Fee hogs that bring home the bacon

Discuss your favourite picks, broker, and trading or investment style.

Postby parvus » 05 Dec 2006 23:34

yogi wrote:
(How does the euphemism go- yes, that's it, for proponents of active management, I'm just "stirring the pot" :wink: )


Are you slicing and dicing generally, or just in Canada (with XRE)?
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Postby YogiBear » 06 Dec 2006 00:28

Bylo Selhi wrote:You may or may not want to take on the hassles of running accounts at multiple institutions in order to minimize costs. (Simplicity is both a virtue and has value, particularly for people with dayjobs.) I'm not trying to sell you on either option, only pointing out that there are alternatives to paying BGI a 55bp lifetime annuity for what seems to me is very little service rendered.


:? ... Don't think that over the past year, in particular, I haven't been wondering what, if anything, to do about XRE ... The stumbling block always comes back to those taxable CGs, and the relatively small % allocation to XRE in our portfolio- the latter point providing comfort in inertia! I could, I suppose, always [s]wait for[/s] hope for a Reit crash to reduce the CG exposure, but that might just substitute the alternate risk of unbounded fury from any remaining trust believers here ... (joke, it was a joke ...). And simplicity is a driving element to our set-up, more than anything because of the cubs in our den. :D This January, during my annual portfolio update, I will look at numbers and options again ...

Anyway, a question for Yogi. If you were to take a fork off the yellow brick road as I did, would you then no longer consider yourself to be an indexer?

I would still be an indexer. Leaving aside semantics, it represents a view on market participation. The (ex ante) expected return from active management, net of costs, is less than my expected return from indexing most of the time. Why would I assume additional manager risk if I cannot expect to be compensated for it?

Direct purchase of securities in approximate imitation of existing indices, then, where intermediated indexing is not feasible or cost effective, is just the same thing without an MER. There is no "manager" risk- whether third party or self- so long as the implemented goal is to imitate, not to try to beat, an objective benchmark.

The dividend stocks are a special case. I guess the old "withdrawal"- income issue changes the terms of discussion, since the focus is on sustainable income, rather than capital growth. ISTM in this case an index/ active distinction is less useful than a "expected sustainable and sufficient (income)" vs "potentially unsustainable and uncertain (income)" distinction. But costs still count towards returns, and manager risk is still an issue WRT the sustainability and certainty of the income.
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Postby YogiBear » 06 Dec 2006 00:42

boib22 wrote:The biggest drawback of going on your own is the emotional baggage you bring to the equation. Now only you are responsible for your decisions and you don’t have anyone else to blame if things don’t go as planned.


I agree that many (most?) retail investors might see this as a drawback- but I see it as a tremendous advantage. I- and only I- am responsible for all aspects of our portfolio that are actually subject to individual control- costs, asset allocation, cash inflows and withdrawals, "holding the course", etc. Once having resolved these decisions to my satisfaction, time to let the markets- which I can do nothing about- do their thing, for good or bad or ugly. There will be no need to blame anyone or anything- I am responsible for my decisions, and "the market" is just the reification of impersonal forces resulting from mass aggregate behaviour. So what? Relax. It's fascinating. Enjoy when it goes well. Laugh when it doesn't.
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Postby NormR » 06 Dec 2006 00:46

YogiBear wrote:The dividend stocks are a special case. I guess the old "withdrawal"- income issue changes the terms of discussion, since the focus is on sustainable income, rather than capital growth. ISTM in this case an index/ active distinction is less useful than a "expected sustainable and sufficient (income)" vs "potentially unsustainable and uncertain (income)" distinction.


Oh dear, now Yogi has gone astray. What ever happened to efficient markets?
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Postby YogiBear » 06 Dec 2006 01:00

parvus wrote:Are you slicing and dicing generally, or just in Canada (with XRE)?


Um. Seriously, I don't quite agree with the term "slicing and dicing" when referring to Reits as a proxy for RE exposure. In technical terms, it is, since the Reits held by XRE are all components of the TSX Composite. But- without going into the literature, which I'm sure you know well (probably better than me!)- commercial real estate can usually be considered a separate asset class from stocks as such, and Reits can usually be considered an effective proxy for RE exposure. Finally, the S&P/TSX Capped REIT Index, which XRE tracks, makes up a vanishingly small part of the total TSX Composite market cap.

So, to answer your question, I don't slice and dice. I have exposure to the world's publicly traded equity through broad or total market indices. I also have exposure to Canadian real estate, and fixed income.
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Postby YogiBear » 06 Dec 2006 01:05

NormR wrote:What ever happened to efficient markets?


I don't know- why don't you fill me in? I only care about CMH- as in Costs Matter Hypothesis- and not letting some manager make his year-end bonus by putting my money at risk. :wink:
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Postby Shakespeare » 06 Dec 2006 01:13

I only care about CMH
I prefer a better one - RMH.

(Risk Matters Hypothesis.) :twisted:
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Postby George$ » 06 Dec 2006 09:28

Shakespeare wrote:
I only care about CMH
I prefer a better one - RMH.

(Risk Matters Hypothesis.) :twisted:

Shakes:
In your RMH, is Risk=Volatility (as measured by a standard deviation via assuming a normal distribution)?
It seems to me actual investment risk is much more than that? I don't really think I understand "risk".
Care to comment?

In CMH I can understand "cost". :roll:

ps I've not been posting much lately as my left arm is slowly and painfully recovering from a messy compound fracture. But I continue to enjoy reading all the great to and fro posts here at FWF.
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Postby Shakespeare » 06 Dec 2006 12:32

Risk is whatever you think it is. :twisted:

Tough luck about the arm. Hope you get better ASAP.

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Postby NormR » 06 Dec 2006 13:25

George$ wrote:ps I've not been posting much lately as my left arm is slowly and painfully recovering from a messy compound fracture. But I continue to enjoy reading all the great to and fro posts here at FWF.


Bad news about the arm. Sounds painful. Get well soon.
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Postby George$ » 06 Dec 2006 14:45

Shakespeare wrote:Risk is whatever you think it is. :twisted:


OK. What do you think risk is? :twisted: :lol:
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Postby Shakespeare » 06 Dec 2006 17:48

Whatever keeps me awake at night worrying that I won't have a (financially) happy retirement.

I've been sleeping like a babe the last few years. :P

P.S. This is being posted from Hawaii. EYHO. :twisted: :wink:
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Postby parvus » 06 Dec 2006 22:43

yogi wrote:
So, to answer your question, I don't slice and dice. I have exposure to the world's publicly traded equity through broad or total market indices. I also have exposure to Canadian real estate, and fixed income.

Okay. But actually, I was thinking of global exposure to real estate, or for that matter, fixed income (I should have posed a clearer question :oops: ). I would assume, given your walking the talk, that you hold as few ETFs as possible, so I was just wondering about what you feel gives the broadest-possible exposure and which classes you have to pinpoint, e.g., real estate.

I haven't made up my on these things (I'm still working within the value/small-cap continuum of possible risk premia and wondering about the degree to which dividend-payers are a value proxy). But I'm always looking for possibilities over the risk-free rate, or else just contrarian plays.

Lurking in the back of my mind, of course, is a pullback in REITs, and I've read enough on these threads about REIT valuations.

(FWIW, Morguard just bought some Ottawa properties with an unnamed pension fund; Primaris just issued $100 million in new units, a week after its normal course issuer bid and purchase of a full stake in a Winnipeg shopping mall; then there's the Cominar/Alexis Nihon merger. What a week!).

XRE's performance has been impressive, but I worry about the pension fund craze for slightly higher returns over government bonds pushing cap rates down to 6%. I have a similar concern for global real estate. (Yeah, yeah, another one of my "madness-of-crowds" theses, tho' real estate doesn't lend itself as much to Verdinglichung as other, reified assets might. :wink: )

As for fixed income, there were a couple of interesting reports today on Bloomberg. Junkoutperformed last year and some think it might outperform this year, but the spreads have come down to about 320 bps over treasuries rather than a more normal 550. On the other hand, investment grade debt is in trouble (at least index-wise) because, in the flurry of private equitytakeouts, normally financed by loading up the takeover target's balance sheet, credit quality gets very quickly downgraded. The spreads are also thin, from an average 125 bps to around 90 bps.

I would say I'm "always learning," but I think someone already has that moniker. "Always debating" might work better. :wink:
Last edited by parvus on 07 Dec 2006 21:23, edited 1 time in total.
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Postby YogiBear » 07 Dec 2006 00:53

parvus wrote:But actually, I was thinking of global exposure to real estate, or for that matter, fixed income ... I would assume, given your walking the talk, that you hold as few ETFs as possible, so I was just wondering about what you feel gives the broadest-possible exposure and which classes you have to pinpoint, e.g., real estate.


One of the issues that a Canadian retail indexer faces is the dearth of choices for international asset classes outside of traditional equity. We all hear constantly about the huge variety of ETF choice in the US- yet if one looks at such things as real estate or bonds, all of the available ETFs index various portions of or orientations to the US market for those asset classes. There are no international bond ETFs, for example (do the new foreign currency ETFs count?), nor international Reit ETFs. The result is that- unless one wants to take a fling at Dublin-domiciled ETFs, with the attendant costs- "global exposure" to real estate or bonds, in a low-cost indexed implementation using ETFs, is limited to the US. And WADR the US does not sum up the full extent of the meaning one might attach to "global".

To illustrate the nature of the problem, consider that there is exactly one- and only one- way for Canadians to access international government bonds in a low-cost, indexed format that I am aware of: the CIBC Global Bond Index fund, with MER rebate (effective MER of 0.32/ 0.27%). This is actually a perfectly reasonable choice- it tracks its index pretty well, and is a wonderful portfolio diversifier (as a quick example, check its annual return for 2002 when world equity markets tanked- +18.11%. Across any period that I have checked, using annual or quarterly numbers, it has a negative correlation with US and EAFE equity returns in CAD)- but to be cost-effective requires one to qualify for the CIBC index MER rebate, and there is no alternative for someone who might not want the 25% exposure to the USD of the CIBC fund (because they already have USD debt, for example).

The point, then, is that I do not choose to "hold as few ETFs as possible" as a doctrinal position- to a certain extent, given the conditions I have set for my asset allocation and its implementation, my options are constrained by the choice of available instruments. What my portfolio might look like in a world of unlimited ETF/ index fund choices covering the entire range of investable world financial assets is a moot point, unfortunately.
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Postby tidal » 07 Dec 2006 13:07

YogiBear wrote:
parvus wrote:But actually, I was thinking of global exposure to real estate, or for that matter, fixed income ... I would assume, given your walking the talk, that you hold as few ETFs as possible, so I was just wondering about what you feel gives the broadest-possible exposure and which classes you have to pinpoint, e.g., real estate.


There are no international bond ETFs, for example (do the new foreign currency ETFs count?), nor international Reit ETFs.
sSga/streetTracks is introducing a DJ Wilshire International Real Estate etf imminently, which you can buy on the US Exchanges. There is also a global property iShare trading on the FTSE currently.

Regarding international bond etf's, which is not an asset class that I am interested in... as you note, there are plenty of US options, and there are also £- and euro-denominated bond etf's trading on FTSE. But furthermore, you can call up your broker and buy bonds denominated in euro's, £, rand, krona, aussie $, kiwi $, swiss franc, yen.... and more often than not, you can buy these issued by Canada, Ontario, Quebec, supranationals (e.g. IBRD), other foreign governments, etc. (so high credit quality and typically no withholding tax...).... I mention this just because the reality is that one is hardly "constrained" from investing in these asset classes, and the depth of the etf market is only going to get better... But really, does "no international bond etf" mean "i guess we can forget about retirement until we get one, darn it!"? I think the allocation to "international bonds" at OTPP is about 1%, and at CPPIB I think it might be 0%... just to put some perspective on this...
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Postby tidal » 07 Dec 2006 13:17

tidal wrote:sSga/streetTracks is introducing a DJ Wilshire International Real Estate etf imminently, which you can buy on the US Exchanges. There is also a global property iShare trading on the FTSE currently.
Coincidentally, a timely development today on the same topic:
http://www.indexuniverse.com/index.php? ... =6&id=1724
With the U.S. real estate market teetering, investors are increasingly looking overseas for ways to access the popular real estate asset class. Recently, Northern Trust launched the world’s first global real estate index fund, and global real estate indexes are all-the-rage. There is a feeling that in real estate, as in other asset classes, different parts of the world are functioning at different points of the cycle, and that diversifying overseas offers the potential to boost those returns.

Jumping on this bandwagon, indexing giant Dimensional Fund Advisors (DFA) has filed with the Securities and Exchange Commission (SEC) for the right to launch an international real estate fund. The fund will complement the existing DFA U.S. fund. It will generally follow a free-float market-cap weighted index, although it has the discretion to deviate from that to ensure adequate country diversification.

The prospectus is available here.

The fund focuses largely on developed ex-U.S. markets, although - curiously - it includes three countries generally thought of as emerging markets: Turkey, Taiwan and South Africa.
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Postby parvus » 07 Dec 2006 21:21

tidal wrote:
I think the allocation to "international bonds" at OTPP is about 1%, and at CPPIB I think it might be 0%... just to put some perspective on this...


The latest issue of Canadian Investment Review picks up the diversification argument.

The theory of global fixed income investing is relatively simple, and the same logic has been well accepted in the equity markets. Investors who diversify globally can expect to be rewarded by superior long-term results. The higher incremental yields available in some markets, when combined with the diversification and risk reduction benefits of a broader opportunity set, lead to an improved information ratio.
However, implementation is far more complex.

<snip>
Table 1 shows that foreign bond markets are more volatile than Canadian bonds, but low correlations make foreign markets a good diversifying asset class to reduce overall portfolio risk and/or enhance returns for a given risk profile. However, correlation data and optimization are notoriously sensitive to the time period used. Interest rates have been on a downward slide for the past two decades, and credit spreads have been on a general narrowing trend. Analysis based on recent periods may therefore not provide a reliable indicator of future relationships, particularly in a new regime of lower, more stable inflation coupled with potential event risk.
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Postby brucecohen » 07 Dec 2006 21:47

tidal wrote:I think the allocation to "international bonds" at OTPP is about 1%, and at CPPIB I think it might be 0%... just to put some perspective on this...


CPPIB is interested in international bonds because it is gung ho on global diversification.* But its bond allocation is currently pretty much filled by the legacy provincial borrowings. Management intends to begin building active bond management capability as the provincial bonds mature. CPPIB does hold a good sized position in US TIPS as part of its 10% inflation-linked allocation, in large part because the supply of Canadian RRBs is so small.

* In addition to the normal arguments for global diversification, CPPIB's managers cite these reasons:

-- At $100 billion and growing, the fund must look elsewhere to avoid disrupting the relatively small Canadian market

-- The flow of CPP contributions is directly tied to the Canadian economy. Global diversification offers a way to cushion the fund when the Canadian economy turns down and contributions decline.

-- Global diversification enables the fund to use strong growth elsewhere to subsidize pensions for Canadians.
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Postby YogiBear » 08 Dec 2006 01:53

tidal wrote:sSga/streetTracks is introducing a DJ Wilshire International Real Estate etf imminently, which you can buy on the US Exchanges.

Interesting.


There is also a global property iShare trading on the FTSE currently.

Regarding international bond etf's ... there are also £- and euro-denominated bond etf's trading on FTSE. [emphasis added]

As I noted in my post, one always has the option of "Dublin-domiciled ETFs, with the attendant costs"- these European versions of iShares not only trade in London, but on several exchanges in the Euro-zone as well. The problem with them, as implied by "with the attendant costs", is the cost effectiveness of buying them- and even more, reinvesting distributions- for all but the largest retail portfolios. As a practical matter, these funds are not very accessible for that reason.

BTW, for those who are inclined to trade across the pond, not only is there a global property iShare, as noted by tidal, but also Asian property and EUR-denominated property iShares. There are also, in addition to nominal bond ETFs, an index-linked EUR bond (French, mostly, IIRC) and an index-linked GILT (GBP) iShares.


But furthermore, you can call up your broker and buy bonds denominated in euro's, £, rand, krona, aussie $, kiwi $, swiss franc, yen ... I mention this just because the reality is that one is hardly "constrained" from investing in these asset classes, and the depth of the etf market is only going to get better [emphasis added]

One can of course buy individual bonds, as suggested, if one wished.

Nevertheless, the constraints exist, as formulated by the initial condition I put upon my discussion- that it related to a "Canadian retail indexer". The Canadian part relates to the "Dublin-domicile" mentioned previously, while the "retail indexer" applies here. Out of curiosity, what sort of transaction costs (particularly for foreign currency denominated bonds) do you think a retail investor is likely to face, in order to buy enough bonds to provide the same currency diversification found in one of the relevant bond indices (Citigroup, JP Morgan, etc) for a small part of his portfolio? How cost-competitive would the result be with any reasonably priced index tracking instrument? If one indexes due to a desire or need to keep things simple and hassle-free, and as low-cost as possible, do you still agree that the choices you have listed ensure that "one is hardly "constrained" from investing in these asset classes"? Get real.

No one argues that "the depth of the etf market is only going to get better"- the issue is that at the moment it is full of US equity funds slicing that market every which way to Sunday, and little else. Maybe we can revisit this thread when "the depth of the etf market" is such that real international diversification is actually possible through it.


... But really, does "no international bond etf" mean "i guess we can forget about retirement until we get one, darn it!"? I think the allocation to "international bonds" at OTPP is about 1%, and at CPPIB I think it might be 0%... just to put some perspective on this...

Hhmm- I haven't noted your posts as being exemplars of hyperbole, but I guess there is always the odd exception. My comments were in direct reply to questions and observations put by parvus, bless his inquisitive heart. You are, of course, free to completely ignore "international bonds" if you wish- heck, go further, all the way, sell the Dublin iShares short, go for it, knock yourself out ... as I noted, my experience and research, such as it is, suggests to me that a small allocation to the asset class has provided a powerful portfolio diversification benefit in the past. Unlike you, I have no idea what the future will bring, so by default the best option is to assume that past experience will continue to apply until better evidence suggests itself.
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Postby tidal » 08 Dec 2006 11:44

Yogi,

My points on alternatives for investing in international bonds stand. I was trying to provide that as information, and it's accurate. Are there costs involved? Not surprisingly, yes, but if you feel you "need" the asset class, surely a one-time $100 or $200 extra price of admission is worth it, since the benefit must outweigh it?

As to the size of the benefit, admittedly it is a matter of opinion. The reality is though, for a Canadian investor, that the compounded 5-year return on the CIBC Global Bond Index fund you reference is -0.90% (albeit without the MER rebate) and the since-inception number (almost 9 years ago) is 1.63%.

Granted, it did protect you in 2002, but in general, you want to add asset classes that not only have low correlations to other portfolio investments, but that also have good risk-adjusted expected returns.

My opinion, and it is just my opinion, is that you should keep your fixed income exposure domestic, and get your foreign currency exposure via equity investing (or property investing)... Hence my lack of interest in the asset class.

Fwiw, here is what DFA has to say on global bond investing:
The Use of Global Bonds

Generally, investors pursue global portfolios in order to diversify. Statistically, diversification should result in lower portfolio volatility due to the combination of uncorrelated assets. The use of non-dollar developed market bonds, however, introduces foreign currency exposure. Currency exposure noticeably increases the volatility of the fixed income portfolio, while there is no reliable evidence to suggest that the expected return of exchange rates is anything other than zero. If volatility is increased with the addition of global assets, the whole purpose of international diversification is defeated. Therefore, we believe currency exposure should be hedged in global bond portfolios.

With currency exposures hedged away, the goal of diversification is attained. Introducing hedged foreign bonds into a domestic portfolio reduces the volatility of the portfolio. Portfolios of hedged global bonds, including the Two-Year Global Fixed Income Portfolio and Five-Year Global Fixed Income Portfolio, take advantage of imperfect correlations among developed bond markets and enjoy the classic benefits of diversification. Further, given the global nature of highly rated debt issuers, this international diversification can be reached without sacrificing the credit standards maintained in domestic portfolios.

In terms of returns, just as investors are no longer subject to the risk of one bond market, they are no longer subject to the expected returns of just one yield curve. Expected returns across hedged bonds differ as the shape of each yield curve is different. Portfolios can be formed that are tilted toward the higher expected return countries. In this case, portfolio maturities and country weightings follow a variable approach based on the expected return matrix generated for each eligible country.

In our view, global bonds do not represent a separate and distinct asset class from domestic fixed income. Instead, the use of currency-hedged, non-dollar bonds along with domestic bonds allows investors to create a more diversified, less risky fixed income portfolio. Global bond portfolios are often better suited than their domestic-only counterparts to achieve the primary goal of fixed income in the investment portfolio—reducing its volatility.
There are some other tables etc. at their site that support their conclusions. (Emphasis added above mine.).

Now, the final paragraph can be read to support your opinion of global bonds in a portfolio, or it can be used to support mine - and in the end they are just opinions. But my personal conclusion is that advantages to adding global bonds are marginal at best - hedged or unhedged. On the other hand, as I have mentioned here earlier, I do not believe in hedging away currency when in investing in foreign equities. To each his own.

Regarding OTPP and CPPIB allocations to non-North American bonds at approximately 1% and 0% currently. I stand by those numbers. Will they change in the future? Who knows, but clearly they have not considered this "job 1" in effectively investing and diversifying their portfolios. That was my point regarding perspective on the asset class.

Fwiw, I do not try to engage in hyperbole, and, like you, I have no idea what the future will bring. Finally, what the heck is this discussion doing in this thread? :| I will try to post when the sSga international property etf is launched, and their World(ex-US) Small Cap portfolio launches as well.
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Postby YogiBear » 08 Dec 2006 16:37

tidal wrote:My points on alternatives for investing in international bonds stand. I was trying to provide that as information, and it's accurate. Are there costs involved? Not surprisingly, yes, but if you feel you "need" the asset class, surely a one-time $100 or $200 extra price of admission is worth it, since the benefit must outweigh it?

If it was only "a one-time $100 or $200 extra price of admission" ... But what about ongoing reinvestment of distributions/ coupons? What about rebalancing and general cash inflows to be spread amongst all portfolio holdings? That "$100 or $200 extra price of admission" each time is going to add up terribly fast- thus the constraints and the need for low-cost ETFs/ index funds ...


As to the size of the benefit, admittedly it is a matter of opinion. The reality is though, for a Canadian investor, that the compounded 5-year return on the CIBC Global Bond Index fund you reference is -0.90% (albeit without the MER rebate) and the since-inception number (almost 9 years ago) is 1.63%.

Granted, it did protect you in 2002, but in general, you want to add asset classes that not only have low correlations to other portfolio investments, but that also have good risk-adjusted expected returns.

Investing based on past performance? I would have expected better from you ...

The -0.32% compounded annual return on the CIBC fund in the 5 years to October 31 (-0.96 + 0.64 MER rebate) is within 50 bps of the index that Globefund compares it to (not the fund's actual benchmark, BTW, but relatively if not exactly similar) over 5 years- so the issue is not the fund, but the asset class, as you have stated.

What has happened during those 5 years? During the last 3 and half years in particular, conditions for international bond funds have generally been quite negative. Should those conditions continue, the expected return from such a portfolio component, viewed in isolation, might indeed be nasty.

But what if the recent past does not repeat itself? What if there is a more-or-less global economic slowdown, or simply a 1998 style market "correction"- whoops, an international bond fund is going to look mighty fine as a part of a diversified portfolio- just as it did in 2002. The rebalancing benefit from averaging down the ACB of such a fund over several years of poor results, then reaping the reward of massive "insurance" when everything else tanks (and then rebalancing the international bond profits into the tanked equity funds, lowering their ACB and setting the stage for better results when they rebound), is what a rebalancing portfolio approach to risk and return is all about. It's called "buy low, sell high" while lowering overall portfolio volatility, and the recent past has nothing to do with the effectiveness of such an approach.


My opinion, and it is just my opinion, is that you should keep your fixed income exposure domestic, and get your foreign currency exposure via equity investing (or property investing)... Hence my lack of interest in the asset class.

That is fine- everyone is entitled to their own view. Just be careful about blanket statements of the type "in general, you want to add asset classes that not only have low correlations to other portfolio investments, but that also have good risk-adjusted expected returns" when applied to asset classes you are not interested in, since that lack of interest colours your appreciation for how the asset class might work for others.


Fwiw, here is what DFA has to say on global bond investing:
The Use of Global Bonds

In our view, global bonds do not represent a separate and distinct asset class from domestic fixed income.
There are some other tables etc. at their site that support their conclusions. (Emphasis added above mine.).

Now, the final paragraph can be read to support your opinion of global bonds in a portfolio, or it can be used to support mine - and in the end they are just opinions.

You don't provide the link so I can't check for myself, but it would be reasonable to suppose that DFA is writing from the POV of a US investor, not Canadian. Could that difference colour their views- or the numbers used to support those views- on the role of international bonds?

In any case, I have seen the same view as DFA elsewhere as well- just as I have seen studies and well-respected practitioner writing extolling the diversification benefits of international bond exposure as opposed to entirely domestic (i.e., US) holdings. There would seem to be a live debate on the role, if any, of the asset class. That is good- though more Canadian-centric research would be nice.


On the other hand, as I have mentioned here earlier, I do not believe in hedging away currency when in investing in foreign equities. To each his own.

I agree- I do not hedge currency exposure at all. But if you are concerned about "good risk-adjusted expected returns" when investing in asset classes- considering currency as an asset class separate from the equity or bond return as such- then you should hedge away all such exposure, since currency has a nil expected return over time, despite considerable "risk" (volatility).

The benefit of exposure to currency asset class(es)- other than cost reduction from not paying for hedging- is in their diversification benefits within a portfolio. OK for currencies, not for international bonds?


Regarding OTPP and CPPIB allocations to non-North American bonds at approximately 1% and 0% currently. I stand by those numbers. Will they change in the future? Who knows, but clearly they have not considered this "job 1" in effectively investing and diversifying their portfolios. That was my point regarding perspective on the asset class.

I am not familiar with the details of the use of international bonds by Canadian pension plans, though like you I've heard that they have been little used (to date).

Thanks to BruceCohen for the information on the plans of the CPPIB for the future- could you link to any discussion, published research, position papers, etc related to their view of the place of international bonds? Again, as with tidal's DFA citation, I am interested in all views, including those that conclude that international bonds have no place in a diversified Canadian portfolio.
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Postby parvus » 10 Dec 2006 21:19

tidal quotes DFA:
Therefore, we believe currency exposure should be hedged in global bond portfolios.

<snip>
In our view, global bonds do not represent a separate and distinct asset class from domestic fixed income. Instead, the use of currency-hedged, non-dollar bonds along with domestic bonds allows investors to create a more diversified, less risky fixed income portfolio. Global bond portfolios are often better suited than their domestic-only counterparts to achieve the primary goal of fixed income in the investment portfolio—reducing its volatility.


OTPP:
Fixed Income and Absolute Return Strategies

This asset class represents 19% of the fund and takes advantage of a range of sophisticated investment techniques to earn returns above market benchmarks.

We include a number of different types of investments in this category: absolute return strategies, hedge funds, our currency policy hedge, as well as the traditional fixed-income investments in government and corporate bonds and money-market securities.

Investments in this category represented 19% of the fund's investments at year end.

Bonds and money-market securities
Our bond portfolio holds Government of Canada bonds, global bonds, Ontario government debentures, corporate bonds (including convertible bonds and high-yield unsecured notes) and money market securities that provide the fund with a regular stream of income.To diversify our bond portfolio, we have credit portfolios that include new emerging market strategies and North American high-yield securities.

These holdings provide the plan with the liquidity it needs to pay pensions each month. We also manage the bond portfolio relative to its benchmark by trading in anticipation of interest rate changes. In the absence of inflation, long-term government and corporate bonds give stability to our asset mix.


CPPIB:
We have established a position in Canadian real-return bonds (RRBs) and have added Treasury Inflation-Protected Securities (TIPS) issued by the United States government. Canadian RRBs are in short supply, requiring us to consider similar bonds from other countries. We also see trading inflation-linked bonds as a potential source of above-market returns.


Can't find anything specific for OMERS, or CDP, except for this:
Impact of currency hedging on the results
The strength of the Canadian dollar against other currencies affected the Caisse’s overall return, with the result that the specialized portfolios hedged against foreign exchange risk outperformed the unhedged specialized portfolios. The hedged Foreign Equity portfolio returned 28.1%, significantly more than the 10.4% return on the unhedged portfolio. This difference of 1,766 b.p. (17.66%) is due mainly to the appreciation of the Canadian dollar against the euro (18%), but also against the yen (18%) and the pound sterling (15%).

As for the difference of 182 b.p. (1.82%) between the return on the hedged U.S. Equity portfolio and the return on the unhedged U.S. Equity portfolio, it is due to the 3% appreciation of the Canadian dollar against the greenback. The Investments and Infrastructures, Private Equity, Real Estate Debt and Real Estate portfolios are hedged against currency
risk.
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