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Institutional portfolio manager Ben Carlson got tired of arguing about the importance of the U.S.’s temporarily inverted yield curve and used that as an excuse to try and pick the best money manager of all time.

The candidates were unsurprisingly America-focused and all from the 20th century, which is limiting. On the other hand, I’m not sure current Canadian investors have much to learn from the rise of the Rothschild banking dynasty in the 1800s anyway.

The most interesting potential pick was Jim Simons of Renaissance Technologies. Mr. Simons was heralded as “the greatest money maker” in market history in the marketing material for the upcoming book “The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution.”

Mr. Carlson rejected Mr. Simon as his first choice because his fund has been closed to new clients for a number of years and also because the methodology behind the investment process is shrouded in mystery.

George Soros and his protégé Stanley Druckenmiller – the latter probably would have been my pick for the brilliance and audacity of his trades – were discarded because the amount of money they managed was small relative to Mr. Carlson’s final choice for best investor ever – Warren Buffett.

Warren Buffett is hardly a surprise as the winning candidate, but it’s worth looking more closely at the details of what he’s achieved,

“Berkshire Hathaway has more than doubled up the annual returns on the S&P 500 – 20.6 per cent annually versus 9.6 per cent annually from 1965-2018… The total returns over this time frame were nearly 2.5 million per cent for BRK versus 14,000 and change for the S&P 500… The market’s returns of nearly 10 per cent per year over five plus decades are great. Buffett’s returns are otherworldly.”

Berkshire Hathaway has generated annual returns higher than 50 per cent 10 times in its life and the S&P 500 has never gone up that much.

Investors have heard the Warren Buffett stories time after time and the endless fawning at the annual Berkshire Hathaway meeting can be grating. The reminder that he deserves the accolades, however, for longevity in addition to the remarkable returns, is well taken.

It is possible that no single person has created more wealth for more people than the Oracle of Omaha and while it’s tempting at times to take him for granted, we really shouldn’t.

-- Scott Barlow, Globe and Mail market strategist

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The Rundown

As U.S.-China trade tensions escalate, UBS shifts strategy to reduce risk in portfolios

Looking for a place to hide amid rising trade tensions between the United States and China? You’re in good company. The wealth-management division of UBS Group AG recognizes that the current bout of market volatility could last, and is taking a dramatic shift in its sector allocation. Zurich-based UBS is taking a more defensive position, raising its exposure to U.S. consumer staples and real estate stocks, and lowering its exposure to energy and technology, given those sectors’ close association with the global economy. David Berman reports (for subscribers).

A close-up look at preferred share ETFs, a mega-hit with investors turned surprise money-loser

Canadians love dividends, and preferred share ETFs are dividend-paying machines. How this dream match-up went sour is a classic story of the right investing product appearing at the wrong time. Exchange-traded funds holding preferred shares have, in fact, been machine-like in paying monthly dividend income to investors. But their share prices have fallen over the past five years, a startling result from an investment product that has been used as a bond substitute. Rob Carrick explains (for subscribers).

Worried about market volatility? These outperforming funds could offer a winning strategy

The passive investing boom has not been kind to stock pickers, but one form of active management continues to hold its own: low-volatility funds. Investors have flocked to low-volatility strategies in recent years for their ability to reduce the level of risk in a portfolio, without having to sacrifice returns. “Being careful has paid off,” said Jean Masson, a managing director at TD Asset Management who manages a number of low-volatility funds. “And it’s going to be like that for a while, I think.” Tim Shufelt reports (for subscribers).

Short sales on the TSX: What bearish investors are betting against

Short sellers have significantly increased their bets against publicly traded Canadian companies in 2019. Is this a warning that the stock market is headed for a major downturn? What companies are targeted by short sellers and are they at risk of selling off? Larry MacDonald takes a look (for subscribers).

Horizons plans to turn $5.2-billion in ETF assets into corporate class funds

Horizons ETFs Management Canada Inc. plans to restructure about half of its assets into corporate-class funds, including its flagship $1.9-billion Horizons S&P/TSX 60 Index ETF, after the federal government moved earlier this year to close a tax loophole being used by certain exchange-traded funds. Horizons announced after markets closed on Friday that the proposed change, which will affect about $5.2-billion of its overall $10-billion in assets under management, will not create tax consequences for unitholders of the affected funds. Horizons says unitholders will have the same tax efficiencies under the new corporate-class structure, and that investment mandates, fees and tickers of the funds affected will stay the same. Brenda Bouw reports.

Others (for subscribers)

Relax about the global economy, Canadians, only U.S. growth matters: CIBC

There’s no obvious relief for U.S. energy investors on the horizon

Recession may be the key to ending Trump’s trade war with China

New Suncor CEO is buying on stock weakness

Monday’s Insider Report: Management executives are selling millions of dollars worth of shares in the market

Monday’s analyst upgrades and downgrades

Monday’s small cap stocks to watch

Others (for everyone)

The Globe’s stars and dogs for last week

Bullish on Canadian Solar

Globe Advisor

Mortgage investment corporations are appealing but carry notable risks

Advisors and their teams must be empathetic, understanding when working with seniors

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Ask Globe Investor

Question: In a recent column you talked about being able to earn $52,000 in dividend income in certain provinces without paying tax. However, you failed to mention that the dividend gross-up creates phantom income that could trigger (or increase) the clawback of Old Age Security benefits for seniors, which makes dividends less attractive. Why didn’t you mention this?

Answer: Because it’s not as big a deal as some people believe.

I’ve written about the dividend gross-up and OAS clawback before. My conclusion then, based on calculations provided by a tax expert, was that, even for an investor in the OAS “clawback zone," earning dividend income is still more tax-friendly than earning interest income.

But since a few readers raised the OAS clawback issue again, today we’ll take another look at it.

For 2019, the OAS clawback – formally known as the OAS pension recovery tax – kicks in when net income reaches $77,580. For every dollar of income above that threshold, 15 cents of OAS benefits are clawed back. When income reaches $125,937, no OAS is payable.

In my column about earning tax-free dividend income, the OAS clawback wasn’t even a factor. If you’re a senior in Ontario, for example, and collect $52,000 in actual dividends, the 38-per-cent gross-up would increase your taxable income to $71,760 – still less than the clawback threshold. And, thanks to the dividend tax credit, you would pay no tax (apart from an Ontario health premium of $600). This assumes you have no other sources of income.

Granted, most people don’t live on dividend income alone. What about a more typical situation, where a senior has income from OAS, the Canada Pension Plan and a company pension, in addition to dividend or interest income?

Dorothy Kelt of crunched the numbers and found that dividends still provide a clear tax advantage over interest, even after taking the OAS clawback into account. She compared two seniors, both with 2019 non-investment income totalling $39,653 – $7,253 from OAS, $8,400 from CPP and $24,000 of eligible pension income. One senior also earned $30,000 in eligible dividends, whereas the other collected $30,000 in interest from fixed-income investments.

Result: The dividend gross-up would push the first senior’s income several thousand dollars past the OAS clawback threshold, resulting in an OAS recovery tax of $521. The second senior would have no OAS clawback. But the first senior would still have a significantly lower tax hit over all (including the OAS clawback) than the second senior because of the dividend tax credit.

In Ms. Kelt’s comparison, the dividend investor’s tax savings relative to the fixed-income investor ranged from about $3,500 to more than $7,000, depending on the province or territory. Her calculations also took into account a clawback of the age credit available to people 65 and over. Ms. Kelt ran a second comparison with $50,000 of investment income from either dividends or interest, and the tax savings for the dividend investor were even larger.

“Normally, dividends are still the best way to go, even with the OAS and age credit clawbacks,” Ms. Kelt told me.

Remember, too, that with interest rates at depressed levels, the yields on fixed-income securities pale next to the yields available on many dividend stocks. Many five-year guaranteed investment certificates, for example, pay about 2.5 per cent, but you can easily find bank stocks, pipelines, power producers or telecoms yielding 5 per cent or more. Yes, there are risks with dividend stocks – prices can decline and dividend cuts can happen – but you can manage the risks by buying only high-quality companies.

I’m not suggesting that people should avoid bonds and GICs, which have their place in a well-balanced portfolio. What I’m saying is that arguments against dividend stocks based on the OAS clawback don’t stand up to the facts.

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

Old-school value investors frequently look for stocks which pass the net-net working capital screen favoured by the original value investor, Ben Graham. Simply stated, this screen looks for companies where the stock market value is less than the balance sheet value of the current assets minus, not just the current liabilities, but all the liabilities – hence the name, net-net working capital. Well, from this point forward, forget about the strategy. Robert Tattersall will explain why this stock hunting method no longer works.

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Compiled by Gillian Livingston

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