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Investment Ideas Diversification is failing investors, a rebounding discount retailer, and why U.S. markets are on shaky ground

Ben Hunt thinks portfolio diversification is dead, killed by central banks.

Mr. Hunt is a fascinating writer, a Harvard Ph.D in government, technology entrepreneur and venture capitalist. In part two of an extended column “Things Fall Apart,” the author uses Tony Soprano and the current U.S. political environment to explain why diversified portfolios have been underperforming for the past decade.

“It is a fact that diversification has failed us for a decade… our markets have moved from a multi-modal [asset class diversified] distribution of investor preferences to a single-peaked distribution, so that it’s all U.S. large-cap stocks all the time…. I can’t overemphasize how damaging the failure of diversification is to both our portfolios and the stability of our financial advisory system. As both investors and advisers we have put our faith in the power of diversification, and when that Greater Power deserts us we are left open and exposed.”

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A combination of central bank policy and legislative capture by the ultra-wealthy are, in this reading, to blame for the failure of diversified investment strategies.

“[This is] what happens when emergency government action to rescue the financial system from political ruin becomes permanent government policy to use the financial system for political gain… Originally, [loose monetary policy] was to keep the status quo financial system from imploding. But soon after … and still now … it was to keep the status quo political system from imploding. What started as an entirely laudable effort to keep capital markets from collapsing became an entirely problematic effort to turn capital markets into political utilities.”

Mr. Hunt believes the current market structure will continue until the next recession because “clients will tolerate an underperforming theology in their investment lives so long as they are doing okay in their non-investment lives. Begrudgingly… But the thing about recessions is that they’re not just a market phenomenon, they’re also a real-life phenomenon where jobs are lost, businesses are strained, and debts come due. Your clients have zero tolerance for disappointment in both their investment AND their non-investment lives.”

Importantly, I’m not forwarding this argument as fact but as an idea to think through. Political theory is not my purview but it’s not hard to see the possibility that the author’s initial expertise in politics might lend him towards a politics-heavy market framework.

That said, the theories offers two potential benefits for investors. It provides an explanation for the underperformance of diversified portfolios and also implies that diversification will work again, once central bank policy returns to normal.

Mr. Hunt’s perspective also entails a warning about the negative market effects of the withdrawal of central bank support. A market that has been driven higher primarily by central banks will have a significant way to fall when the help disappears, more so than the usual bear market.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Dollarama Inc. (DOL-T). This stock appeared on the negative breakouts list (stocks with negative price momentum) last month when the share price was down nearly 13 per cent year-to-date. However, since then the share price has rebounded 9 per cent and additional upside may result if the company reports solid quarterly results later this week. Last quarter, weather negatively impacted the company’s financial results. However, earnings may rebound given warm summer weather conditions. Jennifer Dowty reports (for subscribers).

Alimentation Couche-Tard Inc. (ATD-B-T). Alimentation Couche-Tard Inc. has come roaring back after a recent correction, beckoning investors to jump on the rebound. Momentum-loving investors probably should, says David Berman. The convenience-store operator has been aggressively snapping up rivals in a bid to expand its international presence. It completed a US$4.4-billion acquisition of Texas-based CST Brands Inc. in June, 2017, adding more than 2,000 gas-and-convenience stores to a network that is being rebranded as Circle K stores beyond Quebec. But disappointing financial performance and concerns about a looming slowdown at North American gas stations weighed on Couche-Tard’s share price earlier this year. (for subscribers).

Inovalis Real Estate Investment Trust (INO.UN-T). This REIT is a dime away from setting a new record closing high and resurfacing on the positive breakouts list. Analysts anticipate the security may deliver a total return of nearly 13 per cent (including the attractive 7.9 per cent yield) over the next year. The REIT provides investors with potential diversification benefits providing exposure to two European markets – France and Germany. Jennifer Dowty reports (for subscribers).

The Rundown

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U.S. markets on top of the world, but on a shaky foundation

Donald Trump may be experiencing only mixed results when it comes to making America great again, but he is encountering total success when it comes to making the rest of the world poorer. At market close on Friday, the only major national stock market indexes in the world to be showing gains on the year to date were U.S. stalwarts such as the Dow Jones industrial average (up 4.8 per cent) and the S&P 500 (a 7.4-per-cent winner). Every other widely followed gauge of stock market performance around the world has lost ground this year, when performance is measured in U.S. dollars. Ian McGugan reports (for subscribers).

Survey reveals disturbing knowledge gap among investors

There’s a good chance that a significant portion of what you think you know about investing is wrong. At least that’s Ian McGugan’s conclusion after reading a new survey of 1,013 Americans. While the results may not apply perfectly to the Canadian landscape, they do point to the knowledge gap that exists among many financial consumers – a gap that is likely to be just as large on this side of the border. The most striking example in the survey was the apparently widespread belief among respondents that actively managed funds will reliably produce better results than index funds. Fifty-one per cent of those who owned an actively managed fund said they were motivated by the belief that it would produce higher average returns than a passive fund. (for subscribers).

Low-cost investing smackdown: Balanced ETFs vs. robo-advisers

A welcome new development in exchange-traded funds raises questions about the relevance of robo-advisers for people who want a simple, low-cost ETF portfolio. Balanced ETFs give you a fully diversified portfolio in a single purchase. Your investing future with one of these products is simply to keep buying more of the fund you’ve chosen because the fund managers handle diversification and rebalancing for you. That’s kind of what robo-advisers do for clients, but with one big difference. While the cost of balanced ETFs is limited to the usual fees charged to investors who own funds, robo-adviser clients pay fund fees, plus an advice charge that is usually in the range of 0.5 of a percentage point. Are robo-advisers worth the extra cost? Rob Carrick's Portfolio Strategy’s Balanced ETF-Robo Adviser faceoff can help you decide.

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Mutual fund giant Fidelity to launch six ETFs in Canada that target dividend investors

Fidelity Investments Canada, one of the last major mutual fund companies yet to join the Canadian exchange-traded funds industry, is set to begin trading next week in six ETFs for income-seeking investors, offering a suite of dividend factor-based funds starting Sept. 18 on the Toronto Stock Exchange. Clare O'Hara reports.

Canada’s family firms continue to outperform widely held corporations

Canada's big family-controlled companies continue to be winners for their investors, outperforming widely held corporations despite lingering shareholder criticism of the dual-class stock structures most of them have. A new study by National Bank of Canada tracking the performance of 43 major family-controlled firms countrywide found they tallied an absolute return of 206 per cent over a 13-year span from June, 2005, to June, 2018, besting the 133-per-cent return for the S&P/TSX Composite Index. The companies, which include corporate pillars such as Onex Corp. as well as budding newcomers such as Shopify Inc. and Knight Therapeutics Inc., returned 9 per cent on an annualized basis over this time versus 6.7 per cent for the TSX Composite, the research found. Nicolas Van Praet reports (for subscribers).

How to avoid the fee trap awaiting novice DIY investors

Online brokers can be total phonies when it comes to welcoming novice investors who are starting with just a small account. Most of the brokers covered in our annual ranking have no minimum account size, which sends a generally inaccurate message that newbies are going to be nurtured. But unless you dig deep into the fine print, you can easily miss the fees applied to accounts with assets less than $10,000 to $25,000, depending on the firm and account type. Rob Carrick takes a look at these fees (for subscribers).

High-net-worth investors now able to hold bitcoin fund in registered accounts

High-net-worth investors can now hold bitcoin investments in their registered accounts, including registered retirement savings plans and tax-free savings accounts. Starting this week, investment advisers are able to purchase the First Block Capital Bitcoin Trust, a fund that launched last year for accredited investors, on the NEO Connect – a trading platform developed by Aequitas Innovations Inc. and a sister platform to the NEO Exchange. Clare O'Hara reports.

A back-to-school lesson on RESP withdrawals

The benefits of contributing to a registered education savings plan are well understood. Not only does your money grow tax-free, but the federal government kicks in the Canada Education Savings Grant (CESG) for an additional 20 cents on every dollar contributed - up to a maximum grant of $500 annually (on a $2,500 RESP contribution) or a lifetime limit of $7,200 a child. What’s less well understood are the myriad rules that come into play when Junior heads off to postsecondary school and needs to access to the RESP’s funds. With the new school year underway, John Heinzl explains the rules and offers some pointers on withdrawing money from an RESP.

Others (for subscribers)

‘When does a correction become a bear market?’

Goldman Sachs' recession indicator highest in almost 50 years

Tuesday’s Insider Report: CEO completes a $10-million trade in this bank stock

Tuesday’s analyst upgrades and downgrades

Monday’s Insider Report: Two executives sold over $7-million worth of this ‘Big 5’ bank stock

Monday’s analyst upgrades and downgrades

In volatile energy sector, these 13 stocks are generating shareholder wealth

Others (for everyone)

Ten years after Lehman, spotting the next crisis

Ask Globe Investor

Question: Do you know of a website where I can track my dividend income?

Answer: If you do a search for “dividend portfolio tracker," you’ll get a bunch of results. Problem is, some of these services cost money or may not support Canadian stocks. If you’re simply looking for a way to track your portfolio’s total income, consider building a basic spreadsheet. That’s what I did and it is one of the most useful tools I have as a dividend investor because it shows me exactly how much annual income my portfolio is generating. If I buy more shares or a company raises its dividend, I just enter the updated information and the spreadsheet calculates my new dividend income automatically. It’s also completely free (I use Google Sheets). In a previous column (tgam.ca/dividendspreadsheet), I provided instructions for building a simple dividend-tracking spreadsheet. [Note: The way to obtain Canadian stock quotes in Google Sheets changed recently. To get the market price for BCE, for example, enter the following in the cell: =GoogleFinance(“TSE:BCE”,"price"). For Canadian stocks that end with .UN, such as BIP.UN, do not include TSE: before the stock symbol.]

--John Heinzl

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What’s up in the days ahead

John Heinzl looks at three dividend stocks showing positive momentum (and that analysts love, too).

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

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Compiled by Gillian Livingston

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