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A lightning bolt strikes the CN Tower during an electrical storm in Toronto, early Thursday. (Mark Blinch/The Canadian Press)
A lightning bolt strikes the CN Tower during an electrical storm in Toronto, early Thursday. (Mark Blinch/The Canadian Press)

Investor Newsletter

Why there's a place for active management in your portfolio, an electric stock pick, and what the U.S. election means for your investments Add to ...

Every investing study ever done on the performance of active versus passive investing, academic or otherwise, concludes that the vast majority of investors should buy a broad based inexpensive equity exchange-traded fund and forget about it. That said, this is the wrong time to have the active versus passive debate – a number of factors point to a resurgence for high quality active fund managers.

The ‘big get bigger’ markets of recent years are one where attractive stocks valuations add little to performance. The FANG stocks that have led U.S. markets, for instance  – Facebook, Amazon.com, Netflix and Alphabet (Google) –  have an average price-to-earnings ratio of 146.4 times trailing earnings. This is a nightmare environment for fund managers who generate the best returns when undervalued stocks offer both the highest returns and the most downside protection during sell-offs.

There is another important factor in the active versus passive debate that even mutual fund companies trying to sell their products don’t like to bring up – investor behaviour is a big reason for active fund underperformance. Investors’ reasonable tendency to sell funds after missing the benchmark for one or two years has led to widespread ‘index hugging’ – fund portfolio holdings largely mirroring the index. The strategy prevents huge investor withdrawals because performance is similar to the index. Still, it doesn’t make much sense – funds charge fees which almost ensure that index-oriented ETFs outperform them.

For most investors, passive investing remains the best option. But it’s also true that value oriented market conditions that reward active stock picking will return. As Legg Mason’s famed investor Bill Miller  noted recently, ‘volatility is the price we pay for outperformance’ and multi-year periods of poor active fund performance are to be expected. There is still a place, if only a small one, for carefully chosen actively managed funds in investor portfolios.  

Scott Barlow

Three big numbers to note

36 years How many years since the S&P 500 was down for eight straight days, mainly due to investor jitters about the U.S. election.

Nearly 3% The percentage drop in the S&P 500 over its eight-day losing streak.

About 9% The percentage oil futures fell this week, the biggest weekly percentage declines since January, as signs of tensions resurfaced between Saudi Arabia and Iran that could scupper a key supply cut pact.


Stocks to ponder

Hardwoods Distribution Inc.  This distributor of hardwood lumber and wood related products offers both earnings growth and dividend growth, writes Jennifer Dowty. The Street is forecasting a potential 33-per-cent price return over the next year, suggesting it may resurface on the positive breakouts list in the future. The company has reported strong revenue growth over the years. Management has increased its dividend each year since 2012, recently raising it to 6.25 cents per share from 5.5 cents. This equates to a yearly dividend of 25 cents per share, and an annualized dividend yield of 1.3 per cent. All three analysts who cover the company have ‘buy’ recommendations on the stock.

Killam Apartment Real Estate Investment Trust.  This stock is one to watch. It has a 5 per cent yield and 10 ‘buy’ calls and it recently appeared on the negative breakouts list. The downtrend appears intact for now, and as such, it may be premature to consider purchasing units. However, as the unit price continues to slide, the valuation is becoming more interesting and investors may want to do further research on this security, writes Jennifer Dowty. The average one-year target price is $13.86, implying there is 20 per cent upside potential in the unit price over the next 12 months.

Hydro One Ltd. This electric utility appears on the negative breakouts list, despite having solid fundamentals and a reliable, attractive dividend, writes Jennifer Dowty. The company will be celebrating its one-year listing anniversary as a publicly traded company on Nov. 5. It pays a dividend of 84 cents a year for a yield of 3.5 per cent. There are two ‘buy’ recommendations and nine ‘hold’ recommendations on the stock. The average one-year target price is $26.23, implying there is 8 per cent upside potential in the share price over the next 12 months.


The Rundown

Markets face a bumpy ride as Trump rises in polls

The resurgence of Donald Trump’s election hopes is sending investors running for cover, writes David Berman. Over the past several trading days, stocks, currencies and commodities have embarked on a wild ride as polls show that Mr. Trump has narrowed Hillary Clinton’s lead in the upcoming U.S. presidential election. Suddenly, the Republican candidate’s controversial views on trade, defence spending, immigration and corporate taxes are moving from populist rhetoric to something closer to reality – and markets are getting nervous.

After the Agrium-Potash merger, a search for pure-play alternatives

With shareholders of Potash Corp. of Saskatchewan Inc. and Agrium Inc. voting on Thursday to approve their merger, the companies have taken another step toward history: If regulators bless the deal next year, two of Canada’s biggest agricultural success stories will become one. Investors, however, need not wait until 2017 to … sell their shares. David Milstead writes that while this bottom-of-the-market deal may help the companies make it through a rough time in the fertilizer industry, it also dilutes the primary reason investors should put their money in either one. And it suggests investors should look at some other options, which include CF Industries Inc., Mosaic Co., and Tractor Supply Co.

Easing of foreign-ownership restrictions is good news for domestic airline investors

The Canadian government is opening up one small area of the market to more foreign ownership, and domestic investors should be applauding the move, writes David Berman. Ottawa announced on Thursday that it will allow foreign investors to own up to 49 per cent of domestic airlines, up from the current 25 per cent cap – a big deal for anyone overseas who has been waiting in line to buy shares in Air Canada and WestJet Airlines Ltd. But even if you’re a Canuck who holds no such affection, the easing of ownership restrictions on any sector is good news: Removing the barriers to capital deepens the pool of investors, which is good for share prices.

Built-in immunity: These health care stocks have extremely sound cash flow

Global health care is Scott Barlow's favourite investment sector right now because it’s largely immune from ongoing economic and interest rate-related anxieties. An aging developed world population means that, for the sector as a whole, revenue growth is virtually assured no matter what happens. Health-care stocks are not without risks – changing regulations are chief among them – but few if any other sectors can be as confident about growth. The S&P 500 health-care index is now deeply oversold despite these rosy longer-term prospects, making this an ideal time to hunt for investor bargains. The index dropped 12.5 per cent between Aug. 1 and Nov. 1 and according to the relative strength index, or RSI (my favoured short-term technical indicator), the sector is firmly in buy territory.

Why you should set a ‘sell’ price before you buy a security

Portfolio management is not just about buying, it is also important to develop a sell strategy. Ideally, you want to avoid owning “torpedo stocks” – those that keep plunging in value. For that reason, Jennifer Dowty says she always stresses setting a sell price before purchasing a security – a price you sell at if a company’s fundamentals deteriorate. This can help to avoid holding a “graveyard” of underperforming securities. If you learn about a company experiencing headwinds or operational issues, consider selling.

Morningstar expands analyst ratings to include ETFs

With the Canadian mutual fund business continuing to cede ground to ETFs, investors have a new tool in judging one against the other, writes Tim Shufelt. Morningstar has begun to assign analyst ratings to individual exchange-traded funds by applying the same methodology it already uses to evaluate mutual funds and individual stocks. While qualitative ETF research and recommendations are certainly not new, Morningstar said its system is the first of its kind in its methodology and its scope to be made available to Canadian investors.

The importance of sticking to a plan when making investment decisions

Most investors are aware that when they move into the financial markets they are dealing with decision-making under uncertainty. As a result, a great deal of time and money is devoted to analysis and research in the hopes of reducing that uncertainty and improving the quality of decisions. Not all investments unfold according to plan, of course, but we tend to assume that with more or better research, mistakes could be avoided. But, what if the error did not arise from a poor calibration of the uncertainty, but from poor execution of the investment decision once it is made? A recent article in the Social Science Research Network (SSRN.com) suggests that even when we know with certainty the probability and size of the payoff, many of us still manage to lose money, writes Robert Tattersall.

TMX now allows four-letter stock tickers

Canadian-listed companies have one more letter to work with, if they want to use their stock symbol to get a message across to potential shareholders, writes Richard Blackwell. TMX Group Inc., which runs the Toronto Stock Exchange and the TSX Venture Exchange, now allows four-letter stock symbols, after decades of restricting tickers to three letters. The exchanges made the change on Nov. 1, and already several companies have taken advantage of the opportunity to make their ticker symbol more closely reflect the company name. Investing firm Onex Corp. is now listed as ONEX instead of OCX, for example, and e-commerce company Shopify Inc. now has the ticker SHOP instead of SH.

Rob Carrick: Have you saved enough for your health?

What we don’t talk about when we talk about aging is the cost of health care, writes Rob Carrick. The annual health-related cost to various levels of government for a 45-year-old might average about $2,675, according to data obtained by the actuarial firm Eckler Ltd. from the non-profit Canadian Institute for Health Information. Make that $6,235 for a 65-year-old and $30,100 for a 90-year-old. The financial industry has made a decent start at preparing the country for longer lives. Financial planners typically use 90 as a default lifespan, or longer. They’re also getting better at basing plans on how people will actually spend in retirement as opposed to overly general rules about the percentage of your working income that you should strive for after you leave the work force. But we’re still not talking enough about an obvious implication of longer lives – the cost of health care.

Help for a conservative investor who wants an annuity

He wants an annuity. What he has are guaranteed investment certificates maturing at different times. This logistical challenge was presented to Rob Carrick by a reader whose husband wants to buy an annuity with savings in his registered retirement savings plan when he retires in a few years at age 68 or 69. A quick refresher on annuities: They’re a contract with an insurance company to exchange a sum of money for guaranteed income payments lasting as long as you live. If you don’t have a pension, annuities are worth a look for part of your retirement savings.

Five under-the-radar dividend picks

Norman Levine is a big fan of dividend stocks, writes John Heinzl. Virtually all of the companies his firm invests in pay dividends, and he’s especially fond of those that raise their dividends regularly. But not all dividend stocks pass the sniff test, says the managing director of Portfolio Management Corp. in Toronto. For instance, he’s wary of companies that pay out a very high percentage of their earnings as dividends as they may not be reinvesting enough cash in their business to grow. He also generally avoids companies with yields that are well above average. Here’s a sample of the stocks his firm owns: Stantec Inc., Sun Life Financial Inc., Morneau Shepell Inc., MetLife Inc., and Sanofi SA.

Canadian stocks shine in new global index tracking long-term planners

Canadian stocks are well-represented in a new global index that tracks companies taking a long-term approach to their strategy and performance, writes David Berman. But the Canadian names might surprise: ARC Resources Ltd.Teck Resources Ltd.Gildan Activewear Inc. and Canadian Imperial Bank of Commerce reside among a global elite that have an uncanny ability to develop plans for the future, rather than scramble from quarter to quarter. The four companies are among the nine Canadian stocks in the S&P Long-Term Value Creation Index, launched at the start of this year and backed by some of the world’s savviest pension plans and sovereign-wealth funds.

How to build a dividend portfolio from the ground up

Struggling to figure out how to build a portfolio of quality dividend growth stocks? TULF it out. That’s a mnemonic from dividend investing guru Tom Connolly, not a wisecrack. T stands for telecoms, U for utilities, L for low-yielding dividend stocks with growth potential and F for financials, writes Rob Carrick.

Gordon Pape: My Balanced Portfolio has gained 8.4% in six months

Gordon Pape says his Balanced Income Portfolio, which was launched in September, 2011, had the goal of combining above-average cash flow with reasonable risk. It's done well with a gain of 8.4 per cent since April, and now is worth $40,261.55, up from  $25,027.75 at inception.

Buying a condo? Be aware of monthly fees and repair costs

Brock Penner has heard all of the knocks against condo living: the small space, monthly maintenance fees and extra levies, neighbour noise and various rules and bylaws that don’t apply when owning a house, writes Brenda Bouw. Still, he loves it, and not just because it’s all he can afford right now in Vancouver. There’s also the convenience and close proximity to his job downtown. But for those who haven’t lived in a condo before, the costs and lifestyle can be an eye-opener. While condos have many of the same fees as homes, such as insurance, taxes and utilities, owners must also pay hundreds of dollars in monthly condo fees, which can rise regularly to help pay for continuing maintenance.


Number Crunchers

Twelve large-cap stocks showing reliable dividend growth

Fifteen profitable health-care stocks in a bruising month

Seeking safety and value among Canadian natural gas stocks

Ten S&P/TSX stocks showing growth at a reasonable price


Ask Globe Investor

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

Looking for the best investment books? John Heinzl has reader picks on Saturday. What does the U.S. election mean for markets? Tim Shufelt explores this topic on Monday, a day before the U.S. election. Larry Berman says it's likely that Hillary Clinton will win the U.S. election, but just in case Donald Trump wins, it never hurts to have insurance in your investment portfolio. There are some key investments you can use to hedge your bets, such bullion and long bonds. John Reese will explain why now is the time to look at investments that haven't worked recently.

Click here to see the Globe Investor earnings and economic news calendar.

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