Economic Pulse
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Are exchange-traded funds dangerous? (Part 1 of 2)
December 8, 2011
Recently, the press has been sounding the alarm about exchange-traded funds (ETFs). These criticisms target the two types of ETFs representing the vast majority of assets under management worldwide: “physical” and “synthetic” ETFs. In the January 2012 edition, we’ll take a look at the concerns about synthetic ETFs, but today, we’ll review the criticisms of physical ETFs.
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International Diversification
November 14, 2011
We recently attended the Dimensional Fund Advisors (DFA) Canadian Investment Conference. This conference was unlike those typically organized by mutual-fund companies, as a lot of the presentations were made by finance professors such as Eugene Fama (University of Chicago) and Ken French (University of Dartmouth), plus some younger talented academics. Ideas from these thinkers have been part of the curriculum at business schools for decades. Here are two important takeaways from these presentations:
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North American Equities and the Federal Reserve
October 11, 2011
In the last Economic Pulse, we maintained that, despite the serious problems in Europe and the U.S., we’re not overly worried about PWL portfolios. We even went so far as to assert that this summer’s steep decline in government bond yields actually supported stock prices. Yet the grim reality of the market does not escape us: a vast majority of European equity markets are firmly in bear territory, with declines of 20% or more year-to-date 2011. North American markets have fared better: Canadian Equities (S&P/TSX Index) are down 12% and U.S. Equities (S&P500) are down only 5%. Why is there such a difference?
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Lessons from the Recent Equity-Market Drop
September 8, 2011
Investors will remember the summer of 2011 for the major decline in the equity market. Stocks were hit hard by the looming possibility of a recession, by the U.S. government’s dysfunctional negotiations regarding its national debt ceiling—and its eventual downgrading of the credit rating—and by the lack of progress in European debt problems. From peak (April 29) to trough (August 8), the S&P500 Index declined 18%. There are lessons we can draw from these events and from the anxiety they caused many investors.
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Another Look at Pension-Fund Managers
July 7, 2011
The June edition of the Pulse looked at the characteristics of large pension-fund managers. This was not by chance: PWL has studied their practices for a long time and has implemented, wherever possible, those that made the most sense. We are also on occasion asked to compare our portfolio returns with these managers.
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Five Characteristics of Large Pension Managers
June 10, 2011
In a recent internal study, PWL reviewed the latest annual reports of six of the largest Canadian pension managers*.
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U.S. Treasury Bonds: Between a Rock and a Hard Place
May 5, 2011
In a recent newsletter, Bill Gross (the Chief Investment Officer of PIMCO, one of the largest and most prestigious bond-management firms in the U.S.) highlighted the following three important points:
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Is Gold a Viable Asset Class?
April 8, 2011
The case for gold investing has gained a lot of momentum recently. Since 2000, gold has outperformed most stock indices by a wide margin. The U.S. government’s high level of indebtedness and the political turmoil in various regions around the world have enhanced the perception that gold is a safe store of value. But is gold a viable asset class? Let’s examine some of the key arguments that are made in its favour.
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The ABCs of DFA
March 9, 2011
Recently, Dimensional Fund Advisors (DFA) received Lipper Fund Awards in Canada (Top Canadian Equity Fund over three years) and the U.S. (Best U.S. Equity Funds in 2010). This recognition from the investment industry was unexpected; after all, DFA aims in principle to mirror the market’s performance, not to beat it. Even more surprising are the quartile rankings of its equity mutual funds in Canada...
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Turbulence in the Bond Market
February 4, 2011
Last week, Standard & Poor’s downgraded Japanese government bonds to AA-minus, from their previous rating of AA. On the very same day, the U.S. government announced that the federal budget deficit would likely climb to $1.5 trillion in 2011, a hefty hike from the $1.29 trillion of 2010. While neither announcement was unexpected, they both point in the same direction: the governments of major economies are facing excessive levels of debt. How can they deal with this?
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The Irish Disaster and Canadian Investors
December 9, 2010
The demise of Irish finances is no small reversal of fortunes. Between 1995 and 2007, Ireland had caught up with the rest of the developed world thanks to an extraordinary 6% GDP growth. Today, despite a population of only 4 million, Ireland boasts a GDP per capita that is similar to Canada’s. Not bad for an economy that had languished throughout the 20th century. However, this economic success was accompanied by a bank-financed real-estate boom, which is now turning into a nightmarish bust. Credit losses are so large that even the government can’t bailout the Irish banks on its own, leading to the recent European/IMF-led rescue package.
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Quantitative Easing: Four Questions and Answers
November 12, 2010
Last week, the U.S. Federal Reserve unveiled a controversial plan to buy $600 billion in U.S. Treasury bonds, in the hopes of boosting the lackluster economy. I would like to demystify this operation, which, in economic jargon, is known as “quantitative easing” or “QE.”
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Vanguard Surpasses Fidelity
October 15, 2010
According to The Globe and Mail, the Vanguard Group has now surpassed Fidelity Investments as the largest mutual-fund provider in the U.S. ($1.3 vs. $1.2 trillion). This is a landmark event for two reasons. First, Fidelity dominated the industry for twenty years. Second, and more significantly, Vanguard distinguishes itself by mainly offering index funds (also known as passive funds).
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The Financial Sector Reform: Three Interesting Developments
September 3, 2010
The new U.S. legislation for the financial sector is now one month old. It rewrites the rules in every branch of finance including consumer protection, derivative-product trading and bank risk management. At the same time, regulators around the world are also redesigning other national financial regulations. Three developments have caught my attention.
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Securities from the Midfield (Part 2 of 2)
July 13, 2010
Last month, we reviewed three asset classes that belong in the middle ground between safe assets (government bonds) and risky assets (equity). I will close this short series by reviewing three more classes.
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Securities from the Midfield
June 14, 2010
For decades, the golden rule of managing portfolio risk has been to start by deciding on the split between safe assets (government bonds) and risky assets (equity). But what about the asset classes that share some characteristics with both stocks and bonds? Let’s review some of the key features of three asset classes that stand at midfield between government bonds and equity.
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Sudden Stock Market Drops: A Few Observations
May 13, 2010
A steep equity-market drop occurred on May 7, 2010, which brought the S&P500 Index down 8.5% at one point during the day. This type of event worries a lot of investors.
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An Anomaly in the U.S. Bond Market
April 1, 2010
Bloomberg News recently reported that bonds from several high-quality corporate issuers have traded at a slightly lower yield-to-maturity than comparable U.S. Treasury securities.
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The Greek Tragedy and European Stocks
March 10, 2010
The recent turmoil in the finances of Greece resembles a Greek tragedy. On top of the intricacies of internal politics, street protests and union strikes, there is a crosscurrent of complex international issues at play.
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Takeaways for Good Portfolio Governance
February 9, 2010
Recently, Michael Sabia of the Caisse de Dépôt et Placement du Québec (CDPQ), was focused on public communications. He clearly wants to advise the public of where the CDPQ is heading. His reflections include some useful takeaways for individual investors.
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Monetary Policy For Extraordinary Times
April 30, 2009
Last week, the Bank of Canada announced its latest interest rate cut, leaving the interbank lending rate to its lowest possible level: 0.25%. This rate cut, which caps a cumulative 4.25% reduction since December 2007, raises a question among investors: Has the Bank of Canada exhausted its capacity to further fight the Canadian recession? The central bank maintains it still has ammunition. In the coming months, it will use two new tools to help re-energize the economy.
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Capital Trust Notes: An Overview
April 2, 2009
In recent weeks, securities known as “Capital Trust Notes” (CTNs) have received a certain amount of attention. These securities, which are issued by Canadian banking and life-insurance conglomerates, seem to offer a high interest rate and the seeming safety of a familiar issuer.
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