Clippings 2017

Recommended reading, economic debates, predictions and opinions.
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Are REITs A Distinct Asset Class?

Post by Park » 24 Sep 2017 23:35

The New Wealth Management
Harold Evensky et al
2011 p. 212

"we concluded that REITs are in fact too highly correlated with the domestic equity market (specifically midcap value) to provide useful diversification, so we do not currently use a REIT allocation; however, as noted, we continually revisit these decisions, so by the time you read this section, we may once again be using a REIT allocation."

http://www.etf.com/sections/index-inves ... nopaging=1

The following is from a post by Larry Swedroe. It summarizes a May 2017 research paper from his organization "Are REITs a Distinct Asset Class".

"These results, and the associated failure to satisfy their asset class criteria, led Kizer and Grover to conclude that REITs are not a distinct asset class. It’s important to note the results did not lead Kizer and Grover to recommend excluding REITs from equity portfolios. Instead, the results of this study led them to suggest that REITs, as an equity security with marginal diversification benefits, shouldn’t receive a weighting in investor portfolios that significantly deviates from market-capitalization-based weights."

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Re: Clippings 2017

Post by Arby » 25 Sep 2017 10:47

The articles mentioned in the above post refer to the US market. The situation may be different in Canada. Following is an excerpt from CIBC's monthly REIT report:
Canadian REITs have historically offered low betas and low correlations to the S&P/TSX Composite Index. We expect Canadian REITs could continue to offer strong diversification benefits in all but the most severe and turbulent capital market conditions. ...
.. the sector continues to provide significant diversification benefits to equity portfolios, with low beta and correlation. We expect that the higher beta and correlation seen in 2016 should return to more normal levels in 2017.
There are a couple of existing threads on this topic:
Are REITs A Portfolio Diversifier
REIT Asset Allocation

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Re: Clippings 2017

Post by AltaRed » 25 Sep 2017 11:03

I don't think REITs are a distinct asset class but they can diversify IF one picks certain REIT sectors over others. For example, I think office, hotel and retail REITs tend to follow the market more than if one held disproportionately residential REITs. I currently hold about 6.5% allocation in REITs which I don't separate from my Cdn equity allocation. I hold them for their constant (unwavering) income stream and I think that allocation is good enough.
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Re: Clippings 2017

Post by farco » 25 Sep 2017 11:43

I hold REITs too, but I don't see how we can consider them other than what they are, stocks. It's like apples and berries.

They are a specific industry but the asset class stay the same.

They are also integrated with my cdn stock portolio.

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Foreign Stock Investing

Post by Park » 27 Sep 2017 09:07

Nice article from morningstar on diversifcation by investing in foreign stocks:

http://beta.morningstar.com/articles/82 ... ation.html

"The foreign stock allocation embedded in the global market-cap-weighted portfolio is a good starting point because it reflects the collective views of all investors about the relative value of each market and represents the theoretical optimal portfolio. But money doesn’t float as freely in practice as it does in theory. In most markets, local investors tend to have overweightings in domestic stocks, a phenomenon called home-country bias. This may stem from greater familiarity with local stocks and an aversion to currency risk. However, it means that the regional composition of the global stock market does not necessarily reflect the optimal allocation.

At the end of March 2017, non-U.S. stocks represented about 47% of the world’s available market capitalization. Parking such a large sum in foreign stocks may be hard to stomach and is not necessary to realize most of the diversification benefits. The market-cap-weighted portfolio’s exposure to foreign stocks changes over time with prices, which can change the portfolio’s risk profile. For many, it may be more sensible to maintain a fixed allocation to foreign stocks."

He doesn't mention that foreign currency hedging sometimes doesn't work out well in practice.

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Re: Clippings 2017

Post by BRIAN5000 » 27 Sep 2017 19:20

http://cawidgets.morningstar.ca/Article ... um=twitter
RBC expands into broadly based index ETFs

He noted that there has been some demand for multi-asset products, but not enough relative to the demand for the product types that have been added or are about to be added in the near future. :thumbsup:
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Re: Clippings 2017

Post by AltaRed » 27 Sep 2017 20:07

Beats me how every issuer believes they will make a go of these. The field is perversely overcrowded.
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Fund Longevity

Post by Park » 28 Sep 2017 09:26

For a long term buy and hold investor in funds, the longevity of a fund is an issue. Otherwise, there could be premature cap gains tax to pay. This mostly applies to stocks fund, not bond funds. The funds that are more likely to survive are those with a competitive advantage.

If you're investing in vanilla stock index funds, they're akin to commodities. When it comes to commodities, the lowest cost producer has the competitive advantage.

The lowest cost provider is Vanguard, and I don't see that changing.

It's also something to consider, when it comes to tax loss harvesting.

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Re: Clippings 2017

Post by BRIAN5000 » 28 Sep 2017 15:57

Anybody been watching seminar activity to gauge market utopia?

Introduction to Investing in Options
October 18, 2017 12:00pm to 1:00pm TD Tower, 700 West Georgia Street Total Seats: 20 Seats Remaining: 0
Description: Learn about the different types of option investments, how they are traded, and basic option trading strategies. The presenter will educate the audience about the tools available on WebBroker.
Speaker:Mike Daudelin,
Direct Investing Specialist, TD Direct Investing

Is interest in options one of those things that peak near market tops?
“Sometimes you are going to sell early and wish you would’ve held on, other times you will hold on a
little bit longer and wish you would’ve sold early - this is just part of the game.” - Frank Zorilla via Abnormal Returns

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Re: Clippings 2017

Post by ghariton » 28 Sep 2017 16:33

BRIAN5000 wrote:
28 Sep 2017 15:57
Is interest in options one of those things that peak near market tops?
TD has been running these "free" seminars for many years now, at least in the Ottawa area. I don't know what the attendance levels are -- maybe that's what your indicator should be -- but I assume that the turnout must be reasonable if they keep running these things.

George
The plural of anecdote is NOT data.

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Re: Clippings 2017

Post by BRIAN5000 » 28 Sep 2017 17:29

but I assume that the turnout must be reasonable
This was a sell out I've heard some advisors gauge market level by how full their presentations/courses are.

This course was full others only had none one or two signups just wondering if there was something special about options trading seminars and market peaks.
“Sometimes you are going to sell early and wish you would’ve held on, other times you will hold on a
little bit longer and wish you would’ve sold early - this is just part of the game.” - Frank Zorilla via Abnormal Returns

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Liability Driven Investing

Post by Park » 29 Sep 2017 10:12

One approach to investing is conventional asset allocation. Another is liability driven investing, where one matches assets to liabilities. The link below from morningstar discusses the two approaches:

http://beta.morningstar.com/articles/82 ... ation.html

The author makes the case that LDI is different for individuals, as opposed to institutions, for the following reasons:

"1) Most pensions have very little risk capacity. If they promise more benefit than their investment portfolios can deliver, then they must defray the shortfall with corporate monies. That is bad for the stock price at the best ... and ruinous at the worst. In contrast, individual investors have greater flexibility. Should their portfolios perform badly, they may be able to work longer (if they have not yet retired) or may be able to avail themselves of other assets.
For example, a married couple who owns a fully paid house and expects to stay in that house during the first decade of retirement could accelerate that timing if their investments disappoint. They could move several years earlier than planned, thereby increasing the size of their financial portfolio. Disappointing? Sure. But they would be happier than the CEO of the company that declared Chapter 11 because it couldn’t fund its pension.

2) Retirees don’t have fixed liabilities. If push comes to shove, they can postpone that trip, keep the old furniture. They won’t be sued because their portfolio doesn’t deliver the cash amount that was promised, to the penny. Adhering to a fixed, guaranteed payment schedule is a desirable attribute for retirees but a legal duty, enforced by strict regulations, for pensions.
As a result, state the authors, the LDI portfolio can look very different when created for individuals rather than a pension fund. Whereas pensions that use LDIs invest largely in bonds (unless the pension has a substantial surplus, in which case it may invest more aggressively), the retiree who adopts an LDI approach might conceivably place half or more of his assets into stocks."

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UBS Perspectives

Post by Profit not Prophet » 30 Sep 2017 08:35

UBS has a section of it's web site where they have text and video interviews with some top notch people. Usually more of a broad nature. This is a widely read intelligent group and thought some of you could loose an evening or two around these parts.

A broader link
https://www.ubs.com/microsites/together/en.html

Investments
https://www.ubs.com/microsites/together ... sting.html

This is Shiller
https://www.ubs.com/microsites/together ... iller.html

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Re: Liability Driven Investing

Post by longinvest » 30 Sep 2017 10:53

Park wrote:
29 Sep 2017 10:12
2) Retirees don’t have fixed liabilities. If push comes to shove, they can postpone that trip, keep the old furniture. They won’t be sued because their portfolio doesn’t deliver the cash amount that was promised, to the penny. Adhering to a fixed, guaranteed payment schedule is a desirable attribute for retirees but a legal duty, enforced by strict regulations, for pensions.
As a result, state the authors, the LDI portfolio can look very different when created for individuals rather than a pension fund. Whereas pensions that use LDIs invest largely in bonds (unless the pension has a substantial surplus, in which case it may invest more aggressively), the retiree who adopts an LDI approach might conceivably place half or more of his assets into stocks."
Effectively, people are flexible. When they lose their job, they cut expenses until they find a new one. If their new job comes with a lower salary, they do whatever they have to do to deal with it and permanently cut expenses.

That's why I plan to be flexible in retirement. I'll combine stable lifelong non-portfolio income (OAS + QPP delayed to age 70 to maximize them along with a GIC ladder for covering missing payments between retirement and age 70, pension) with variable withdrawals (VPW) from a balanced 50%/50% stocks/bonds portfolio. I'll reduce expenses if and when needed, but not before.
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Re: Liability Driven Investing

Post by Park » 01 Oct 2017 10:29

Park wrote:
29 Sep 2017 10:12
One approach to investing is conventional asset allocation. Another is liability driven investing, where one matches assets to liabilities.
I've read "Living Off Your Money" by Michael H. McClung. Retirement strategies are broadly divided into probability based and safety first. One could consider probabiity based as conventional asset allocation; safety first could be considered liability driven investing.

He comes out in favor of conventional asset allocation.

Liability driven investing would tend to have lower returns. And his analysis found that conventional asset allocation has significantly lower risk than traditionally estimated.

He also points out that the risk of insufficient income can come from poor markets or unexpected expenses. Conventional asset allocation deals better with unexpected expenses than liability driven investing.

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Re: Liability Driven Investing

Post by longinvest » 01 Oct 2017 11:13

Park wrote:
01 Oct 2017 10:29
Park wrote:
29 Sep 2017 10:12
One approach to investing is conventional asset allocation. Another is liability driven investing, where one matches assets to liabilities.
I've read "Living Off Your Money" by Michael H. McClung. Retirement strategies are broadly divided into probability based and safety first. One could consider probabiity based as conventional asset allocation; safety first could be considered liability driven investing.

He comes out in favor of conventional asset allocation.

Liability driven investing would tend to have lower returns. And his analysis found that conventional asset allocation has significantly lower risk than traditionally estimated.

He also points out that the risk of insufficient income can come from poor markets or unexpected expenses. Conventional asset allocation deals better with unexpected expenses than liability driven investing.
I would rephrase all this in the past tense, e.g. "Liability driven investing would tend has tended to have lower returns. ..."

Here's what Vanguard Canada writes on its website, when presenting past returns: Past performance does not guarantee future results, which may vary.

I wouldn't base my investing decisions and retirement plans on projecting past returns (absolute and relative) as well as correlations (assets and metrics) into the future. I simply don't know what to expect. So, I diversify (balanced portfolio during accumulation, flexible portfolio withdrawals and lifelong stable non-portfolio income in retirement).
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Mean Reversion of Profits

Post by Park » 01 Oct 2017 14:16

https://www.forbes.com/sites/timworstal ... e57a942a36

“Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” – Jeremy Grantham

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Re: Mean Reversion of Profits

Post by AltaRed » 01 Oct 2017 14:40

Park wrote:
01 Oct 2017 14:16
https://www.forbes.com/sites/timworstal ... e57a942a36

“Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” – Jeremy Grantham
So much for all those 'talking heads' that look at stocks on cash flow multiples..... With the except of REITs of course, which are their own animal due to RE depreciation.

I've never been a believer of focusing on cash flows, especially for the longer term, which typically happens with resource/commodity stocks. Ultimately, the shareholder wants a ROE (and ROCE) on the investment and increasing one's speed on the treadmill just to get cash flow up, often results in a stumble and falling off the treadmill.
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Currency Hedging

Post by Park » 01 Oct 2017 17:46

https://papers.ssrn.com/sol3/papers.cfm ... id=1641006

"This paper examines the benefits from hedging the currency exposure of international investments in single- and multi-country equity and bond portfolios from the perspectives of German, Japanese, British and American investors. Over the period 1975 to 2009, hedging of currency risk substantially reduced the volatility of foreign investments at a quarterly investment horizon. Contrary to previous studies, the paper finds that at longer investment horizons of up to five years the case for hedging for risk reduction purposes remained strong. In addition to its impact on risk, hedging affected returns in economically meaningful magnitudes in some cases."

So currency hedging was beneficial up to a 5 year horizon. However, you can make the case that for stock investing, you should have a minimum of a 5 year time horizon.

Also, currency hedging was examined from the perspectives of German, Japanese, British and American investors. In a global bear market, the Canadian dollar tends to decline in value, whereas the $US and euro tend to increase in value. I don't know about the pound or yen. So currency hedging for a Canadian investor may be less useful.

Over short periods of time, currency exposure volatility can be greater than foreign stock volatility, where foreign stock volatility is in the local currency. The following is taken from Rick Ferri's book on asset allocation. He gives the EAFE returns to US investors, in both local currency and $US, for each year from 1997 to 2009. In 1997, EAFE returns in local currency and $US were 11.8% and 2.1% respectively. In 2007, the respective numbers were 1.2% and 11.6% respectively. I've cherry picked those years, to show how much effect currency can have on return.

There may be scenarios where a Canadian investor would want a currency hedge. As an example, assume one has a foreign stock investment that isn't currency hedged. Due to changes in one's life, the time horizon changes to months. Ideally, one would want to sell the investment. But that might not make sense from a tax planning point of view or may not possible. It might make sense to hedge the currency exposure. You'd likely have to create a DIY hedge using derivatives.

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Post by Park » 03 Oct 2017 09:15

http://beta.morningstar.com/articles/82 ... goals.html

For the novice investor like myself, why there will never be a book titled "Stocks For The Short Run".

"While the S&P 500 posted a positive return in more than of rolling 10-year periods in the past 25 years, stocks have been much less of a sure thing for shorter time horizons. Over rolling one- and three-year periods from September 1992 through August 2017, the S&P has posted a loss roughly 20% of the time, and some of those short-term losses were punishing, especially in one-year windows. The unlucky soul who invested in the S&P 500 in early 2008 and needed to get his money out a year later would have had to settle for a 43% loss, for example.
Meanwhile, bonds have a much higher probability of holding their ground over shorter time periods. During the same 25-year period, which was admittedly strong for bonds, the Barclays U.S. Aggregate Bond Index had a positive return in every rolling three-year time period and in more than 90% of rolling 12-month periods. And the worst 12-month loss for bonds was much milder than what stocks incurred at their nadir: just 3.7% (between late 1993 and late 1994). Of course, past is not prologue. In a sustained period of rising interest rates, bond losses could be higher and more frequent than they have been in the recent past."

I believe those are nominal returns, which might place bonds in a more favorable light. Also, if your marginal tax rate is higher and it's a taxable account, that would make bonds less favorable.

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Japanese Stock Bubble 1980s

Post by Park » 04 Oct 2017 01:25

http://investingforaliving.us/2017/10/0 ... 0-edition/

Above is a link to CAPE of the Japanese stock market in the 1980s. Unfortunately, I can't copy the figure to this post.

Around 1980, CAPE increased above 20. For the next 47 months, it was between 20-39. It then spent 19 months between 40-59. This was followed by 9 months between 60-79. Finally, about the last 33 months were 80 or greater. The peak was reached at the end of those 33 months with a CAPE of 94 in December 1989.

For purposes of comparison, the peak S&P500 CAPE was about 44 at the end of 1999.

What strikes me is how true the saying that the market can remain irrational longer than you can remain solvent. It would not have been easy to make money shorting the Japanese stock market bubble.
Last edited by Park on 04 Oct 2017 09:06, edited 2 times in total.

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Re: Clippings 2017

Post by Shakespeare » 04 Oct 2017 09:02

This image?
Japan-CAPE-Craziness.jpg
“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 2017

Post by Park » 04 Oct 2017 09:12

Shakespeare wrote:
04 Oct 2017 09:02
This image?
Japan-CAPE-Craziness.jpg
Thanks. My keyboarding skills aren't what they should be. Hopefully, I'm a better investor :-).

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Re: Clippings 2017

Post by Park » 05 Oct 2017 02:28

http://www.fortunefinancialadvisors.com ... ng-lessons

"...individual stocks in the largest decile of market capitalization (group 10) generated positive results 80% of the time, most individual companies in the lowest decile (group 1) failed to match the return on cash, but, as a group, generated higher "lottery-like" returns, which demonstrates both the small company premium, as well as the need for diversification among a portfolio's small company bets"

Companies in the lowest decile generated positive results 43.1% of the time and beat the market cap index 31% of the time. In group 10, 44.2% beat the market cap index. That's not far off from a coin toss, whether a group 10 stock will beat the market or not.

Look at Panel C in the link.

You'll commonly read that most stocks don't beat the market, and that's true. But most stocks are smaller cap stocks, and most smaller cap stocks underperform.

I've wondered why the Dow index has historically had similar performance to the total US stock market, even though it's only 30 stocks and most stocks underperform. That's because it's 30 megacap stocks, and megacap stocks are less likely to underperform.


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