Connecticut-based asset management firm Validea Capital has an active, highly informative website for public consumption. Jack Forehand, a portfolio manager at the company, recently published a ‘best-of’ online article featuring the five most important lessons he learned after a series of long interviews with prominent fund managers and finance industry gurus.
The five lessons were “Beware the risks you can’t see" (from a discussion with Corey Hoffstein from Newfound Research), “Learn to say ‘I don’t know’” (Jim O’Shaughnessy, O’Shaughnessy Asset Management), Active managers “get paid to endure pain” (Wes Gray, Alpha Architect), the importance of a repeatable thought process for investing (Michael Mauboussin, BlueMountain Capital Management) and “Sometimes, this time is different” (Ben Hunt, Epsilon Theory).
There are useful takeaways from every interview but I want to focus on Wes Gray’s observation that active fund managers get paid to endure pain. The discussion focused on whether the time-honoured value investing strategies that have underperformed over the past decade would ever return to favour.
The issue is important on two fronts. For one, most investors are taught that buying assets when they’re cheap, and selling them when expensive – value investing - is the basis of successful performance. But this hasn’t worked for years.
Second, the potential for value stocks to outperform the market in the near future has been a topic of interest for numerous prominent market strategists, particularly global equity strategist Chris Montagu at Citi.
Back to Mr. Gray, who believes value investing will stage a comeback. He noted that value strategies still provided lower risk returns, and that finding mispriced assets lead to competitive returns even in the current environment.
The manager then added “Our overarching framework for “active” strategies (which includes “value”), is what we call the sustainable active framework. The basic idea is simple: you get paid to do things that are painful.”
This is an interesting point (one that might also apply to factor investing ETFs but let’s not complicate things for now). The premise is that the fees paid to active managers are so that investors can buy the patience and discipline they might not be able to achieve themselves.
Applied to value investors, the fund manager endures the pain of underperformance so that value-based investing strategies are available if market conditions change, and value stocks begin to outperform the market.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Six key investing insights from financial scholars
New investing insights can be found in the dozens of papers published every month by finance professors and researchers in peer-reviewed journals, such as the Journal of Finance, the Journal of Investing and many more. But readers usually need to first work their way through some heavy-duty math and jargon in these scholarly articles. Larry MacDonald takes care of that for you and highlights some of their recent findings.
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Rob Carrick introduced us to the 2MP in 1999 to investigate the idea of simplifying the portfolio-building process by focusing on the largest stocks in the Canadian stock market. It didn’t outperform the blistering gains of the TSX last year, but over the long haul, it’s proved its worth. Rob looks at the changes being made to the portfolio of stocks for this year.
Place your bets: These are Bay Street’s highest and lowest rated stocks for 2020
The list of equity analysts’ top Canadian stock picks for 2020 goes well beyond the usual suspects of bond proxies and big banks. Lower-profile and lesser-followed names such as Ottawa-based software company Kinaxis Inc., fashion retailer Aritzia Inc. and specialty drug manufacturer Knight Therapeutics Inc., are among Bay Street’s darling stocks for the year ahead. These are stocks with unanimous sell-side support, meaning every analyst covering them has buy recommendations. There are 13 such stocks in the S&P/TSX Composite Index, spanning nearly every sector of the stock market. While some investors may consider mining this list for buying opportunities, contrarians may want to go in the opposite direction of analysts’ consensus. Tim Shufelt reports.
Others (for subscribers)
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Monday’s Insider Report: Director invests over $1-million in this high-yielding stock
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Ask Globe Investor
Question: Is there a Canadian equivalent to U.S. TIPS?
Answer: TIPS is short for Treasury Inflation-Protected Security. These are U.S. Treasury bonds that are indexed to inflation. The principal value of TIPS rises in lock-step with inflation. In Canada, these are called real return bonds.
Blackrock offers the iShares Canadian Real Return Bond Index ETF, which trades under the symbol XRB. It has done well recently, with a one-year return of 10.83 per cent to Nov. 30. However, average annual results since inception in December 2005 are an insipid 3.83 per cent. The management expense ratio is 0.39 per cent.
--Gordon Pape
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Compiled by Globe Investor Staff