Tag Archives: security selection

Security Selection is a nebulous Value proposition

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Image courtesy https://advisor.wellington-altus.ca/standupadvisors/

By John De Goey, CFP, CIM

Special to the Financial Independence Hub

By now, you will have almost certainly heard a few stories about the folly of stock picking as a viable way to beat the market.  The problem that high net worth (HNW) investors are disproportionately saddled with is they are bombarded with people who purport to be able to add value by doing things that, in aggregate, cannot possibly be true.

There are three basic equity building blocks investors might use to mix and match in their portfolio construction: individual securities, ETFs and / or mutual funds.  Very few HNW investors use funds, but I will mention them for the sake of completeness and comparison.  Mostly, funds are used as an example of what NOT to do.

To provide structure and consistency to this discussion, I should add there are a couple industry terms you might be somewhat familiar with that nonetheless need to be defined. They are:

Alpha – The pursuit of reliable, consistent and superior risk-adjusted returns; and:

Closet Indexing – The practice of masquerading as an active manager while holding a portfolio basket that nearly replicates the index it tracks.

No matter what vehicles are used, these two concepts need to be considered when assessing options.

Dreams versus Reality

There’s a simple way to think of them.  They are, respectively, the dream and the reality of how most traditional mutual funds are managed.

Everyone wants Alpha at a micro (personal) level, but Alpha does not even exist on a macro (aggregate) level.  A metaphor many use is that no matter how high anyone’s mark is, if everyone else in the class has a high mark, the class will have a high average, but it will be difficult to beat the average.  This was simply explained by a Nobel prize winner named William F. Sharpe of Stanford, who wrote a paper about 30 years ago called “The Arithmetic of Active Management.”

In it, he showed the self-evident logic that any market is made up of active managers (traders) and passive managers (benchmark replicators).  Any benchmark (such as the TSX) is merely the sum of all active and passive participants.  Seeing as the passive people merely replicate the benchmark, their returns will equal the return of the benchmark minus their fees. It follows that the average return of all active managers will also equal the total benchmark minus fees.  Since average active fees exceed average passive fees, it logically follows that the average passively managed dollar must outperform the average actively managed dollar.  Continue Reading…

SPIVA Scorecard: Canada comeback?

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Graham Bodel

By Graham Bodel, Chalten Advisors

Special to the Financial Independence Hub

“Not to fear, we have found a manager based in our very own Canada that is able to consistently beat the pack.”

Standard & Poor’s has done a brilliant job over the last few years of shining the light on the fund management industry by publishing its SPIVA (S&P Indices Versus Active Funds) Scorecards,  which report on the performance of actively managed mutual funds relative to their benchmark indices.

We’re not spoiling anything by telling you the results don’t usually come out favourably for active managers:  the performance data has been fairly consistent and compelling for years.

The latest SPIVA Canada Scorecard for the year ended December 31, 2015 came out on Monday and at first glance there may be reason to cheer, especially for those fund managers focused on domestic stocks.

SPIVA Canada Scorecard 2

While 57% might not seem very convincing, it’s certainly a better result than US domestic equity managers, only 25% of whom managed to beat the benchmark last year (Source: SPIVA US Scorecard).

Of course, 2015 was a year where the Canadian stock market performed worse than any other developed market globally in USD terms and was only able to squeak past Russia and Brazil.   If you’d been one of the few lucky Canadians to properly diversify outside of Canada last year, you would have been disappointed with active fund management as only 21% of Canadian funds managing International Equities (outside North America) were able to outperform their benchmark.

The longer the time period, the worse the results

Continue Reading…

Stop Doing #4: Stop Picking Active Money Managers

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Steve Lowrie

By Steve Lowrie, Lowrie Financial 

Special to the Financial Independence Hub

Last month, we explored Jim Collins’ “Good to Great” suggestion that we would be well served by having a STOP-Doing List to pair with our To-Do Lists.

For starters, we advised investors to STOP reacting to market noise and start heeding the long-term evidence. Another worthy addition to your financial STOP-Doing List is to stop picking active money managers (or hiring someone else to try to do this for you).

As a reminder, my definition of an active money manager is someone who is engaging in some form of forecasting, whether it be picking stocks, timing markets or a combination of both.

Predicting the Unknowable
In our personal and financial lives alike, we worry about so many things that we cannot control. One of the greatest of these things is the future. When speaking with investors about the dangers of trying to accurately forecast the market’s or a stock’s pricing moves, many can accept that it’s difficult to succeed on their own. But the next leap is harder to make. Most investors want to believe that, while they may not personally have the time, energy or expertise to beat the market, they can still turn to well-heeled professional managers to do the forecasting for them.

Financial Services Attracts the Best and Brightest

In most pursuits in life, more practice and more experience makes perfect. So if someone is really good at some occupation or trade, it’s a safe assumption to assume he or she will continue to be good at it in the future.

However, active money management is different. Continue Reading…