Canadian Fund Managers Outperform
Does it really pay to invest in mutual funds? Apparently, it does.
According to a recent report, Canadian Fund Managers outperformed the S&P/TSX in the final quarter of 2008. That is especially important considering it was one of the worst three month periods in market history. Although the difference was small, specifically a -22.71% return for the index versus a -21.67% return for active Managers, the news is still quite positive. In fact, over 50% of active Managers were in this category of “outperformers”, while in previous periods that number was as low as 11.2% to 22.0%.
Your Take-Away: There is no question that you are probably thinking that this news is not overwhelmingly positive considering that the markets still fell quite steeply and that it is the first time in a long time that so many Managers beat the index. I agree.
That said, what I do think is important is that although the majority of Fund Managers may not have beaten the index in the past, there are still many that do. What that says to me is that the Managers you choose to invest with need to be well researched and have some form of proven track record. If in fact you happen to find one of these great Manager’s, you can unquestionably justify that there are times when Mutual Fund’s are worth their price tag.
One great place to start in terms of researching both the fund you are being recommended as well as the Manager who is responsible for it is www.morningstar.ca. I have used that many times myself and I’m confident that you will find this resource quite useful for your own due diligence.
Until next time, have a Wonderful Wednesday!
Chris
Maybe, Just Maybe, We Have Actually Hit the Bottom
In the article entitled “Is the Tide Turning? Managers Think So”, Mark Noble provides some very interesting reasons as to why many Managers seem to think that 2009 may just in fact be better then previously expected.
According to the Russell Investment Manager Outlook poll for the fourth quarter, “more than 70% of Canadian managers expect positive returns for the S&P/TSX in 2009. Further, 90% of managers surveyed believe the TSX is either fairly valued or undervalued.” In other words, these beliefs are not a direct result of any specific event that has occured in the Canadian market recently, but more because of a belief that the gloom and doom of 2008 and looking into the first half of 2009 has already been “built into” the current pricing of the Canadian index known as the S&P/TSX Composite.
Does this positive news, something we haven’t heard for quite some time, mean that we can expect to recoup our losses from 2008. According to the same poll, that is likely not the case. The article goes on to say “Managers seem to be leaning toward a slow and methodical recovery over the next year. More than 40% of respondents expect the Canadian market to bounce back more than 10% — an impressive comeback — but this is against a backdrop of near 40% losses for 2008.
Your Take-Away: As I mentioned in my last post, you can take just about any quote out of context and generally speaking, even shape it how you want it to sound. That said, this article and poll simply proves to me that it is time to consider getting back into the market or at least sticking with your existing plan. If you have taken a large chunk of your portfolio out of the market and are too afraid to jump back in full force, consider moving back in with smaller amounts spaced over the next couple of weeks and months. If you never did take your money out in the first place, make sure you don’t start now.
No one really knows what the future holds, and I’m certainly not arrogant enough to say that I do. I just can’t help but think that if some of the smartest minds and Money Managers in our Country believe that we most likely will not see much more of a decline in our economy and that we may have actually hit rock bottom, maybe it’s time we start to listen.
Until next time, have a Terrific Tuesday!
Chris
Have We Hit the Bottom?
That is a question that has been asked by nearly all of us around the world in the last couple of weeks.
In terms of the market, it’s hard to imagine things getting worse. Yet every day we open the paper or turn on the radio we hear of a new wave of job losses, a new institution going bankrupt or issuing new shares to raise capital. How is it possible to know if we are at the bottom or not. Or better yet, is it possible at all?
In my opinion, it’s close to impossible to predict the future or for that matter, the current bottom. We can use historical data to make that assumption, but in many cases we can slice and dice the information to further prove our point. One personal finance Columnist for the Wall Street Journal, Jason Zweig, said in a recent article that “his initial research showed that the drop in 2008 as of November 20th was the worst drop since 1926. In fact, if the November 20th year-to-date losses hold, 2008 would be the worst year in the New York Stock Exchange’s 194-year history.” Read that sentance out of context, and we are in dire straights and running for the closest bomb shelter.
On the other hand, and better yet in the same article, Abby Joseph Cohen, CFA, president of the Global Markets Institute and senior investment strategist at Goldman Sachs said “In our Goldman Sachs forecast for quarterly economic growth, we believe the economy is at its worst right now; GDP decline in the fourth quarter of 2008 and the first quarter of 2009 will be dreadful. However, we could see stabilization and some glimmer of growth by the end of 2009.” That sounds much different then the first sentance, doesn’t it?
The simple fact that two incredibly bright and well respected financial Commentators feel very differently about the exact same issue further lends to the idea that it is impossible to predict the future or the bottom. If that’s the case, what is one to do in terms of their response to this myriad of information overload?
Your Take-Away: What we are doing both for ourselves and our clients is a simple as “sticking to the plan”. After all, we have no idea when we as a country or even a global economy will come out of this mess, but we are confident that we will…one day. If that’s true and we can’t predict the bottom, how can we then predict the inevitable turn around and thus get our money back into the market at the perfectly right time? “Sticking to the plan” is a combination of both having a plan to start with and believing in that plan and the core fundamentals and reasons you initiated it in the first place.
This may sound a bit simplistic in thought, but I challenge you to consider what would happen if you were to pull your money out of the market at the wrong time, completely hijacking your plan, and then get back into the market at the wrong time again. The end result, your losses are no longer just on paper. They are very, very real. I’m confident if you think three, five or ten years out, you will be more then happy with your decision to see this through.
Until next time, have a Terrific Thursday!
Chris
Ten Pieces of Good News in the Gloom
The following article was first published in Globe Investor Magazine Online on November 28, 2008. Typically I prefer to comment on an article that I post but the author, Dan Richards, does a great job of that. This is one that is definitely worth the read!
Article: Ten Pieces of Good News in the Gloom
By Dan Richards
Few have had as many quotes attributed to them as Winston Churchill. One of his expressions seems especially relevant right now: “Pessimists see problems in every opportunity. Optimists see opportunities in every problem.” These days, there’s certainly no shortage of difficulties to point to – the only saving grace is that the vast majority of these problems appear to be priced into the market.
In fact, a strong case can be made that the pendulum has swung to the point of excess gloom. At a lecture I attended a few years back, a prominent professor of business history commented: “There has always been good news and bad news out there. Only two things vary at any given point in time: First, the balance between good and bad news and second, what people focus on.” The tech mania of 1998 to 2000 was a classic period in which we only focused on the good news and ignored the bad; arguably we’re seeing the opposite take place today as all that people talk about are the negatives, neglecting anything remotely positive. When thinking about all the bad news that faces us, here are 10 “good news stories” to consider:
1. Attractive market valuations
Depending on who you talk to, stock valuations are generally seen to be at either normal historical levels (which should lead to returns in the 8 to 10 per cent range) or at extremely attractive levels, which would result in returns well above that. Of note are recent actions by Prem Watsa of Fairfax Financial, an insurance holding company that made over $2-billion betting against U.S. financials.
Throughout 2008, Fairfax had its equity portfolio fully hedged, eliminating exposure to the stock market – but on November 20, Mr. Watsa announced that they had removed the hedges saying: “While the recession may be long and deep, we also believe that stock prices may have discounted the worst of the economic decline. As value investors, we are finding an incredible number of investment opportunities across the world.”
Another skeptic who has changed his views is Robert Schiller of Yale, who predicted both the tech collapse and U.S. real estate meltdown – and now says that market valuations have returned to normalized levels.
2. The impact of lower oil prices
The dramatic drop in oil prices has put many more dollars in the pockets of businesses and individual consumers. No matter how dire economic prospects might appear, they’d be much worse if oil was still at $150 a barrel (unless of course you happen to be employed in the oil patch – this is a classic example of the same news being positive for some and negative for others.)
3. A return to the old virtues among banks
At one time, banks stood for prudence, risk management, oversight and transparency. It’s clear that too many banks got away from these – and also clear that we’re seeing a return to these traditional virtues that will ultimately leave the banking system stronger.
4. Strong political leadership around the world
The challenges we’re facing today will test the leadership of all of the major economies. The good news is that it’s difficult to remember a time when we had leadership that was stronger and more collaborative and open to new directions than we see today with Gordon Brown, Angela Merkel, Nicolas Sarkozy and Jean-Claude Trichet in Europe; Barack Obama, Ben Bernanke, Tim Geithner, Paul Volcker and Larry Summers in the United States; and Hu Jintao in China and Manmohan Singh in India.
The early response to Mr. Obama’s new administration is especially positive – as he and his team promise to boost confidence among American investors, consumers and businesses , something sorely lacking over the recent period.
The sole exceptions to strong leadership among major powers are Japan, which has suffered from a leadership vacuum since Junichiro Koizumi retired in 2006 and Vladimir Putin in Russia – while there is little question about his strength, his openness to new directions and willingness to collaborate is another question.
5. A co-ordinated global response by central bankers
In the past, difficulties similar to today’s would have led to a fractured and fragmented global response. That’s a sharp contrast to the co-ordinated and co-operative response we’ve seen from central banks and the economic leadership in place today. Indeed, there appears to be a steadfast commitment to do whatever it takes to keep the financial system afloat and to provide the stimulus to get economic growth restarted.
6. Pruning of weak players
The economist Joseph Schumpeter is best known for the concept of “creative destruction”, the dynamic process whereby new ideas supersede old ones and innovation leads to the collapse of traditional market leaders. While it’s intensely painful if you have the misfortune to work for or invest in one of these companies, a key reason that the U.S. dramatically outperformed every other major economy in the 20th century was its flexibility, adaptability and willingness to allow losers to die.
Whether in the automobile industry, retailing or banking, we’ll be better off as consumers and the economic system will be stronger when marginal players are consolidated into stronger survivors – setting the stage for new upstarts to emerge and challenge the remaining incumbents. In countries such as the U.S., France, Germany and the United Kingdom (Canada being a notable exception), an important byproduct of recent events is that weaker banks have disappeared from the scene, with the surviving banks becoming stronger as a result.
7. Opening of economies and growth of entrepreneurial drive
We’ve all heard the expression “You can’t put the genie back in the bottle.” In the past 10 years, we have seen a remarkable outpouring of entrepreneurial spirit and energy in countries with historically closed economies, ranging from China, India and Vietnam to Eastern Europe and South America.
While the current economic downturn represents a setback, there is no disputing the fierce work ethic and drive to succeed that have been unleashed – and while some Western companies and industries will struggle to adapt to the heightened competition that has resulted, it’s indisputable that the global economy will be a big winner as a result. As a side note, not long ago South America and Eastern Europe were seen as economic and political basket cases. In large measure due to the opening of economies and a renewed commitment to democratic government, countries like Argentina, Brazil, the Czech Republic, Poland and Hungary are now poised for strong economic growth.
8. The commitment to global trade
When faced with tough economic periods in the past, one response was to resort to raising trade barriers – this was a key contributor to the Great Depression. The good news is that there have been no signs of a global trade war – and indeed we continue to see movement towards reducing trade barriers (albeit slower than some would like.)
9. The continued payoff from technology
Since the commercialization of the Internet in the mid 1990s, we’ve seen hundreds of billions of dollars invested in the technology that permeates our personal and work lives. While this technology has led to compressed margins and severe pressure on some industries (think travel agents and newspapers, for example), on balance, it’s continued to be a huge driver of increased productivity – and with higher productivity come heightened profits. Another benefit of technology is higher return on research and development - the impact of processing power and instant communication is paying immense dividends in making research dollars more efficient, as information on new discoveries is disseminated in real time.
A shift in focus by the best and brightest
The best talent migrates to those fields offering the most recognition and highest pay. As a result of stratospheric compensation in the financial industry, an entire generation of the best and the brightest young people aspired to be financial engineers. There are already signs that the return to reality on compensation levels is leading to some of that same talent becoming real engineers, where their drive and abilities are going to be put to better use.
“None of this is to say that we don’t continue to have real issues ahead of us and that unwinding some of the excesses of the recent past won’t continue to be painful. Thinking about investment prospects going forward, however, it’s important to bear in mind that we seem to be in that part of the market cycle where the problems seem overwhelming with any offsetting positive ignored … and that it’s exactly these kinds of environments that have historically represented some of the very best times to invest.”
Until next time, have a Terrific Tuesday!
Chris & Elisseos
Active Managers Beat the Index in Q3
There has been a lot of talk surrounding whether to buy into mutual funds or simply invest in the equivalent index.
Recent data was released by the Standard & Poors Indices Versus Active Funds Scorecard (SPIVA) specific to Quarter 3 results in a down market. This report said that over 60% of active Manager’s beat the S&P/TSX index which is a substantial increase over past results. S&P’s Jasmit Bahndal responded by saying “The important thing for investors to take away is not that there are active managers who can beat the benchmark, but that it’s hard to find them”.
Your Take-Away: Finding a great Money Manager can be tough. Never hesitate to ask your Advisor why he or she recommends that specific Manager and always do your own due diligence to ensure you understand as much as possible about the Manager you may be investing with. Issues such as experience, track record, core philosophy and primary holdings are all key to helping you make the right decision.
This is not a black or white issue at all and many beliefs and theories surround this very controversial topic. My thought is that I’m more then happy to leave the big buying and selling decisions to the people who do this every day, all day, then to try and do it myself. However, that’s just my opinion and it’s up to you to decide for yourself.
Until next time, have a Magnificent Monday!
Chris
Stay Invested…PLEASE!!!
Volatility seems to be a very popular word lately, and with good reason!
Over the course of last week, we saw the Canadian market fall a whopping 16% in only five business days. Those are numbers we haven’t seen for years. Amazingly however, both the Canadian and American markets bounced back quite strong to start off their trading week. The Dow Jones was up over 11% yesterday and the S&P TSX rebounded today by almost 10%. Those are both very substantial one day numbers and present a great learning opportunity for all of us.
Your Take-Away: There is no one, including myself, who enjoys watching their investment portfolio diminish as we’ve all seen over the course of the last few weeks. It becomes very easy to consider selling your investments and moving everything to cash, but after yesterday and today, it becomes very evident that usually that is not the best decision.
Don’t get me wrong, I’m not here to predict whether this is “capitulation”, a “dead cat bounce”, or even the “bottom” for that matter. I am here to say however that if you lost 16% last week and pulled ouf of the market on Friday, you would have missed a 10% or 11% turn around and still been sitting at your “personal market” low. In other words, you would not have been in the market long enough and thus recovered a good portion of your losses.
Riding the wave is not easy, but if you do have a mid to longer term time horizon, it usually works out to be your best bet in the long run. Staying invested and waiting this out will most likely help you to recoup your losses and exceed your highs over time!
Until next time, happy investing…and waiting!
Chris
Warren Buffet Weighs In
Warren Buffet is widely recognized as one of, if not the most, successful investors of our time.
He was recently interviewed Charlie Rose on PBS and provided some fantastic insight into where our economy is and what he recommends in terms of our own personal response. Below is just a small exerpt from that interview and above is a link to the entire document.
Happy Reading!
Charlie Rose:
There is a time to accumulate and a time to spend.
Warren Buffett:
Absolutely. You want to be greedy when others are fearful. You want to be fearful when others are greedy. It’s that simple.
Charlie Rose:
What are they now?
Warren Buffett:
They’re pretty fearful. In fact, in my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now.
Charlie Rose:
Are you satisfied with that rescue plan?
Warren Buffett:
Well, I don’t think it’s perfect, but I don’t know that I could draw one that’s perfect. But I’d rather be approximately right than precisely wrong, and it would be precisely wrong to turn it down. We need — we have a terrific economy — it’s like a great athlete that’s had a cardiac arrest. It’s flat on the floor, and the paramedics have arrived. And they shouldn’t argue about whether they put the resuscitation equipment a quarter of an inch this way or a quarter of an inch this way, or they shouldn’t start criticizing the patient, because he didn’t have a blood pressure test or something like that. They should do what’s needed right now. And I think they will. I think the Congress will do the right thing. I think that they’ve — you know, they got into certain arguments and they start worrying about assessing blame, and there is a little demagoguery, but in the end, something this important, they’ll do the right thing. So this really is an economic Pearl Harbor. That sounds melodramatic, but I’ve never used that phrase before. And this really is one.
The long and short, doing what feels so “wrong” may be just the answer. Don’t be afraid to take advantage of a market that is largely on sale. After all, if it works for the greatest investor of our time, maybe it will work for us!
Until next time, have a Fantastic Friday!
Chris
Volatility and the Canadian Market (S&P/TSX)
Stay Focused, Stay Invested, Stay Diversified
There is no question that you have heard a lot about the recent volatility the Canadian market has seen in the last couple of months, and specifically the month of September.
I can say that I understand your fears and reservations when it comes to our current Canadian and Global economies. I am still confident however in market trends and the fact that with every great fall comes a great rebound, historically speaking.
Your Take-Away: Considering the overall “gloom and doom” we are reading about or hearing about every day recently, I wanted to provide you with a great education piece entitled “Stay Focused, Stay Invested, Stay Diversified”. This document speaks specifically to what we saw in early January when the S&P/TSX market tumbled a total of 605 points and then recovered with a rebound of 508 points the very next day. It also speaks to the importance of staying focused and staying invested by demonstrating the result on a portfolio if you were to miss the best 10, 20, 30, 40, 50, and 60 days in a ten year window.
Rest assured that I personally understand the feeling of watching my own portfolio take a hit over the last few weeks and months. I urge you to take a look at the document attached and ensure that you don’t make any rash decisions. Simply put, stay the course and I am confident you will reap the rewards.
Until next time, have a Wonderful Wednesday!
Chris
Last Week was Rough on the Canadian Market
It is no longer news that last week was a rough one for the S&P/TSX.
In fact, the Canadian Market fell over 900 points within the four trading days that the market was open which just happens to be one of the worst single weeks in Canadian history. Although we avoided a recession in the second quarter of this year by only 0.3%, it is clear that we are definitely still hurting in terms of our market strength.
Your Take-Away: The results of last week are not easy to swallow, especially if you were like many others and saw your investments take a pretty steep fall. Despite the fact that I work within the financial world, it’s still not fun or easy to see my portfolio fall the way it has over the last few months. That said, I also believe that although we are probably not at the bottom of this fall, we have the chance to buy stocks and funds while they are on sale and God willing, just before they rebound. I’m not telling you to invest everything you have in the market, but it may not be a bad idea to take advantage of “Dollar Cost Averaging” and start getting back into the market in smaller amounts over the next few months.
Keep this in mind. Warren Buffet once said that he “sells when others are buying, and buys when others are selling”. I know that’s a paraphrase, but the concept is crystal clear. It’s up to you what you do, but I’m definitely taking advantage of this market as opposed to running from it.
Until next time, have a Magnificent Monday!
Chris
Should I Pay Down My Mortgage or Invest in the Market (Part 2 of 2)
In my last post, I discussed my perspective of whether to pay down your mortgage sooner with your extra cash flow, or whether to invest that money in the market. In this post, I thought I would share an alternative reason as to why I choose to invest in my RSP’s with extra cash flow rather then pay off my mortgage with that same amount of money.
The strategy I’m referring too is to invest your extra cash flow into an RRSP on a monthly basis. Each deposit will go towards your total RRSP contribution for that year and thus create an annual tax deduction. If you are like most Canadians, you will then receive a tax refund sometime in the early part of the following year that you can then put directly against the principal of your mortgage. This strategy allows you to grow your RRSP and also pay down your mortgage sooner.
Your Take-Away: Think of it this way. If you have $10,000 to put against your mortgage, why not put that into your RSP and create a tax deduction of $10,000? If you are in the highest tax bracket of 46%, you would receive a tax refund of $4,600 which you could then put directly into your mortgage. Right off the top you have turned your $10,000 into $14,600 and have both grown your RRSP and also reduced your mortgage debt.
In the end, sticking to your regular mortgage payment plan or paying it off sooner becomes a matter of preference and a decision based on “Opportunity Costs”. Only you can make that decision, but if you can handle a bit of debt and stay with your original plan, why not take advantage of a market that is largely “on sale” today?!?
Until next time, have a Fantastic Friday.
Chris
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