It’s convenient that this list of “Ten Rules of Forecasting” can extend beyond investing to politics in light of the current chaos surrounding Justin Trudeau’s government.
Written for the CFA Institute by Joachim Klement of U.K.-based Fidante Capital, the 10 rules are: Data matters; Don’t make extreme forecasts; Reversion to the mean is a powerful force; We are creatures of habit; We rarely fall off a cliff; A full stomach does not riot; The first goal of political and business leaders is to stay in power; The second goal of political and business leaders is to get rich; Remember Occam’s razor; and Don’t follow rules blindly.
Mr. Klement has an attractively sardonic writing style, advising investors to “torture the data until it confesses, but don’t frame the data to the story,” a thought reminiscent of my Feb. 28 newsletter column about the numbers being important.
The most relevant of the 10 rules for Canadians now is likely the warning about reversion to the mean, as applied to the domestic housing market. According to Bank of Montreal economist Robert Kavcic , there is a slowdown in domestic residential investment (new housing construction, resale activity and renovations) of such a dramatic scale that it usually only occurs during recessions.
Canadian household debt levels remain at record levels approaching 175 per cent of disposable income. A decade ago, the ratio was about 25 percentage points lower, just above 150 per cent.
With signs of the real estate market flagging, it is probable that, over the coming years, the level of household debt will revert to the mean – decline to some average level between the current 175 per cent of disposable income level and 150 per cent seen 10 years ago.
The process of paying down debt (economists like using the term ‘deleveraging’) will have significant effects on the economy. The housing market would, of course soften, and consumption would decline as more income is diverted to paying down debt. These negative effects could potentially be offset by rising wages or export growth so economic disaster far from assured.
Mr. Klement’s list is a quick, accessible informative read that I can highly recommend, and not just for investors.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Pembina Pipeline Corp. (PPL-T). This dividend stock appears on the positive breakouts list (stocks with positive price momentum), and its share price has rallied nearly 21 per cent year-to-date. Along with price appreciation, the stock offers investors an attractive yield, currently yielding 4.7 per cent, combined with steady dividend growth. The stock has 19 buy recommendations with a potential 16 per cent total return forecast. Calgary-based Pembina is a midstream service provider for the North American energy industry. The company owns and operates pipelines that transport products derived from natural gas and hydrocarbon liquids. Jennifer Dowty reports (for subscribers).
Diversified Royalty Corp. (DIV-T). This stock appears on the positive breakouts list (stocks with positive price momentum). The stock has a unanimous buy call with an expected potential total return of over 37 per cent, which includes the current dividend yield of 7 per cent. The company has over $80-million of cash on its balance sheet, or approximately 76 cents per share, which is earmarked for a future royalty acquisition – a potential catalyst for the stock. Investors continue to patiently await an acquisition announcement. Jennifer Dowty reports (for subscribers).
The Rundown
Investors cheer as Power Corp and its entities buy back shares
Power Corp. of Canada and two of its publicly traded entities announced that they will buy back a massive swath of their own shares, sending share prices higher but raising the question of what the announcement means for future acquisitions. Power Corp., a holding company that has a 65.5 per cent stake in Power Financial Corp., will repurchase as much as $1.35-billion worth of its own shares, representing about 10 per cent of the current value of the company. Power Financial will repurchase up to $1.65-billion worth of its own shares, and Great-West Lifeco Inc., a subsidiary of Power Financial, will buy back up to $2-billion worth of its shares. David Berman reports (for subscribers).
Three key takeaways from Credit Suisse’s annual investment returns yearbook
For investing geeks, it’s that special time of year – the moment when the Credit Suisse Global Investment Returns Yearbook lands with a thud on our desks. The annual big-picture overview of investing trends has a way of challenging preconceptions and the 2019 edition is no exception. The authors – the renowned research team of Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School – take a close look at emerging markets, the likely future return from stocks and also individual national markets. Ian McGugan takes a look at three key takeaways.
Brand power loses its potency as a stock picking tool
Despite owning two of the most iconic brand names in corporate history, Kraft Heinz Co. has been a financial disaster for Warren Buffett and its other big-name investors. This sad experience is not as unusual as you may think. Anyone betting on the power of corporate branding over the past decade was essentially spinning a roulette wheel. Some big brands did better than the overall market; just as many struggled. Investors who believe in the magical properties of well-known corporate names may want to take note. As invulnerable as today’s top brands may appear, recent history suggests they’re anything but. Famous corporations now seem just as likely to lag behind the market as they are to generate above-average results. Ian McGugan reports (for subscribers).
Rob Carrick’s 2019 ETF Buyer’s Guide: Best U.S. equity funds
The U.S. stock market had a bad year in 2018. Or did it? Your actual experience as an investor holding a U.S. equity exchange-traded fund last year depended to a large extent on which one you owned. With an S&P 500 index fund using currency hedging to smooth out the impact of fluctuations in the value of our dollar, you lost money in 2018. Without hedging, that S&P 500 fund produced a reasonable gain. Low-volatility funds without hedging did even better. This latest instalment of The Globe and Mail 2019 ETF Buyer’s Guide is designed to help you sort out which U.S. equity fund might work for your portfolio. The focus here is on core funds – your one and only ETF for the U.S. market – with a history of at least five years. Rob Carrick explains (for subscribers).
Why Canada’s oldest and largest ETF is bleeding assets
The granddaddy of Canadian exchange-traded funds is showing its age. The iShares S&P/TSX 60 Index ETF – the oldest ETF in the world and the largest in Canada – has been bleeding assets as domestic investors move to cheaper alternatives and foreign investors turn away from Canada. Once the only game in town for low-cost, one-stop, diversified exposure to the Canadian stock market, XIU is steadily losing market share as fees on newer ETFs shrink toward zero. “The spreading concentration of ETF assets in my mind speaks to a healthy and maturing ecosystem,” said Daniel Straus, head of ETF research and strategy at National Bank Financial. Less healthy, perhaps, is the portion of XIU outflows attributable to negative sentiment toward Canada stemming from the pipeline predicament, real estate prices and household indebtedness. Tim Shufelt reports (for subscribers).
Investing in ETFs was supposed to be simple. What happened?
Low-cost diversification is the key driver behind the popularity of exchange-traded funds. A portfolio built with just a few funds can offer investors the world, or at least Canada and the United States. Yet as their popularity has increased, so too has the number of ETFs. In addition to basic index trackers, investors will find sector-specific, factor-based and even actively managed funds. All this choice can leave investors confused. After all, weren’t ETFs the “easy button” for diversified portfolio building? Or do we now require more nuanced approaches to achieve true diversification? The answer is anything but clear. Joel Schlesinger reports.
This commodity is hitting record highs. Here’s how Canadian investors can profit from it
A recent surge in the price of palladium, a precious metal primarily used to help lower vehicle emissions, has investors looking at how to play the sector to potentially reap future gains. The spot price for the metal hit a record high of US$1,565.09 last week amid threats of a strike at a number of mines in South Africa, one of the world’s top palladium-producing countries. A work stoppage would further reduce the supply of the commodity which is already tight as demand for the metal continues to increase. While the price of palladium has retreated from its high in recent days, it has increased by more than 20 per cent so far this year. Brenda Bouw takes a look at a few stocks in the sector (for subscribers).
Cashless society feature:
Going cashless: Small business owners face pressure to accept plastic
On a busy day at Huong Trang Fish Market – a stall within the indoor, year-round Hamilton Farmers’ Market – owners Trieu Tran and Yao Xue don’t get much downtime. Ms. Tran often handles the transactions while Mr. Xue cleans the fish, an efficient system the couple have refined over years working together. They say the main reason they only take cash is because they don’t like making customers wait very long. “If we had a machine, people would be pressing buttons, pulling out their card and taking too much time,” said Ms. Tran recently. "There are customers who don’t want to buy anything if we don’t accept debit and credit, but the majority of customers go use the ATMs and come back.” At a time when it’s easy to go weeks without touching money, Huong Trang is among the small number of cash-only holdouts in Canada. Citing speed of service, ease of accounting and avoiding fees associated with accepting cards, these businesses say cash still works best for their operations, despite constant pressures to accept plastic. Saira Peesker reports.
Others (for subscribers)
Markets rally while Canadian and global economies weaken
How the Canadian dollar bulls got crushed
Grimmer fairy tales: The ‘Three Bears’ of Canada’s economy
Income and momentum: Two distinct styles, one portfolio
Canadian dollar hits five-week low as China deals potential blow to economy
Tuesday’s Insider Report: CEO and CFO are buying these two stocks
Tuesday’s analyst upgrades and downgrades
Tuesday’s small-cap stocks to watch
Monday’s Insider Report: CIO cashes out nearly $1-million as this marijuana stock spikes over 70%
Monday’s analyst upgrades and downgrades
Others (for everyone)
The Globe’s stars and dogs for last week
Ask Globe Investor
Question: I am thinking about moving my money to robo-adviser. What sort of all-in costs am I looking at?
Answer: When you’re calculating the fees charged by an automated investing service, also known as a robo-adviser, there are two layers of costs to consider: the fee charged by the robo-adviser itself, and the management expense ratio (MER) of the exchange-traded funds it buys on your behalf.
Wealthsimple, for instance, charges a fee of 0.5 per cent on deposits up to $99,999, and 0.4 per cent when total deposits across accounts reach $100,000 or more. This is on top of the MER of about 0.2 per cent, on average, charged by the ETFs it uses. So, your total annualized cost could be as high as about 0.7 per cent for a small account or as low as about 0.6 per cent for a large account.
Some robo-advisers are slightly more expensive while others are cheaper. Questwealth Portfolios, for instance, charges a management fee of 0.25 per cent on assets of $1,000 to $99,999 and 0.2 per cent for amounts above $100,000. This is in addition to an average MER of about 0.17 per cent for the ETFs in its portfolios.
Don’t base your decision solely on costs. Robo-advisers offer different levels of advice and personalized service, so be sure to read customer reviews and compare offerings carefully before taking the plunge. Also keep in mind that building a portfolio of low-cost index ETFs is relatively easy. If all you plan to do is buy and hold a handful of funds and make contributions a few times a year, you may decide that you don’t need the services of a robo-adviser. Going it alone will cut your costs to the bone and – all else being equal – generate better returns over the long run.
--John Heinzl
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
There are tentative signs of strength in the U.S. housing market, and that suggests Norbord shares could be in store for a lift. David Berman will share his thoughts.
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Compiled by Gillian Livingston
Scott Barlow