Rational Advisor

Many have asked fro my presentation of the Toronto Investment Conference
Here I’ll include my notes
- “Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and almost invariably, abandon it at precisely the wrong time” - David Dreman
- Dreman and all investors with strong track records of out performance have countless times told us that having a sound strategy and sticking to it are the key secrets to their out performance. Individuals under perform because they flip flop when it seems that the strategy is not working. They change when they get led by the fear of underperformance. Bad investors get lulled into what is hot and leaving what is rational, and these are the classic mistakes. We see that currently in all the advisors and investors making changes to their portfolios at the peaks of the market - because it has not kept pace. This according to David Dreman is a No No.
- Benjamin Graham in his classical book intelligent investing shows a table of the Super investors, and it shows that they have underperformed the index around 30% of the time, yet still their long term numbers have outperformed the indices. So, outperforming an index is not a key measure of successful investors.
Below are my key takeaways from the managers that presented to that I had met recently.
From the Brandes Institute,
- their research in the US shows that of the previous five years top performers, 80% of them will be in the bottom quartile over the next five years. So, investors that choose their investments based on top quartile rankings, they are likely to under perform in the next five years.
- Top ten funds in 1998 averaged double the market return Investors chasing performance invested nearly $60 billion in these ten funds over the following year (1999) these ten funds then delivered almost double the market loss in 2000
From The Canadian Asset Allocation Manager
- When their is a policy change on interest rates going down, equities do outperform, and large caps outperform small caps.
- The Big Mac and the Ipod index, which compares the prices of these goods in different countries says that the Canadian $ should trade at 88 cents.
From the Canadian Mid Cap manager
- Markets are in a “tug of war” between Chinese strengthening and U.S. weakness
- Underweight Financials and Consumer Discretionary
- Overweight Industrials, Technology and select Materials (eg Gold)
- Market weight Materials and Energy
From the Canadian pure Bond manager
- Challenges we have are Aging Workforce, U.S. Deficits and Housing. Aging workforce means that more people will be on pensions and requiring income, so the last 20 years of growth investing should change to income investing. We will see more pension funds demand bonds to provide a secure rate of income - so the demand for bonds is high
- CPI in Canada is low, Debt to GDP is low, so the government does not need to finance their budgets through the income markets - therefore supply for government bonds will be low
- Corporate Balance sheets are good, debt is low, cash is high. So less need for companies to finance their growth through bonds - Supply of corporate bonds is low
- Large demand and low supply for bonds means a good investment environment for bonds for the next twenty years.
From the Canadian Growth Manager
- Longer term outlook for equities is positive, although shorter term risks are significant
- Positives: The relative valuation of stocks is attractive, Sentiment measures are supportive of equities, Massive capital pools exist that need to be invested over time
- Concerns: Volatility is likely to remain high, Increasing credit spreads must show signs of stabilizing, Credit crunch has increased the risk of recession
- Canada has had an unusually good run and we need to rebalance back to what is norm. Canada may be a risky place to invest, need to add more foreign content back.
- Compared to the rest of the world Canada is much more risky, it is primarily made up of two sectors Energy and Materials. As they go, so does Canada, as they go down so does Canada - so be careful.
From the Canadian Dividend manager.
-9 of the past 11 bull markets experienced corrections of at least 10% lasting on average a little over 2 months.
-9 of those 11 witnessed 20% plus moves after correction.
- Market upset caused by financial crisis almost always retests old low
- Market following second low almost always higher 12 months following
- Dollar parity will not last long.
- The Canadian index is over valued and prime for a correction. Everytime it has gone beyond its earnings bands that we have set, it has come down dramatically.
- Banks are offering their best yields when compared to government bonds that they have since the 1970s. We think there is more sub-prime issues but will be adding to these positions as they come down more
From the Canadian Small Cap manager
- Good stocks are being thrown out with the bad
- Value is appearing across the board in a wide variety of sectors
- Many high quality stocks are falling into our value sweet spot
- Canadian economy remains vibrant. Interest rates remain low and are expected to remain so for some time
- Actively buying stocks in consumer, financial, manufacturing and energy sectors
- A great time for value investors!
From the Canadian Large Cap manager
- US market likely more vulnerable than Canadian
- Market normally led by financials
- Emerging markets look like they are peaking
From the Canadian Bond plus strategy manager
- Inflation contained
- Further rate cuts by US Fed likely to continue into 2008
- Bank of Canada; cuts more likely than hikes
- Last 3 cycles: 10 year bonds delivered double digit returns within a year of last hike
- Rally less significant this time
- Majority of long bond rally behind us; short term bonds more attractive
My closing point
“There will be times of underperformance, and you will want to change, well this will cause all your future problems, if not done on a rational and unemotional basis” - Charles Brandes Nov 2007
Any changes you make now based on emotion or irrationality will be the cause of your future problems
Thanks
Rational

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