Tuesday, 3 February 2015

My ETF picking is working better than my stock picking

Michael James' tongue in cheek The Stock Picker's Checklist prompted me to look at one of my accounts at TD where I have bought individual stocks as part of my overall Canadian equity allocation.

On first glance, the screenshot below of my account return against the TSX Composite Index Total Return (which is the appropriate benchmark since the account is entirely Canadian equity holdings and all the stocks, and the holdings of the one ETF, are part of the TSX Composite) makes me look like a rival to Warren Buffett and Charlie Munger.
(click to enlarge)
... but the sudden divergence of the lines around September 2014 made me look a bit closer and the source of the marked difference is the sole ETF in this account, BMO's Low Volatility Canadian Equity fund (TSX: ZLB). ZLB contains much less weight in energy and materials by virtue of its criteria to select low volatility stocks.

The following chart from Yahoo Finance shows ZLB against the TSX Composite and a couple of other ETFs - iShares' XIU, which tracks the TSX 60, and Powershares' PXC, which is a fundamentally-weighted Canadian equity fund. PXC has closely tracked the pattern of the TSX while doing appreciably worse. Meanwhile ZLB works completely differently.
(click to enlarge)





The TD account balance screenshot (edited to remove dollar amounts of my holdings, which unfortunately are nowhere near rivalling those of Buffett and Munger) confirms this. ZLB is about half the holdings and its gain is far ahead of anything else. Its return has dominated the account.
(click to enlarge)






My takeaways:
1) My stock picks so far have been doing about the same - no better but no worse either - than their benchmark. Not much benefit or harm either way.

2) ZLB's low correlation with PXC and the TSX Composite indicates that a portfolio built to include non-cap-weight components (like the Smart Beta described here on my other blog) makes sense. The last three years, market conditions have been such that ZLB is powering ahead. At some point, it will be PXC's turn. All along my portfolio is more stable / less volatile.

Monday, 26 January 2015

Short Selling - Superb "how to" from a pro

Worth reading, even if you have no intention of ever trying to be a short seller - Short Selling: Cleaning Up After Elephants by Guy Judkowski on Seeking Alpha. He describes in understandable, brief yet explicit detail how he did it successfully. It made me realize the exacting, relentless, painstaking effort involved.

Friday, 23 January 2015

CEO Pay - Benchmark this, corporate Canada

The 2015 version of the Canadian Centre for Policy Alternatives report on CEO pay by Hugh Mackenzie revealed a substantial increase in average pay from the year before. The comparison to the pay of employees and all Canadians, who own shares in all these companies through their pension plans, mutual funds ETFs or directly, is shockingly out of whack. Companies justify this through incredibly complex schemes (got to Sedar.com and download a sample Management Information Circular aka Proxy Circular) that basically use peer comparison to benchmark.

So ... let's benchmark this:
  • BBC reports that in 2014 Apple CEO Tim Cook received total compensation of $9.2 million. Apple is the world's largest company (by far ahead of #2 Exxon), with a market cap of $659.21 billion. His pay was 9.2/659210 = 0.0014% of market cap. Cook is not exactly working for peanuts by CEO standards though. in 2013 he earned $73.9 million US, which is about $81.3 million CAD (mostly from stock options), or 0.0123% of market cap.
  • According to the Mackenzie report, the top CEO earner in Canada, Gerry Schwartz of Onex, took in $87.917 million in 2013. Onex's market cap is $7.67 billion. If we apply the Apple Cook percent as benchmark, Schwartz should have earned roughly 0.0014% x $7670 = $107,000 in 2014. Even at 2013 rates for Cook, Schwartz would deserve only $938,000. We'll be watching with high expectations in early April when Onex's 2015 Proxy Circular is filed with 2014 actuals.
Mackenzie is coming at the issue from from an ideologically leftist viewpoint, so those who merely want to invest profitably may want to read investment author and industry insider James Montier's investor-centered case against CEO pay run amok, which he ascribes to a faulty corporate philosophy of shareholder value maximization. One of his conclusions: "
Shareholder’s Lesson
Firstly, SVM has failed its namesakes: it has not delivered increased returns to shareholders in any meaningful way,
and may actually have led to poorer corporate performance!"

Disclosure: I own zero Onex shares and won't be buying any soon, given the pathetic earnings history of the company. I own Apple shares inside the PRF ETF.

Saturday, 13 December 2014

Norway on Horns of a Fossil Fuel Dilemma

You gotta love the irony of the situation. Norway has been considering a change in the investment policy of its giant $800 billion national wealth fund by divesting all its holdings of fossil fuel companies to help stop climate change. Guess where the $800 billion came from? That's right, from its North Sea oil.

They are not gonna divest however, as they think it would not be effective. They plan instead to "influence from inside" by working directly with bad companies. That's a relief since the fund on average owns 1.3% of every developed public market equity and a sale of those assets would probably knock back Canada's energy and coal mining companies yet more.

Mind, there is another solution to the Norwegians' dilemma with their "ill-gotten wealth" that would relieve their collective conscience. Could they not just give the money away to poor African countries?

Friday, 12 December 2014

Retirement Income Planning must read - Yin and Yang

"The Yin and Yang of Retirement Income Philosophies," by Wade Pfau and Jeremy Cooper is a fantastic review of the range of retirement income strategies. Non-technical, thorough, impartial, referenced, it assesses the pros and cons of each approach, starting with the 4% rule classic at one end of the spectrum to the Managed DC plan exemplified by the UK's new NEST scheme at the other end. 

Their conclusion: "While neither a probability-based nor a safety-first approach is definitively right or wrong, different people will align more easily with one or the other."

Thursday, 11 December 2014

Gains from Theft are Taxable and Claiming Fraudulent Scheme Losses

The Canada Revenue Agency has just published an updated tax folio describing how thieves should declare gains from theft (it's taxable income), or losses (deductible!).

Perhaps more relevant to law-abiding blog readers it also says business can deduct losses from theft by strangers, or employees ... but not business partners (how dainty, it's termed a capital withdrawal).

And finally, to add to the woes of those investors who have been victims of a fraudulent investment scheme, the folio describes some tax relief, but it looks complicated enough that professional help is likely to be required to report income tax correctly.

Monday, 8 December 2014

A fresh perspective on risk

Too true! (from Sidney Harris) Substitute the idea of investing and it puts a new light on risk.

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