Despite recent underperformance, there still may be a value premium.
Has the value factor — the tendency of value stocks to outperform growth stocks — faded into oblivion? Several recently published papers argue otherwise. The EDHEC-Risk Institute in France analyzed factor returns in the U.S. from 1977 to 2017 and concluded that value’s recent underperformance is not abnormal and occurs fairly frequently.
The analysis of macroeconomic influences suggests negative surprises over the past three years are in part a contributor to the underperformance. Read more >
The advisor’s job includes making sure a client’s portfolio can fund future expenses.
Ever since the groundbreaking research of Gary Brinson, Randolph Hood and Gilbert Beebower identified asset allocation as the primary determinant in the variability of portfolio returns, thoughtful investment advisors focus on asset-mix composition as the building block of portfolio construction. The goal has been to construct optimally diversified portfolios that seek the highest return relative to their risk as measured by volatility. Read more >
Why do markets reward investors for holding stocks that usually provide excess returns over low-quality ones?
Of all the factors associated with long-term outperformance by equities, quality is the most puzzling. Because investors demand a return premium for incurring risk, it is easy to understand why small company stocks have outperformed over long time frames: they are more volatile and less liquid than large-capitalization stocks. Read more >
Impressive returns over the past decade represent only the bull phase of the market cycle.
Many investors must be delighted with the 10-year performance of their equity funds. International and emerging markets stocks, as measured by MSCI market indices, delivered 10.5% and 11.1% annual returns, respectively, for the decade ended Feb. 28, 2019, while the S&P 500 composite index sported a stunning 17.1% annual return. Even the lacklustre Canadian market posted double-digit returns, with the S&P/TSX composite index returning 10.2% per annum. Read more >
Private investment funds often are marketed as a cure-all to low interest rates and equities market volatility.
Private investment funds that invest in illiquid assets such as mortgages, corporate loans, real estate and private companies are growing in popularity. Low interest rates have dulled the appeal of investment-grade bonds, the traditional portfolio stabilizer, while nerve-racking volatility has left many investors disenchanted with stocks, the classic source of higher returns. Read more >
Momentum is dead. At least that’s what several studies published in the first half of this decade suggested. Back then, momentum – the well-documented tendency of stocks that have outperformed over the past three to 12 months to continue to outperform for a short period – was no longer generating excess returns reliably. Read more >
Today, retirees are rightly concerned with the risk exposure of their portfolios. Therefore, financial advisors appropriately spend considerable time designing portfolios that meet their clients’ downside risk tolerances. Read more >
Today’s low interest rates and high stock valuations translate into modest expected future returns. At a time of increasing longevity, this situation creates a formidable challenge to financial advisors assisting their clients in retirement planning. Read more >
Global synchronized growth, combined with muted inflation and low interest rates, propelled stocks to new highs in 2017. Read more >
For many years, Canada’s stock market was a proxy for emerging-market equities. In both markets, energy and materials have played an outsized role. Read more >
Active share – a measurement of the degree to which an active portfolio manager’s portfolio varies from its benchmark index – has become one of the most popular metrics in the investment industry. Read more >
As financial advisors pour billions of dollars into index-based ETFs, the use of active managers in portfolio construction increasingly comes under question. Read more >
There is an adage from Wall Street’s early days: “Valuation helps define risk, but it doesn’t help with timing.” Brokers learned eons ago that simply because a stock is cheap or expensive says nothing about its short-term price direction. Read more >
Several academic studies have determined that investors’ future return expectations are heavily influenced by recent performance. With the Canadian stock market delivering an exceptional 21.2% in 2016 and the U.S. market up 17.4% annually over the past three years, many investors are likely ratcheting up their return expectations. Read more >
In the U.S., actively managed domestic equity mutual funds have suffered nine years of consecutive outflows as investors have poured money into index domestic equity mutual funds and ETFs. The contrast is glaring – from 2007-15, US$835 billion exited actively managed domestic equity mutual funds while $1.2 trillion flooded into index domestic equity mutual funds and ETFs. Read more >
Proponents of actively managed, concentrated portfolios will be heartened by the results of a study published recently in the Financial Analyst’s Journal.
The authors, Eitan Goldman, Zhenzhen Sun and Xiyu (Thomas) Zhou, analyzed the returns and portfolio concentration of 3,895 actively managed U.S. equity mutual funds from 1990-2012. They found that funds with a higher level of portfolio concentration within sectors display better performance. Read more >
Calendar anomalies have been studied by financial academics and practitioners for decades. These irregular stock return patterns include the January Effect, the Holiday Effect, the Turn of the Month Effect and the weekend Effect. Every spring, one such anomaly – Sell in May and Go Away, also known as the Halloween Effect – is a recurring topic in the financial press. Read more >
The double-digit growth of index-based exchange-traded fund (ETF) assets under management (AUM) globally has outpaced that of actively managed portfolios. In 2014, Canadian ETF AUM increased by 21%, a growth rate that is almost 50% higher than that of traditional mutual fund AUM. Read more >
Academic research in the U.S. has shown that in addition to market risk, certain dimensions of the stock market or “factors,” including company size, explain stock returns. Over long periods of time, small-capitalization stocks, on average, have higher returns than the stocks of large companies and, hence, exhibit a size premium. Read more >
Financial advisors in search of lower-cost equity funds with higher long-term return potential might consider exchange-traded funds (ETFs) that strive to replicate equal-weight indices. Read more >
Savvy financial advisors know that a buoyant stock market doesn’t last forever and, consequently, maintain suitable risk profiles in their clients’ portfolios. The challenge today is that the traditional anchors of stability for portfolios – investment-grade bonds – offer paltry yields and have heightened interest rate risk. Hedge funds, although no panacea, are an option because of their lower volatility and drawdown relative to stocks. Hedge funds, however, have drawbacks. Read more >
One of the tenets of modern finance is that risk and return are inextricably related as investors demand a premium (or excess return) for risking their capital. In respect to stocks, this excess return is referred to as the “equity risk premium” (ERP) and is measured as the difference in return between that of a broad stock market index and of high-quality government debt, such as treasury bills. Read more >
With expected returns compressed by low interest rates and above-average stock market valuations, financial advisors are challenged in helping their clients achieve their retirement goals. Even before management costs, the numbers seem daunting. Read more >
Hedge funds often are treated as an asset class, but in actuality they’re a heterogeneous assortment of distinct investment strategies that invest in various underlying asset classes ranging from bonds to stocks to commodities. Read more >
It’s easy to understand the appeal of emerging-markets bonds. With the DEX universe bond index in Canada yielding 2.7% as of Oct. 31, the 5.6% yield of emerging-markets bonds – as measured by the J.P. Morgan EMBI global diversified index C$-hedged (JPMEMBI) – is attractive. However, financial advisors need to look beyond yield to assess the risk characteristics of this asset class before including it in clients’ portfolios. Read more >
Michael Nairne discusses the efficacy of forecasting for financial markets. He explains which measures do and do not work, and how to address client requests for predictable income. Nairne spoke with Dan Richards of clientinsights.ca at the TMX Broadcast Centre in Toronto. Link to video on Investment Executive >
With investment-grade bonds in the red this year and yields at dismal levels, many financial advisors are considering reducing their clients’ allocations to this asset class. But before acting, you should consider the important role that bonds play in risk mitigation within a balanced portfolio. Read more >
Emerging markets are an increasingly important component of global markets. Consisting in 1988 of 10 countries that comprised only 1% of the world’s stock market capitalization, emerging markets have expanded to include 21 countries comprising approximately 12% of the total market cap of the MSCI all-country world index. Read more >
Ongoing research into the fundamental drivers of stock returns continues to identify opportunities for outperformance. Robert Novy-Marx recently published an article in the Journal of Financial Economics, entitled “The Other Side of Value: The Gross Profitability Premium,” which has created a stir in both academia and the passive investing world. Read more >
There is an evolution underway in the exchange-traded funds (ETFs) space that allows financial advisors to construct better portfolios for their clients.
ETFs originally were designed to replicate the returns of well-known, market capitalization-weighted indices such as the S&P 500 composite index. Today, the index methodologies that underlie certain ETF portfolios have advanced in three significant ways to create the potential for superior risk-adjusted returns or even market-beating performance. Read more >
Joanne Swystun and Michael Nairne explain how HNW investors often have multiple managers and therefore no central CIO to manage tax efficiencies, overall portfolio strategy and asset management. They spoke with Dan Richards, President, Client Insights, at the TMX Broadcast Centre in Toronto and gave pragmatic tips on how to ensure HNW clients steer clear of fragmentation and build a cohesive management strategy. Link to video on Investment Executive >
Selecting equity investments that have the potential to outpace the overall market is challenging for financial advisors. Based on an analysis by my firm, Tacita Capital Inc. of Toronto, one strategy with the potential to do that is using momentum securities. Read more >
Canadian hedge funds lost 4.7% in 2012, as measured by the asset-weighted Scotiabank Canadian hedge fund index (SCHFI), which tracks the 70 domestic hedge funds that constitute the bulk of the sector in Canada. In comparison, the S&P/TSX composite index returned 7.2%. Read more >
Just when most financial advisors have become familiar with exchanged-trade funds (ETFs), they will have to master a new nomenclature. ETFs are now part of a category of what is known as “exchange-traded products” (ETPs). Read more >
Quality bonds are the investment of choice today. In Canada, equity mutual funds are in net redemption almost every month while bond funds enjoy capital inflows. Investment-grade bonds have clobbered almost every major asset class over the past five years. Read more >
There is a clash of the titans underway that is benefiting both financial advisors and their clients. The new Canadian division of Vanguard Group Inc., with more than US$2 trillion in assets under management (AUM), is challenging the Canadian subsidiary of BlackRock Inc., which handles more than US$3.5 trillion in AUM, in the fast-growing exchange-traded fund (ETF) sector. Read more >
As the search for yield intensifies, convertible bonds are receiving attention as an asset class that offers a unique blend of income, downside protection and opportunity.
To assess this asset class’s long-term performance, the research team at Tacita Capital Inc. spliced the BofA Merrill Lynch U.S. convertible bonds all qualities index (ML index), available since January 1988, with the Ibbotson Associates (IA) monthly convertible bond index, available since January 1973. Canada lacks a similarly comprehensive index. Read more >
TODAY’S PALTRY INTEREST rates have financial advisors searching for investments that offer enhanced income. One strategy is covered call writing – selling call option contracts on a stock or basket of stocks for premium income while owning an equivalent amount of the underlying stock(s). Read more >
Today’s abysmally low interest rates and incredible market volatility have sent many financial advisors on the hunt for yield in a variety of fixed-income and equities investment vehicles. The pursuit of higher yield, however, can easily introduce new risks into a portfolio that are masked until changing economic or monetary conditions trigger their appearance. Read more >
In today’s environment, some financial advisors have undoubtedly been attracted to the high yields being offered by some fixed-income hedge funds. As fixed-income arbitrage strategies can possess unforeseen risks, the portfolio research team at my firm, Tacita Capital Inc. of Toronto, has delved into their performance. Read more >
With interest rates on government bonds at levels not seen since the Second World War, many financial advisors are assessing investment-grade and high-yield corporate bonds for their clients’ portfolios. In turn, the research team at Tacita Capital Inc. has reviewed research on corporate-bond performance and analyzed several bond indices.
Read more >
Today’s turbulent markets and dismally low interest rates have triggered a search for ways to moderate portfolio volatility without sacrificing return. One candidate is equity long/short funds. To obtain a picture of this strategy’s performance, the portfolio research team at Tacita Capital Inc. has reviewed recent research on both U.S. and Canadian hedge fund performance and analyzed several U.S. hedge fund indices. Read more >
With interest rates at levels not seen since the Second World War and stock prices in the red, many financial advisors are assessing ways to improve the income and risk-adjusted return potential of their clients’ portfolios. Read more >
With gold share prices badly lagging gold bullion prices, many financial advisors are wondering about their relative merits. To address this issue, my firm, Tacita Capital Inc., analyzed the Canadian-dollar returns of gold shares and bullion. To get a long-term picture of share performance, we spliced the S&P/TSX global gold index, available since October 2000, with the S&P/TSX gold index and the now discontinued TSX gold/silver index. Read more >
Financial advisors in search of ways to improve their clients’ portfolio diversification should consider managed futures. These strategies provide direct exposure to futures contracts on financial assets such as stocks, government bonds and currencies, as well as on physical commodities such as energy, agricultural, industrial and precious metals, and soft commodities. Read more >
Financial advisors who invested clients’ funds in Canadian small-cap energy and resources stocks over the past decade have to be smiling. The BMO Nesbitt Burns small-cap energy and resources indices had annualized returns of 18.1% and 27.5%, respectively, from Jan. 1, 2001, through Feb. 28, 2011. Read more >
With low interest rates dampening returns from bonds, many financial advisors are using stocks and mutual funds with high dividend yields to bolster income returns for their clients. Based on an analysis of high-dividend-yield stock returns conducted by my firm, Tacita Capital Inc., this can be a wise move for the right clients. Read more >
The plummeting U.S. dollar and rising inflation concerns as a result of more quantitative easing in the U.S. have highlighted gold shares as a portfolio option. Read more >
Exchange-traded funds represent the greatest advance in managed money for individual investors since the launch of the modern mutual fund in 1928. ETFs allow the construction of highly diversified, cost- and tax-effective portfolios composed of diverse asset classes. Read more >
With interest rates having plummeted to new lows, it’s challenging for financial advisors to find investments that offer higher yields. Read more >
As the global financial crisis continued to take its toll last year, world economic output declined by 2%. Yet gross domestic product grew by 4.5% in the Asia-Pacific region, excluding Japan, bolstered by strong GDP growth in China and India. Read more >
The threat of a bond default by Greece sent tremors through stock markets in May as investors reacted to the prospect of a renewed credit crisis centred on sovereign debt, diminished global growth and even the possible breakup of the European Union. Read more >
Among the most important types of guidance good financial advisors offer is in helping their clients make the trade-off between risk and return that is right for them. Read more >
Improving employment, reduced capacity overhang and a bubbly residential real estate market have dramatically increased the odds that the Bank of Canada will initiate a new rising interest rate cycle. Read more >
Of all the assumptions that go into clients’ retirement plans, none has a bigger impact than the expected return on their investments. Read more >
The superior performance of the Canadian stock market relative to its global counterparts over the past decade has left some financial advisors doubting the wisdom of global equities diversification. Read more >
Financial advisors looking to enhance the diversification of their clients’ portfolios need to consider real estate investment trusts. Read more >
As fears of inflation and escalating government debt mount, gold is being highlighted as an asset that can hedge these risks. To assess the portfolio role of gold, my firm, Tacita Capital Inc. of Toronto, analyzed its long-term returns and volatility (in Canadian dollars), its correlation to inflation and surveyed the current product environment. Read more >
Building a portfolio that beats the broad market indices over the long run is a daunting task for advisors. One asset class that forms the foundation of any such portfolio is Canadian value stocks, according to analysis by Toronto-based Tacita Capital Inc. Read more >
With returns in the past decade so dismal, advisors need to examine options to enhance long-term portfolio performance. Read more >
Two decades ago, international investing was in vogue. The stunning growth of Japan and the ongoing expansion of the European Union had created a compelling investment thesis. Read more >
With the painful losses of the recent bear market still fresh, many advisors are examining their investment strategies to improve the diversification in their clients’ portfolios. Read more >
With long-term capital appreciation numbers in the red and stocks facing uncertain growth prospects, many advisors are exploring income-oriented options in the hope of bolstering future performance. Read more >
The stunning appreciation of the Canadian dollar from a low of US62¢ in January 2002 to a 13-decade high of US$1.09 in November 2007 dramatically undercut U.S. equity returns. Read more >