2-per-cent base fee and 20 per cent of any profits. For clients willing to share the spoils with their manager, 2 per cent is too high a retainer. There shouldn't still be a bonus when managers don't perform.

One of the buy side's dirty little secrets is the pricing of balanced or diversified funds. These have a large component of cash and bonds (40 to 60 per cent), assets that should garner a considerably lower fee. And yet these funds are often priced in line with pure equity funds. The premium fee might be justified if managers were more active in adjusting the asset mix, but most balanced funds don't stray far from their long-term target (i.e. 60 per cent equities, 40 per cent bonds).

The math demonstrates what I'm saying. If we assume the fee for fixed income is 1 per cent (which is generous), then it works out that a 60/40 fund with a 2.5-per-cent fee is charging 3.5 per cent for the equities. Clients can easily construct their own diversified portfolio by holding individual funds and thereby reduce their cost and reclaim some of the industry bonus pool.

Instead of letting governments make a hash of regulating executive compensation, it's time these firms' clients take some responsibility for reducing the bonus payouts. As rocker and poet Patti Smith says, “People have the power.”

The Dash for Trash

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

This current market rally has been characterized as ‘a dash for trash’. In other words, lower quality companies have seen their stocks bounce back dramatically, while the higher quality ones have experienced more modest gains. When the companies that were left for dead start to breathe again, their stocks double, triple or quadruple in short order. It’s a logical outcome, albeit a risky one to predict.

From reading the latest GMO Quarterly Letter written by Jeremy Grantham, it would appear that the latest dash was a record setter. The return difference over the last three months between high and low volatility stocks in the U.S. was 49%, well beyond previous cyclical rallies. Another measure of quality – low-priced versus high-priced stocks – tells the same story. On average, the ‘under $5.00 stocks’ outperformed the ‘over $50.00 stocks’ by 91%.

Obviously, there are lots of exceptions to this pattern. The Canadian banks have experienced a huge rebound and they can hardly be categorized as trash, although there were concerns that they might get caught up in a banking crisis that was much bigger than them.

Where do we go from here? Well, time will show that some of the trash went too far, while some of the moves will fairly reflect the corrective measures that were taken to address life-threatening issues (e.g. Teck was able to refinance its debt and alleviate its liquidity crunch). As for the high-quality laggards, they still look cheap. In light of our being in a more normal market again (valuation-wise), Mr. Grantham says, “Only U.S. quality feels (and measures) to us like a real outlier.”

The Right Questions - An Addendum

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

In my last posting, I talked about the questions that money managers should be asking. I focused on three – inflation, the next market leaders and valuation.

There is an additional question that individual investors (and their advisors) should be asking.

Is there a reason my portfolio should be significantly different than its long-term asset mix?

The up and downs of the last couple of years have left many people with asset mixes that are far different from what their plan calls for. Chris, Scott and I have certainly found a disproportionate number of investors holding over-sized cash positions, even though their objectives and time frame call for a large commitment to long-term assets (i.e. bonds, stocks, real estate).

I can’t make a case for such a divergence. A long-term asset mix represents a person’s best guess as to what type of portfolio is appropriate to meet her/his objectives. For investors to deviate significantly from the target mix, they need to have a contrarian view that carries with it heaps of conviction and confidence.

As regular readers know, last fall I found myself holding such a view - “prepare for the other side of the valley”...“this isn’t the RRSP season to miss”. Pounding the table on such a topic is a rare occurrence for a market-timing atheist like me, but I just felt that markets were significantly out of whack.

Today, economic and company forecasts are conservative and the apocalyptic scenarios of last year are no longer realistic (all of which is good for investors). Valuations are at more normal levels after the market rebound. And while the problems and opportunities ahead still point to a wider range of possible market outcomes, I don’t think we’re at either extreme on the reward/risk continuum.

Investors have a plan for a reason. To be significantly out of line with that plan, they need to have good answers to the right questions.

Inflation and the Next Market Leaders

Sat, 19 Sep 2009 14:44:00 PDT

The Globe and Mail, Report on Business
Published July 25, 2009

Knowing the right questions to ask is an important and difficult part of any decision-making process.

For the last two weeks I've been parked on the edge of Crystal Lake, Ont., where the right questions have been: Is the water calm at the slalom course? Will the old guys, Lance Armstrong and Tommy Watson, have the legs to win? And do I really believe Malcolm Gladwell's theories in Outliers?

I've also had some time to pull back and think about the key questions that investment managers need to be asking now. Three key ones rose to the surface.

Should we be preparing for inflation?

Investors must come to grips with this question. The unprecedented amount of fiscal and monetary stimulus that's going into the economy makes higher inflation a distinct possibility.

While I don't have a definitive view on the issue (there are strong forces on both sides), I'm not waiting around to figure it out. The chance of rising inflation is high enough, and the risk to a retirement portfolio significant enough, that I want to be prepared.

In this environment, a portfolio should have exposure to assets that will inflate along with the consumer price index (CPI). Gold, real-return bonds (RRBs), real estate and stocks, where the value is based on hard assets, are all possibilities. With the exception of RRBs, nothing is a perfect hedge. Higher interest rates, which go hand-in-hand with rising inflation, will depress valuations on all types of assets. But some will hold up better than others.

Where will the next market leaders come from?

I always assume that in a new business cycle a new set of leaders will emerge at the country, industry or company level. And yet, investors tend to focus their attention on what led the market in previous years and find it hard to imagine that those stocks won't do it again. The most recent illustration of this came in 2002-04 when many investment managers were intently watching for an entry point into technology stocks, while other parts of the market were set up to perform much better. This year they're watching to see when they should buy more energy, metals and bank stocks.

These sectors have been leaders in the current rally, but three years from now we shouldn't be surprised when heath care, technology or another economic force fuels the market's rise. Health care companies still have patent expiry challenges and cost pressures, but demographics are in their favour, balance sheets are strong and stock valuations look reasonable. Technology, which has shown signs of leadership this year, will be at the centre of the productivity gains our economy so desperately needs. There are opportunities in the conventional areas of computing and communication, but we'll undoubtedly see other technologies emerge in areas such as energy and resource management.

After a significant rally, what kind of outlook is being factored into securities prices?

The question that often separates professional from amateur investors is one of valuation. Having a view on the economy or a company's earnings prospects is only part of the process. It's necessary to take the next step to determine how much of that view is already factored in to the price.

As I've pointed out previously, the current rally has largely been driven by a change of valuation, as opposed to a revised profit outlook. The market started its move at a time (early March) when there were questions about the survival of the banking system and the capital markets in general. That gloomy prospect took all stock and corporate bond valuations down. Companies didn't have to be in the financial services sector to see their price-to-earning multiples fall to ridiculously cheap levels.

So where are we today? My reading of the consensus is that managers still have modest expectations for the economy. We are facing an economic double whammy, with both consumers and governments in desperate need of deleveraging. The math appears to be irrefutable – the next business cycle will be sluggish and heavily taxed.

As for valuing that outlook, I prefer to do it on a stock-by-stock basis. I rarely find metrics on the overall market to be useful because the indexes are made up of companies at peak earnings, with no earnings, with rising and falling earnings, and companies not valued on earnings. The late 1990s provided an extreme example of this point. Tech and Internet stocks, along with a select group of global leaders like Coke, Home Depot and General Electric, pushed the market multiple into the range of 30-times earnings, an unsustainable level. Meanwhile, there were a slew of non-technology stocks trading at rock bottom valuations.

Whether it's a slew or not, there are still companies to be found where earnings estimates are achievable and the stock is trading at a reasonable multiple. In these situations, expectations can easily be met and if they're not, the consequences are less severe.

These are the questions that I'm going to focus my attention on in the weeks to come, but not for a couple more days. I've still got more pressing issues to deal with – do I need sunscreen on the dock, or a blanket?

The Credit Crisis 101

Sat, 19 Sep 2009 14:44:00 PDT

By Scott Ronalds

If you look up the term ‘credit crisis’ on Google, you’ll get close to 50 million results. Over the past year or so, you would be hard pressed to find two more commonly used words in the business world (other than the usual expletives that abound in falling markets).

In a nutshell, the phrase refers to an impairment or reduction in the availability of credit (or cash) to businesses and individuals.

We’ve referenced the term often in our reporting and discussions with clients, as it is this constriction in the flow of and access to capital that has been a key factor in the economic and market downturn.

While we have recently seen an improvement in the markets and the ‘crisis’ has subsided, we’re not out of the woods just yet, and the term will likely continue to fill the channels of the business media.

If you’re looking for a detailed, yet plain-English, explanation of the credit crisis, the New York Times has an online feature worth checking out. The site’s Credit Crisis – The Essentials section provides an overview and running commentary (updated periodically) of the current crisis, and has a series of multimedia features for numbers junkies.

Five Lessons From the Recession - Relearned

Sat, 19 Sep 2009 14:44:00 PDT

The Globe and Mail, Report on Business
Published July 11, 2009

We've published this posting in both text and video form. Click the play button below to watch the video.

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

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

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

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

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

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

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

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

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

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

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

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

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

Podcast: Second Quarter Review

Sat, 19 Sep 2009 14:44:00 PDT

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

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

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

It Will Never be the Same

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

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

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

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

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

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

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

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

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

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

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

Sat, 19 Sep 2009 14:44:00 PDT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

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

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

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

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

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

Podcast: Tom & Christine Discuss the Global Equity Fund

Sat, 19 Sep 2009 14:44:00 PDT

By Scott Ronalds

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

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

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

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

Book Review: Panic

Sat, 19 Sep 2009 14:44:00 PDT

By Scott Ronalds

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

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

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

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

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

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

Hedge Fund Costs Add up to Bad Math

Sat, 19 Sep 2009 14:44:00 PDT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hedge Funds are Dead

Sat, 19 Sep 2009 14:44:00 PDT

By Scott Ronalds

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

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

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

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

Re-balancing When Needed

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

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

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

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

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

Is It Justified?

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

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

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

But as investors, we have to remember:

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

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

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

The State of the Canadian Investor

Sat, 19 Sep 2009 14:44:00 PDT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You Go Girl!

Sat, 19 Sep 2009 14:44:00 PDT

Posted by guest blogger Lori Lothian (Steadyhand Director)

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

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

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

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

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

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

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

Teachers Expel BCE

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

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

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

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

But $23?

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

But $23?

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

But $23?

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

Trading Range

Sat, 19 Sep 2009 14:44:00 PDT

By Tom Bradley

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

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

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

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

A Tip of the Hat to the 'Capitalist'

Sat, 19 Sep 2009 14:44:00 PDT

By Scott Ronalds

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

Low cost
Concentration
Co-investment
Low turnover

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

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

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