Steadyhand’s ‘reason for being’ is to help individuals be better investors. We want to break down all the things that are getting in the way of that happening. Such impediments as:
* High fees and commissions
* Short-term approaches to investing, which result in performance chasing and disastrous market timing calls
* Poor alignment of interests between the client (overall portfolio returns) and the institution (asset gathering, profitability)
* Funds designed to mirror the market indexes rather than make clients money
This will sound perverse, but we are using David Swensen’s recent book ‘Unconventional Success – A Fundamental Approach to Personal Investment’ as our inspiration. Mr. Swensen runs one of the world’s most successful endowment funds for Yale University. In this book (his second) he takes a very dim view of mutual funds. The impediments I’ve listed above are essentially the reasons why he urges equity investors to only use low-cost index funds (i.e. Vanguard). He goes so far as to say that “rational mutual fund investors avoid active management”. Mr. Swensen’s book is inspirational to us because if we can reduce or eliminate the impediments that have caused him to say that, we’ll have taken a huge step towards improving our clients’ overall returns.
Bylo Selhi wrote:So has Tom finally seen the light re low-cost, passive index investing? Or is this another prelude to a segue into, "Yabbut, we know how to do active management better."?
yielder wrote:Tsk, tsk. Roughing up an old PH&N hand when you've done very well by that firm and its active management . Not to mention that we haven't even seen what he has to offer. I expect that he'll use the PH&N model but maybe cheaper if that's possible.
And just how are they expected to accomplish that?I have nothing against active management providing it's done passively
Shakespeare wrote:And just how are they expected to accomplish that?I have nothing against active management providing it's done passively
yielder wrote:I expect that he'll use the PH&N model but maybe cheaper if that's possible.
yielder wrote:Sounds like lowish fees, eating his own cooking, and contrarion stock picking.
DanH wrote:Starting a new company after many have come and gone and well into the industry's maturity phase in a much more heavily regulated (and costly) environment is a much different endeavour than what those two gents did.
DanH wrote:I didn't see anything about contrarian stock selection. I would not characterize PH&N - a sector neutral manager - as a contrarian (except maybe on the corporate bond side where there is no widely followed Canadian corp bond index).
Tom Bradley, former CEO of Phillips, Hager & North Ltd., has announced he will launch a rival firm early in 2007. Vancouver-based Steadyhand Investment Funds Inc. will resemble PH&N in several respects: it will use active management but keep fees down by bypassing the middleman and selling direct to the consumer...
Ironically, and as Bradley admits, Swensen takes a dim view of mutual funds, urging retail investors to use low-cost index funds or ETFs (exchange-traded funds). He goes so far as to say "rational mutual fund investors avoid active management." Of course, Bradley doesn't go that far. "I think ETFs are a good product and we don't really want to compete with them. We'd like to complement them." Like PH&N, he intends to use several external active managers, still being negotiated. But he plans to differentiate from PH&N by using what he terms "high-conviction, concentrated portfolios."...
In the early years, he expects fees will be slightly higher than his long-established rival and alma mater. Bradley also recognizes a need to spend some money on marketing. PH&N has been around long enough it can rely on word of mouth and press mentions...
Getting "shelf space" in the advisory channel is a formidable challenge. Newcomers face obstacles Canavan and Stone didn't face when they started up, Hallett says... That poses something of a "chicken-and-egg" conundrum. By going direct to consumers, Bradley bypasses that problem but will undoubtedly encounter many other challenges. As Hahn says, "you don't have to be crazy but you do have to be brave."
Evidently Brenda was so busy jerking her knee in reaction to the "assault" that she didn't get to the bottom of p.7, footnote 9, "For example, we exclude segregated or seg-funds in Canada,..."Brenda Vince, President of RBC Asset Management and chairperson of IFIC (Investment Funds Institute of Canada), takes issue with the numbers and says that without higher-cost segregated funds, the numbers would be lower.
Recall that when E*Trade announced that it would offer F-class shares, the industry ganged up and forced them to quickly retract their announcement. F-class shares are those that don't pay a trailer fee that's ostensibly in respect of "advice." But discount brokers like E*Trade are proscribed by securities legislation from providing advice. So in effect, DIYers are being forced by Brenda's industry to pay for advice that (a) they don't want and (b) they couldn't get from their brokers even if they did want it.You’re paying too much if … you don’t need advice. More sophisticated investors, the ‘do-it-yourselfers’ if you will, shouldn’t own high fee funds that have an advice component built in.
I'm looking specifically for what I call "absolute-return" investors; that is, portfolio managers who are totally focused on buying securities that are undervalued and will make their clients money. They're not worried about industry weightings on the market indexes or what style of box they fit in.
If I had to generalize about these meetings, I'd say they went "clink, clink, clunk." In all cases, the investment process was well established and pursued with discipline (clink). The people were experienced, scary smart and passionate about what they were doing (clink). But, the outstanding track record I heard so much about turned out to be pretty average and in some cases, downright lousy (clunk).
How did that happen? I know that smart people with a defined process don't always produce good results, but I'd heard these managers were at the top of the heap. Somehow they've gone from being stars to being forgotten, or worse yet, to being labelled as dogs.
This, of course, is part of the investment management business. Nobody can be on top all the time. It can take just two years -- one average and one lousy -- to take the lustre off of a good long-term record. Today's stars are all candidates to be tomorrow's dogs. In reality, it's a fine line between the two categories. A couple of stocks in the portfolio that either go to the moon, or conversely become complete busts, can have a large effect. A timely bet on one sector or market theme can meaningfully affect 10 years of performance.
Over the course of the past year, it's amazing how the performance standings have changed. It comes down to the fact that the capital markets have been influenced by a few powerful and long-lasting trends. These trends, which have gone to extremes, serve to exaggerate the differences between the stars and dogs. It's like turning up the sensitivity on your computer mouse or going from level one to three on a computer game.
For investment managers charged with managing a Canadian equity fund, their world has been defined by three important trends -- the commodity boom, a rising Canadian dollar and the focus on income. Get them right and you're golden. Get them wrong and you're heading to the doghouse.
I've always encouraged investing enthusiasts to read more than just the newspaper for ideas and education (User's Guide to the Business Media). If you discover a professional manager on the front lines who writes readable stuff, it's a great find.
An example of this would be Bill Gross, the widely-proclaimed bond king and voice of Pimco, who publishes a monthly missive on-line. Another would be Jeremy Grantham of Boston-based GMO, whose quarterly piece is always interesting and thought provoking.
As I've been reading some of the year-end commentaries and talking to money managers directly, I've picked up a subtle change in their tone. It relates to how the market is pricing risk.
Before I get into the change, however, I should point out that there is a broad consensus that risk measures are extremely low right now. In simple terms this means there is an insatiable thirst for higher-yielding, riskier assets. Market players are willing to take on more risk with very little compensation in return.
Yield spreads on emerging market or corporate bonds are at the low end of their range. In the equity markets, there is no consensus on whether price-earnings ratios are high or low, but most managers would acknowledge that the valuation differential between good and bad companies is too narrow, which is another form of risk measurement.
There is other evidence that risk premiums are at a low ebb. Last Friday Harry Kosa talked about the hedge funds' heroin - the Japanese carry trade. Managers continue to fearlessly pile into this strategy. And the measures that predict future volatility in the bond or stock markets are at the low end of their range.
The importance of all this, of course, is that if our Goldilocks economy - not too hot, not too cold - fails to hold together, there is nowhere for these risk measures to go but up. That will result in lower prices for risky assets, whether it be stocks, bonds, currencies or derivative strategies.
What I found most interesting with the latest round of reports, however, is that many of the whistle blowers are backing off from their fervent stance. They're still highlighting their concern about the wanton risk taking, but they are also providing reasons why Goldilocks may continue down her blissful path and risk premiums could stay low for a while longer.
Mr. Grantham of GMO says "Goldilocks global conditions, especially cheap and easy credit, have caused the broadest over-pricing of financial assets - equities, real estate, and fixed income - ever recorded." A few paragraphs later, however, he points out that "just because risk taking is off the charts does not mean it can't keep going up for another year." He isn't yet seeing any cracks in the economic structure and it may take time for a serious unraveling.
One of my hedge fund manager friends took me through a similar scenario last week. He rhymed off all his concerns, but concluded that the good times could continue for a while. Therefore his portfolios weren't fully committed to the scary scenario. He was hedging his bets.
In his February outlook, Mr. Gross of Pimco says "[asset] prices are increasingly being determined by value insensitive flows and speculative leverage as opposed to fundamentals." He is referring specifically to the global savings glut (that is funding the U.S. trade deficit) and the extreme levels of corporate profitability, both of which are funneling trillions of dollars into U.S. financial assets. He suspects that this cash flow brew is running out, but concludes that it's hard to pinpoint when "because of our financially-oriented casino offering innovation after innovation."
I think the guarded approach these three are taking is interesting because it may represent complacency creeping into the market. I don't mean to say these managers specifically are complacent, but their current stance may reflect a broader apathy.
When trends go on for a long time, a number of things happen. Investment managers that are too early on betting against the trend start to get beaten up. Their intelligence is questioned and clients may start pulling their money out.
The longer a trend goes on, the more normal is starts to feel. We start to hear why "it will be different this time." In the current circumstance, lower risk premiums are being justified by globalization and increased financial sophistication.
And the longer and more extreme a trend is, the more likely it will end badly and take longer to resolve than anybody predicts.
Do I blame money managers for being guarded in their words and strategies around the current market situation? Not for a minute. They have a business to run and after all, it's impossible to predict when a trend is going to end. Certainly, the housing and oil cycles have gone on far longer than I expected.
What we do know for certain, however, is that we have one more necessary ingredient for an eventual trend change. Experts have stopped predicting when the thirst for risky assets is going to end.
In An investment portfolio is like a bar of soap..., Tony Evans wrote:It reminded me of an article I read in the Globe perhaps 10 years ago. The author recommended that in many cases, what he called the "Rip Van Winkle" (RVW) approach was the best one to take, specifically place 80% in a good Canadian Balanced Fund and 20% in an international fund and leave it alone (those were the days of 20% max foreign ownership).
But if you are seeking returns in excess of the index as we are, you want to invest your money with managers that have an approach that has consistently worked in the past - managers that use strategies that are repeatable, but don't expose the portfolio to more risk.
Everyone has an opinion as to where to best find high quality alpha. I'll tell you where I go looking, although I don't expect that my views will receive unanimous support.
Money managers that make the big macro calls garner the biggest headlines because they have the potential to win big, or lose big. There are successful managers who make bets on currencies, commodities or interest rates, but they are few and far between. To me, big picture predictions in our highly integrated world are a crap shoot.
Asset mix calls are slightly more reliable, although there have been plenty of surveys showing that managers add little or no value by shifting the portfolio between stocks, bonds and cash. Long-term assessments of relative value can add to return and reduce volatility, but trying to catch short-term moves is not something I want to pay for.
I also think sector rotation is a tough way to make a living. We often hear managers talking about where market leadership is going to come from next: "It's resources today, but real estate will lead the way over the next quarter." The managers who bill themselves as sector rotators tend to be at the top of the charts one year and at the bottom the next.
Similar to shifting between industry sectors, some managers rotate between investment styles: value versus growth, large capitalization versus small cap. The challenge with this approach is the same one that afflicts all macro strategies. If you're wrong, you can be wrong for a long time. For example, some U.S. managers started calling for large-cap growth stocks to assume market leadership three or four years ago. It wasn't until recently that it happened.
To my way of thinking, security selection is the highest quality alpha you can get. If managers conduct comprehensive research, focus on stocks or bonds they understand and are valuation conscious, good things can happen. They will get it wrong lots of times, but their batting average will be higher than the macro managers. The big picture stuff (interest rates, currencies, economic growth) will influence stocks or bonds in the short run, but a portfolio of underpriced securities will eventually find its value.
The challenge all investors have, be it amateur or professional, is devising an approach that features their most reliable alpha. Unfortunately, it is easy for overconfidence and too much information to lead investors into making decisions based on factors that have less chance of success. They let the poor quality strategies obscure or negate the good ones.
It's important to understand the strategies your managers are using to earn the money you are paying them. You want to know where the alpha is expected to come from. If out-guessing the Federal Reserve Board or making a call on the dollar is part of the plan, I'm inclined to move on and continue looking for someone to manage our clients' money.
BradleyPresident and Founder
Tom is the President and founder of Steadyhand. His education includes a Bachelor of Commerce degree from the University of Manitoba (1979) and an MBA from the Richard Ivey School of Business (1983). Tom has 24 years of experience in the investment industry. He started his career in 1983 as an Equity Analyst at Richardson Greenshields. Tom spent eight years with the firm, the last three of which he served as Director, Institutional Sales. In 1991,he joined Phillips, Hager & North Investment Management Ltd., where he continued his career as a research analyst and took on additional responsibilities as an Institutional Portfolio Manager. In 1996, Tom was appointed to the Board of Directors of PH&N. In 1998 he took on the role of Chief Operating Officer, and shortly thereafter, in 1999, he was appointed President and Chief Executive Officer, a role that he held until he resigned from the firm in 2005. Tom writes a column every second Saturday in the Report on Business section of the Globe and Mail.
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