Clippings 2012

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Park
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Re: Clippings 2012

Post by Park » 19 Nov 2012 09:54

"if we go back about 10 years ago, we find that the percentage of assets that were in long-term mutual funds and ETFs that were in equities was about 48%. Fast-forward to today, and that's dropped to about 37%. So, investors are taking money out of equities. In terms of bonds, the percentage of assets that were in bonds started out at about 13% 10 years ago--that is doubled to about 26%."

http://www.morningstar.com/cover/videoc ... ?id=574837

ig17
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Re: Clippings 2012

Post by ig17 » 19 Nov 2012 10:34

Park wrote:"if we go back about 10 years ago, we find that the percentage of assets that were in long-term mutual funds and ETFs that were in equities was about 48%. Fast-forward to today, and that's dropped to about 37%. So, investors are taking money out of equities. In terms of bonds, the percentage of assets that were in bonds started out at about 13% 10 years ago--that is doubled to about 26%."
One way to explain it: aging boomers are shifting to a more conservative asset allocation, as they should.

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Re: Clippings 2012

Post by lystgl » 20 Nov 2012 20:04

All one has to do is look at the 5 year return for the TSX. 13521 Nov 22, 2007 - 12046 Nov 20, 2012

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Re: Clippings 2012

Post by ghariton » 21 Nov 2012 16:55

Larry Swedroe:
there’s no army that’s strong enough to defeat an idea whose time has come, and passive investing is an idea whose time has come. However, the trend moves very slowly—kind of like waves eroding beaches. It happens inevitably, but it takes a long time. It’s moving at a pace of maybe 1 percent a year. I think perhaps passive investing makes up maybe 40 percent of the total now. But it’s moving at a very glacial pace, because we’re fighting a very entrenched enemy in Wall Street, as well as the financial media. Most of the media are on the side of active investing because they need investors to believe that someone can tell them which stocks to buy; which managers to choose. That way, everyone has to tune in.

<snip>

...And Wall Street of course makes a lot more money selling active products than you do selling passive. I mean, look at ETFs: they’re being driven to zero. I fully believe that one day we’ll see an ETF with a zero expense ratio, because you can generate revenue from securities lending.
Zero MER, eh?

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newguy
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Re: Clippings 2012

Post by newguy » 21 Nov 2012 17:08

ghariton wrote:Zero MER, eh?
It already is as they make up the minimal fees through the aforementioned lending.

Code: Select all

	
                                     1 Year  3 Year  5 Year 10 Year Since Inception
Total Stock Market ETF Market Price  14.78%  13.75%  0.86%  7.76%  3.62%
Total Stock Market ETF NAV           14.75%  13.70%  0.84%  7.74%  3.61%
Spliced Total Stock Market Index*    14.78%  13.72%  0.82%  7.76%  3.63%
newguy

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Re: Clippings 2012

Post by AltaRed » 21 Nov 2012 17:12

What's not to like, eh? An excellent reason to own large, broad based market ETFs.
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Re: Clippings 2012

Post by flywaysuzy » 21 Nov 2012 20:03

Or they could be dumping mutual funds and buying individual stocks...
suzy

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Re: Clippings 2012

Post by ghariton » 21 Nov 2012 21:13

flywaysuzy wrote:Or they could be dumping mutual funds and buying individual stocks...
Either way mutual funds are toast. Thank goodness. I have long suspected that it was to protect the Canadian mutual fund industry that we Canadian investors were not allowed to buy certain foreign products.

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Re: Clippings 2012

Post by AltaRed » 21 Nov 2012 21:22

ghariton wrote:Either way mutual funds are toast. Thank goodness. I have long suspected that it was to protect the Canadian mutual fund industry that we Canadian investors were not allowed to buy certain foreign products.
I presume you mean actively managed mutual funds. The passive, i.e. index, mutual funds still serve their purpose. For example, TDW efunds provide low cost options for young/low income investors to purchase small increments without commission.
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Re: Clippings 2012

Post by Shakespeare » 21 Nov 2012 21:23

Either way mutual funds are toast.
Not as long as they have salespersons.
“A wise man should be prepared to abandon his baggage at any time.” -- R.A. Heinlein, The Door Into Summer.

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Re: Clippings 2012

Post by Bylo Selhi » 21 Nov 2012 22:14

Shakespeare wrote:
Either way mutual funds are toast.
Not as long as they have salespersons.
Moreover not as long as those fund floggerssalespeeps are prohibited from floggingrecommending ETFs and other stocks.
Sedulously eschew obfuscatory hyperverbosity and prolixity.

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Re: Clippings 2012

Post by Park » 24 Nov 2012 07:50

https://www.credit-suisse.com/investmen ... arbook.pdf

Link To Credit Suisse Global Investments Returns Yearbook 2012. Could be worth reading.

Edited to include the following: the equity risk premium of Canadian stocks over Canadian bonds from 1987 to 2011 is a negative 1.5%. For 1962 to 2011, it is a positive 0.8%. Hopefully, there will be mean reversion :) .

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Re: Clippings 2012

Post by Park » 24 Nov 2012 10:44

http://www.ai-cio.com/channel/GENERAL_S ... sophy.html

DFA has written a paper critical of the risk parity approach.

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Re: Clippings 2012

Post by Park » 25 Nov 2012 08:06

http://www.sec.gov/investor/pubs/begfinstmtguide.htm

The equivalent of a pamphlet from the SEC on reading a company's financial statement.

Edited to include the following:

The SEC actually has an investor education website:

http://investor.gov/

Much of this is designed for the individual who is starting to invest. But some of it isn't for those starting out. For example, there is information on using EDGAR to research public companies.

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Re: Clippings 2012

Post by Park » 28 Nov 2012 08:53

For the novice investor, the link below is a good introduction to floating rate bank loans.

http://www.russell.com/Public/pdfs/publ ... folios.pdf

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Re: Clippings 2012

Post by Park » 28 Nov 2012 09:15

Conventional wisdom is that with government bonds, you don't have to worry about capital loss, whereas with stocks you do.

http://news.morningstar.com/all/dow-jon ... cents.aspx

"Greece is set to offer between 28 and 30 cents on the euro to holders of its government bonds"

However, those owning Greek stocks stand a chance of recovering any capital loss, if they wait long enough. This stands conventional wisdom on its head.

I've never been impressed with the arguments in favor of owning foreign government bonds. The risk adjusted returns on foreign bonds tend to be similar to those of domestic bonds. As changes in currency rates can considerably increase the volatility of foreign bonds, currency hedging looks like a good idea, and there is a cost associated with the hedge.

But who would have predicted 10 years ago that an EU country would default on its bonds? Will it be the last EU country to do so? Approximately 10 years after defaulting, Argentina looks like it may default again on its bonds.

IIRC, neither the federal nor any provincial government has ever defaulted on its bonds. The one possible exception was Alberta in the 1930s? Who knows what the future holds though; the PQ party is a wild card.

Perhaps investing in foreign bonds is not such a bad idea, even though my guess is that return would be lower. But if the situation got that bad in Canada, I wouldn't be surprised if the government(s) made it unappealing to own foreign bonds.

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Re: Clippings 2012

Post by Park » 28 Nov 2012 11:05

WSJ has an article on value investing vs. growth investing in the USA, its recent history and some predictions for the future. The link below is a way around the paywall.

http://icydiscernment.wordpress.com/201 ... -to-shine/

The following is a quote relevant to retail investors:

"Fund investors should consider index funds rather than actively managed ones, says Aswath Damodaran, a finance professor at New York University. He looked at the performance of value and growth managers, and found that actively managed mutual funds generally underperform the indexes they follow, and value managers usually underperform by more than growth managers...Too many value investors fail to dig deep enough, Mr. Damodaran says: “For active investing to pay off, you have to bring something to the table.”

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Re: Clippings 2012

Post by AltaRed » 28 Nov 2012 12:24

There is hope for my holding of Vanguard's VTV yet.
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Re: Clippings 2012

Post by ghariton » 28 Nov 2012 17:25

Park wrote:WSJ has an article on value investing vs. growth investing in the USA, its recent history and some predictions for the future. The link below is a way around the paywall.
Thank you for the link. From the article:
These days, the fate of value’s performance relative to growth is closely tied to the performance of two sectors: financials and technology, Mr. Simons says. Financials make up nearly 23% of Russell’s value index, the largest sector weighting by more than six percentage points. Tech stocks, meanwhile, make up about 28% of Russell’s growth index.
Interesting. I wonder to what extent "value" investing and "growth" investing really amount to sectoral bets, i.e. investing in certain sectors of the economy and not in others.

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Re: Clippings 2012

Post by NormR » 28 Nov 2012 17:34

ghariton wrote:
Park wrote:WSJ has an article on value investing vs. growth investing in the USA, its recent history and some predictions for the future. The link below is a way around the paywall.
Thank you for the link. From the article:
These days, the fate of value’s performance relative to growth is closely tied to the performance of two sectors: financials and technology, Mr. Simons says. Financials make up nearly 23% of Russell’s value index, the largest sector weighting by more than six percentage points. Tech stocks, meanwhile, make up about 28% of Russell’s growth index.
Interesting. I wonder to what extent "value" investing and "growth" investing really amount to sectoral bets, i.e. investing in certain sectors of the economy and not in others.
Depends on how you define both. But if you look at low ratio vs high ratio stocks across different sectors the low ratios tend to win over the long-term. Somewhat surprisingly low ratios seem to work just fine in some cyclical industries like energy and mining.

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Re: Clippings 2012

Post by AltaRed » 28 Nov 2012 17:51

ghariton wrote:Interesting. I wonder to what extent "value" investing and "growth" investing really amount to sectoral bets, i.e. investing in certain sectors of the economy and not in others.
There may be a tendency towards sectoral bets, but I think only as a secondary consequence of the types of stocks that have value characteristics. Just look at the holdings of, for example, Vanguard's Growth vs Value ETFs. The value ETF, VTV, got hammered pretty hard in 2008/09 due to fairly heavy financial weightings, for example. It's taken a long time to come back, probably due to the particularly heavy losses in financials, but in theory, if I am patient enough, ihistorical data suggests it should outperform Growth longer term.
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Re: Clippings 2012

Post by ig17 » 28 Nov 2012 19:17

The cycles of value under/over-performance seem to be awfully long. I wonder if one can capture a small rebalancing premium (compared to buying the total market) by holding a 50:50 split of Growth and Value?

Of course, this can only work in a tax-sheltered or tax-free account.

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Re: Clippings 2012

Post by NormR » 28 Nov 2012 19:27

ig17 wrote:The cycles of value under/over-performance seem to be awfully long. I wonder if one can capture a small rebalancing premium (compared to buying the total market) by holding a 50:50 split of Growth and Value?

Of course, this can only work in a tax-sheltered or tax-free account.
Um, sort of just like holding a regular market-cap wt index? :?

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Re: Clippings 2012

Post by ig17 » 28 Nov 2012 19:44

You can't rebalance between growth and value if you own a regular market cap index. Splitting growth and value in two holdings might present rebalancing opportunities.

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Re: Clippings 2012

Post by Park » 28 Nov 2012 20:53

http://www.mebanefaber.com/wp-content/u ... kowitz.pdf

Above is a link to a paper published by two people from AQR and Booth School of Business.

The following comes from Table 1. The first column gives the annualized before tax return from 1979 to 2009; the second column gives the annualized after tax return from 1979 to 2009 using historical tax rates at the time; the third column gives the annualized after tax return from 1979 to 2009 using 2009 tax rates. Those 2009 tax rates are the same as the present 2012 tax rates.

Code: Select all

Russell 1000 (large/mid cap)         11.18% 9.61% 10.41%
Russell 1000 Value                   11.81% 8.96% 10.24%
Russell 1000 Growth                  10.16% 8.88% 9.49%

Russell 2000 (small cap)             10.24% 7.69% 8.62%
Russell 2000 Value                   12.43% 8.86% 10.08%
Russell 2000 Growth                  7.49%  5.60% 6.32%
The above analysis ignores transaction costs, which would be most likely be higher for value indices. Also, it does not include the Russell 3000 (total stock market).

In a tax advantaged account, large/midcap value outperforms large/midcap blend by 0.63%. Small cap value outperforms large/midcap blend by 1.25%.

On an aftertax basis, large/midcap blend outperforms either small cap value or large cap value.

Based on an internet search, 2012 US tax rates for dividends are 15%, for short term capital gains 35% and for long term capital gains 15%. The top Ontario rates are presently around 29% for Canadian dividends, 46% for foreign dividends and 23% for capital gains. As 2009 US tax rates are lower than those of Canadians in the top tax bracket, that would increase the outperformance of large/midcap blend.

I suspect that the above results would also apply to Canadian value index funds.

My conclusions are that in a tax advantaged account, I'm not certain whether it's worth having a large/midcap value fund. One could consider a small cap value fund, although the difference may turn out to be about 1% outperformance.

In a taxable account, I don't see the purpose of value index funds. If you want to value invest in the USA or Canada in a taxable account, you have to stock pick IMO. Outside the USA or Canada, one might consider single country index funds that have attractive valuations. Mebane Faber has written a paper on that.

http://papers.ssrn.com/sol3/papers.cfm? ... id=2129474

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