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InvestmentPulse

Launched in 1999, The Investment Pulse has evolved from commenting the latest economic data towards providing a sense of the direction where PWL Capital leads in term of efficiently investing clients’ portfolios.

This has evolved yet again, please continue to following us through my blog: https://www.pwlcapital.com/kerzerho-blog Our goal is to deliver lasting investment ideas to all readers, in a format that can be read easily within two or three minutes.

2014

Institutional ETF Strategies

September 3, 2014

A new study produced by Greenwich Associates reviews how 48 Canadian institutional money managers utilize ETFs in their portfolios. This survey focuses solely on institutions that invest with ETFs. Here is an overview of the four most prevalent ETF strategies:

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The Performance of Active Fund Managers

July 31, 2014

A few weeks ago, Standard and Poor’s published its SPIVA report on the performance of actively managed mutual funds. While some past patterns are repeated, some of this year’s numbers diverge from trends observed over the last nine years. Here’s my review.

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The Future of Bonds

May 16, 2014

We received several comments recently from investors who are worried about the future of bonds. Bond yields are close to an 88-year historical low and, as a result, yields have more room to move upward than downward. Rising bond yields generally result in a price decline, so investors are concerned that they could experience severe losses. I would like to provide some perspective on the effect of rising yields on bond returns.

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Why Invest in Bonds?

March 20, 2014

Recently, we’ve received a lot of questions about bond investments. People want to know why invest in bonds at all. The question is a legitimate one, what with Government of Canada bonds yielding between under 1% and 3% for maturities of 3 months to 30 years. The answer lies in the specific roles that asset classes play in a portfolio.

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Building a Positive Portfolio Experience

January 29, 2014

The grave financial crisis ended five years ago, and returns have been mostly positive since. But while some investors have been able to benefit from the positive markets of the last few years, others have not recovered from the crisis, with their portfolio values still languishing below their 2006-2007 peaks. What differentiates successful investors from the others? We believe the recipe boils down to two major ingredients: solid governance and sound investment principles.

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2013

Five Predictions for 2014

December 19, 2013

We’ve often made the case that market predictions are not a sound basis for an investment strategy. That may be the case, but some of the behaviours of the investment market may be predictable, and these predictions could be useful for building a successful portfolio. Here is our take on predictions for 2014:

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A Scorecard on Active Investing

September 27, 2013

Every year for more than a decade, Standard and Poor’s has been publishing the SPIVA Report on the performance of Canadian actively managed equity mutual funds. Year after year, this report has been a key piece of evidence supporting our view that index funds are a vastly superior form of investment. And the 2012 study was no exception. We would like to review its main findings and discuss some potential objections to its conclusions.

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Stock Prices and Expected Returns Move Inversely

August 9, 2013

As the head of research at PWL, I have become obsessed with expected returns over the years. After all, clients hire us to help them obtain positive returns. The expected return of a 5-year GIC earning 2.5% annual interest is easy to figure out. In contrast, gauging the expected return of the stock market is tricky. Even trickier is the notion that prices and expected returns move in opposite directions. Let’s illustrate why, by imagining a lottery played by John, Paul, George and Ringo.

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From Confusion to Direction

June 28, 2013

In our last issue, we discussed how vital it is that we ignore much of the information presented in the financial press (or at least take it for what it is: entertainment) if we want to stand a chance of achieving investment success. For example, basing investment decisions on expert forecasts or on market and political events leads directly to confusion. However, some publications truly deserve investors’ attention, as they provide a sense of enduring direction.

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Less Information, More Clarity

May 10, 2013

Travellers roaming the streets of a foreign city for the first time must deal with uncertainty in some form or another. Finding their way to points of interest, choosing a restaurant or communicating with locals may require concentration. Part of this process is information selection: filtering out non-useful information that distracts us from the really useful stuff. Successful investing is a bit similar: what information we decide to ignore is as important as what we pay attention to. Here’s our short list of information that is best ignored.

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Lessons from Cyprus

April 11, 2013

Last week, (yet) another distressed European country received a bailout package from the European Union. Like in Ireland, Cyprus’ problems are concentrated in the banking industry, with the government having clearly lost control of the risk that these institutions were taking on. But contrary to the Irish case, the losses in Cyprus will be partly covered by depositors rather than the whole burden being left to taxpayers and shareholders. Here are our main learning points from this debacle.

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The Other Yale Model

March 21, 2013

In investment circles, Yale University is most famous for its innovative endowment fund, which pioneered the introduction of alternative investments (such as private equity, hedge funds and even tree farms) into long-term portfolios. But its business school’s department of finance is also receiving a lot of praise, especially in today’s challenging economic climate. We’ll discuss what distinguishes Yale from other financial schools and why this matters for your portfolio.

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Momentum Portfolio Strategies

February 11, 2013

Investors are always hungry for investment strategies that promise high returns with only moderate risk. In recent years, strategies that use statistics to try to create this type of portfolio have gained in popularity. In our last issue, we reviewed one of these so-called quant strategies: the low-volatility portfolio. And this time, we look at momentum-based strategies.

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2012

Low-Volatility Portfolios

December 20, 2012

In the last few years, investment strategies that use statistical techniques to create less-risky portfolios have gained a lot of support. One such strategy is the so-called “low-volatility” methodology.

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Financial Repression

November 23, 2012

Last month, we attended a conference given by Harvard University economist Carmen Reinhart. Formerly employed by the International Monetary Fund (IMF), Ms. Reinhart is a luminary on matters such as public debt, financial crises and the politics of interest rates. Here are a few takeaways from her speech.

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Important changes at Vanguard

October 16, 2012

Last week, the Vanguard Group announced it was changing the benchmarks for 22 US-listed exchange-traded funds (ETFs) and 4 of its Canadian-listed ETFs. Because all of these funds are index-based, their composition will undergo changes when the index switch occurs. Since PWL invests part of its client assets in Vanguard ETFs, these changes warrant an explanation.

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Risk is not Danger

September 7, 2012

There is a great deal of disagreement among portfolio specialists about the notion of diversification. Some experts feel perfectly safe with a 20-stock portfolio, while at the other end of the spectrum, firms like PWL build portfolios made up of thousands of securities. This article looks at why we are insistent that extreme diversification is the right thing for investors.

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The diversity index and investment portfolios

August 1, 2012

The diversity index is a concept that PWL has borrowed from the field of ecology. In 1949, statistician Edward H. Simpson developed a simple formula to measure the diversity of species. This formula was later applied in economics as a tool to measure the diversity of industries, which helped antitrust regulators answer questions like “Is Microsoft so large, relative to its industry, that it can control prices?” The more concentrated an industry is, the more likely it is that prices won’t be set competitively, at the lowest possible price.

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Norway’s sovereign wealth fund: Three observations

July 6, 2012

The Journal of Portfolio Management recently published an article by David Chambers (Cambridge University), Elroy Dimson (London Business School) and Antti Ilmanen (AQR Capital Management) about the long-term investment strategy of Norway’s sovereign wealth fund. The fund, which manages the country’s accumulated oil-and-gas revenues, is widely considered among professionals as a formidable investment organisation. The article is full of interesting details, but we would like to highlight three main characteristics of the $550 billion mega-fund.

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Are exchange-traded funds dangerous? (Part 4 of 4)

April 5, 2012

After a modest start during the 1990s, ETFs have grown into a major phenomenon in the financial markets, with assets now reaching US$1.3 trillion worldwide. This exceptional growth has attracted a number of criticisms from investors, journalists and regulators. In the first three parts of this series, we discussed the merits and feared flaws of physical, synthetic and exotic ETFs. In this last part, we will review our own experience with ETFs. PWL has incorporated these investment vehicles into portfolios for over a decade with positive results. What have we learned? What works and what doesn’t?

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Are exchange-traded funds dangerous? (Part 3 of 4)

March 13, 2012

In the last two editions of the Pulse, we addressed important criticisms of physical and synthetic exchange-traded funds (ETFs), which make up the bulk of the ETF market. In this issue, we will discuss exotic ETFs. More specifically, we will look into three types of exotic ETFs: leveraged, inverse and commodity ETFs.

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Are exchange-traded funds dangerous? (Part 2 of 4)

February 10, 2012

In the last Economic Pulse, we refuted a well-publicized criticism about the alleged systemic risk posed by physical exchange-traded funds (ETFs) to the overall equity market. This time, we will review the most important criticism about the other main type of exchange-traded funds: synthetic ETFs.

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2011

Are exchange-traded funds dangerous? (Part 1 of 4)

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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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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2010

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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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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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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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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2009

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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