Canada Falling Back in World University Rankings

The Times World University Rankings for 2010 are out and it is not good news for Canada.

Last year 11 Canadian universities were amongst the top 200 ranked universities in the world. This year only 9 made the list, which uses a supposedly improved methodology that puts less weight on reputation and more on more measurable harder facts. A bunch got dropped and a couple of new names entered the top 200 from Canada. The list:

• U of Toronto - 17th place in the world - up from 29th!
  
• UBC - 30th - up ten spots too from 40th!
  
• McGill - 35th - down from 18th ;-(
• McMaster - 93rd up fifty spots from 143rd!!
• U of Alberta - 127th, down from 59th, ouch!
• U of Victoria - 130th, from nowhere last year!!!
• U of Montreal - 138th vs 107th
• Dalhousie - 193rd, another new entrant
• SFU - 199th, still hanging on after 196th placing last year

Those who fell right off the list into oblivion: Waterloo (2009 - 113th); Queen's (118th), Calgary (149th), Western (151st).

Those who are fond of knocking the USA or predicting its imminent fall may wish to consider that the new rankings indicate an overwhelming dominance by that country in higher education. It dominates in every way: owning the top 5 spots, 7 of the top 10, 27 of the top 50 and 72 of the top 200. That's 18 more in the top 200 than last year! One negative mentioned in this analysis article is that public universities like the U. of California system are suffering from government cutbacks as a result of the debt crisis. Rich private universities like world no.1 Harvard are merely less rich.

The UK has held its own with 29 spots in the top 200, the same as last year and it has the other three in the top ten.

Though Canada's position has fallen back relative to the best, I would not want to be a citizen of much larger countries than Canada that have fared very poorly in these rankings such as Japan with only 5 spots, France with 4, and Italy with not a single university among the top 200. In the national "medals table" (see here) Canada is 5th after the USA, the UK, Germany and the Netherlands.

Amongst countries of the emerging world, China is already in the top class - including Hong Kong and Mainland China together, it would be tied at 10 spots with the Netherlands. The other members of the BRIC - Brazil, Russia and India - do not have a single top 200 university, though the Times editors feel India is on track to muscle into it soon, while Russia is in decline. It is an interesting thought relative to investment prospects for these countries given the key role universities play in economic development.

There is competition not just amongst universities, but between rankings too. After a combined effort in 2009 (the one which is used above to compare), QS and Times have split. The QS 2010 Rankings paint a slightly different overall picture, though Canada has also fallen back in this set of rankings. There is one less top 200 spot - SFU has slipped down to 216th and all but one (U of T) have slipped lower. In QS' results, the number one spot is held by Cambridge, the UK has 4 of the top ten, the US has fewer overall in the top 200, only 53 total, which is down one from last year.

The QS rankings are interesting in that they go right down to the top 500. Being down there is not so shabby, even for bottom-feeders like Carleton, Concordia and U du Québec considering that there are said to be more than 17,000 universities around the world.

Possible Effects of Global Imbalances on Investors

McKinsey & Company's Globalization's critical imbalances in the McKinsey Quarterly report provides a readable summary of those issues along with some implications that, though they are directed at a corporate audience, provide food for thought for individual investors.

Here are a few parts I think to be pertinent:

• "it would be wise to be prepared for the high probability of future financial shocks. To do so, most companies need to become more adept at risk management and to err on the side of being overcapitalized, overliquid, and overprepared." By shocks they mean what is described in the next quote below. To me the implication is to hold a higher amount of fixed income with special regard to credit-worthiness. Canadian government debt seems to me to be a good bet, even better than US Treasury debt.

• "... companies should engage in serious scenario planning around “unthinkables.” These might include the potential for significant, rapid shifts in currency values (for example, a 30 percent decline of the dollar versus emerging-market currencies); an exit from the euro by some nations; dramatic, rapid changes in commodity prices (for example, oil prices spiking to $200 a barrel); or defaults on debt by major nations." Hello major volatility in different parts of a portfolio. Currency exposure may well account for most of the variation in an internationally-diversified portfolio in future. If CAD remains strong because of Canada's production of commodities and because our government's fiscal situation is strong too (thanks again to Paul Martin and Jean Chretien who did the dirty work back in the 1990s that we benefit from today), there is a good possibility we Canadian investors won't gain much overall from such shifts, maybe even lose due to US and European holdings even though emerging markets holdings might rise even more strongly. Since emerging markets are typically a small (only 5% in my portfolio) portion, does that mean one should depart from the traditional backward-looking passive allocation according to current market value and increase the allocation looking forward. Or, an investor has two other choices - 1) try to avoid currency volatility by buying hedged funds but the question is whether such funds are effective given their typical high overhead cost and the tracking error; 2) stay exposed to currency, monitor the portfolio closely and be ready to do major rebalancing. Hmmm, what to do .... cannot say I've decided but just ignoring this stuff isn't smart.
  

Global Investment Returns Yearbook - More Great Stuff in 2010 Edition

The 2010 edition of the justly renowned Credit Suisse Global Investment Returns Yearbook compiled by Elroy Dimson, Paul Marsh, Mike Staunton and Jonathan Wilmot is now available here (pick UK as your download country of origin as it blocks downloads to Canada for 'legal reasons'). As in past editions, it provides the individual investor with insight into global equity markets from a long term perspective. This year it takes a special look at:

• emerging markets,
  
• economic growth and stock market returns
  
• US equity returns
  

Along the way it provides excellent primers on each subject and is definitely recommended reading.

Some highlights:

Emerging Markets

• countries that are emerging tend to stay merging and don't move up into developed very often (only 6 in 110 years), and can just as easily slip back down into "frontier" territory. why not? - dictatorship, corruption, civil strife, wars, communism, disastrous economic policies and hyperinflation - "emerging markets have been accident prone in the past"
  
• "more emerging markets have been downgraded to frontier than have been upgraded to developed. S&P’s downgrades include Argentina, Colombia, Jordan, Nigeria, Pakistan, Sri Lanka, Venezuela and Zimbabwe."
• "... China expected to displace the USA as the world’s largest economy by around 2020, and with India overtaking the USA by 2050."
• "In the late 1970s, emerging markets gave similar returns to those of developed markets, but they underperformed in the 1980s and 1990s. In the 2000s, however, they beat developed markets by 10% per year."
• "... the emerging markets index has been consistently more volatile than the MSCI World"
• higher risk of emerging markets should be worth up to 1.5% per annum extra return compared to developed markets
• correlation of returns between emerging and developed markets has been rising steadily for 30 years but are still low enough to provide significant diversification benefits to the global investor
• there was a big jump up in correlations from about 80% to 90% as a result of the 2008 crash so future correlations should be lower than 90% unless another similar crash comes along
• surprise! the country with the highest return of any during the decade 2000-2009 was .... drum roll please - COLUMBIA!! at over 30% or so annualized return
• from the March 2009 bottom to Dec.31st, a whole raft of emerging countries had phenomenal gains of 100% or more
  
• it is impossible for individuals to invest in emerging markets according to the actual market cap due to restrictions placed on foreign investors or shares being in private or government hands, a prime example being China; moral of the story - market cap weighting is a theoretical ideal that is difficult to even approach
  

Economic Growth and Stock Returns

• "... the link between GDP growth and stock returns is empirically far weaker than many suppose."
• "Looking at 83 countries over 110 years, we find no evidence that investing in growth economies produced superior returns."; the reason is simple, investors predicted and expected higher growth so bid up prices too high to provide good future returns - stock returns are a good predictor of economic growth rather than the other way round.
• however, if you could perfectly predict future economic growth and not base investment on recent past economic growth, then you would make a high return; stock markets seem to extrapolate growth, price it in too high to be able to gain better future returns
• they explicitly liken this to value vs growth investing - fast growing countries are the growth countries while the slow growers are the value countries "In recent decades, investors have historically earned the highest returns - though with greater risk - by adopting a policy of investing in countries that have shown recent economic weakness, rather than investing in those countries that have grown most rapidly."
  
• their conclusion: "Investors should ensure that their global portfolio is diversified across slow and fast-growing economies."

Prospects for US Stock Returns

• "looking forward, it is more likely that real dividends and earnings will grow in line" (with each other)
  
• "... if you believe that America will likely renew itself yet again and deliver trend productivity growth of 2% p.a. in the future then US equities are arguably closer to “fair value” than normal, and nowhere near bubble territory"
• "... given the size of the American market, its importance to emerging country exports and the risk of protectionism in a bad scenario, investing in emerging equities would likely provide no hedge against a steep drop in US consumption, GDP and equity returns."
• "... nearly a quarter of total US profits and about 30% of S&P 500 sales are generated abroad"
  
• "When people assert that the market is overvalued, they are really expressing their skepticism about the future of US productivity growth and/or the future of globalization. Logically enough, the reverse is also true: if you believe in the potential benefits of accelerating technological change and the dramatic rise of the emerging world, then the next decade for US equities is likely to be a bright one."
• the message seem to be, don't count out the USA - as the French saying goes, "plus ça change, plus c'est la même chose"
  

There is also an individual country snapshot for 22 developed countries.

Canada

• real return on equities 5.8% per year since 1900 compared to 2.0% o bonds but ...
• in the last ten years bonds have outdone equities by 2.0%

Australia

• about the only developed country to have a positive real return to equities over bonds (along with Norway) in the "lost decade" from 2000 to 2009 - all of 1.0%
• equities have returned 7.5% annualized since 2009, the highest anywhere

Japan

• the worst performing stock market during 1990 to 2009, losing two thirds of its value in real terms. ouch!

South Africa

• equity returns of 7.2% since 1900, the second best country; both before and after apartheid, the line looks the same, trending steadily ever upwards

Spain

• very volatile up and down historically; they are hurting now, if you have a decade or two to wait, maybe this is a "value play" country?

Sweden

• only country to have returns to its equities, bonds and T-bills all in the top three of the 22 countries

UK

• equity real returns of 5.3% since 1900

World Other Than the USA

• "from the perspective of a US-based international investor, the real return on the world ex-US equity index was 5.0% per year, which is 1.2% per year below that for the USA."

13 European Countries Together

• they under-performed with only 4.8% real equity returns since 1900 vs the 5.4% world average
• possible reasons for the lagging performance that the authors suggest without analysis - wars, resource rich and more vibrant New World economies

Foreign Diversification Cognitive Dissonance

Take a look at this chart and tell me what the heck is going on?

Isn't diversification into foreign equities supposed to reduce portfolio volatility and increase returns through non-correlation and rebalancing? Yet the simple all-Canadian portfolio with 5% T-Bills, 30% All Canadian Bonds and 65% TSX Composite Equities would seem to have done about the same as an international portfolio with the same fixed income but with equity holdings of 25% TSX, 15% S&P 500, 15% MSCI EAFE developed country and 10% Emerging Markets. The cumulative compound return of the two portfolios after 22 years ended up almost identical - the Canadian portfolio at 250% and the International at 256%.

Twenty two years is starting to be a long time waiting for international diversification to help a Canadian investor. Is the data somehow wrong? I used financial advisor and frequent Financial Webring contributor Norbert Schlenker's downloadable time series spreadsheet from his Libra Investment Management website. The data (unique and no doubt compiled with considerable effort) has been adjusted for inflation and converted back into Canadian dollars from unhedged foreign holdings.

This graph goes against the conclusions in such classic books as Roger Gibson's Asset Allocation (my review) to the effect that international diversification helps considerably. Gibson figured things in US dollars instead of the Canadian dollars in this data. Is Canada somehow special and its equity market a mirror of an international portfolio?

Canada's Place in World University Rankings

How do Canada's universities rate when compared with the best in the world. Pretty darn good, I'd have to conclude after looking through the just-published latest Times Higher Education - QS World University Rankings 2009. The ranking are based primarily on ratings of 9300 academics around the world, along with, in order of declining importance, research productivity, student-faculty ratios, employer reviews and proportions of international faculty and students.

• Canada took 11 of the top 200 spots, better than many other countries with much larger populations, like Germany with only 10, France with 4
• Canada had 12 in the top 200 last year - apparently Asian universities are moving into the top rankings displacing mainly US universities (and what longer term effects will the recession aftermath do to further erode that result?) - competition is hotting up and Canada has no cause for complacency as all but McGill and U of T moved lower in the rankings. See also the 2008 vs 2009 table
  
• the USA (54 of the top 200) and the UK (29) dominate the world higher education business, with all of the top ten between them and 18 of the top 20
• in terms of "punching above its weight" in terms of population, Canada is 3rd in the world, at a ratio of about 0.33 (11 universities for a population of 33.8 million) behind the leader UK (ratio 0.47) and Australia (ratio 0.41); the USA is way behind at a measely ratio of 0.18; if one subdivides the UK as Scots are fond of doing(!), wee Scotland with only five million people has the highest ratio of all with 4 universities in the list - ratio = 0.8! ... too bad it doesn't have a very good football team, so everyone could be happy...
• McGill is the best university in Canada and number 18 in the world, followed by:
  

U of Toronto (29th),
UBC (40th),
U of Alberta (59th),
U of Montréal (107th),
U of Waterloo (113th),
Queen's (118th),
McMaster (143rd)
Calgary (149th)
Western (151st)
Simon Fraser (196th)

These Times-QS rankings correspond fairly well with those of Maclean's magazine, which also put McGill on top amongst the medical/doctoral schools, though Queen's is second there and Dalhousie, Saskatchewan and Ottawa rate ahead of Western.

UN Praises Canada

The latest UN Human Development Report rates Canada as the 4th best country in the world for its overall success in achieving well-being for its citizens. The UN defines well-being as a combination of three things : "living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and gross enrolment in education) and having a decent standard of living (measured by purchasing power parity, PPP, income)". 4th is the same position as in 2004.

I daresay that since the data was compiled in 2007, Canada will have moved up into 3rd at least since number 3 Iceland's woes in the 2008 crash would have put a big dent in its standard of living.

Note that the USA is 13th and the UK 21st in the ranking. It is nice also to notice that the upward trending lines of the total averages suggest that the world is becoming a better place to live!

The chronically grouchy CBC doesn't even mention Canada's outstanding result, choosing instead to play up the negative with its UN Calls for Better Deal for Migrants. In contrast CTV highlights the UN's praise for Canada's immigration policies.

McKinsey Says Emerging Equity Markets Will Grow Faster

A few weeks ago, I noted research results which concluded that there is no automatic, direct relationship between GDP growth and equity market performance, and I cautioned against jumping too fast into investments in China, India and Russia.

Now along comes global consulting firm McKinsey & Company with its annual Global Capital Markets review (summary here with link to full report, which is free upon registration) with the view that Emerging country Equity Markets will grow considerably faster than major developed markets like the USA, the UK, Eurozone and Japan (Canada is too insignificant to merit much of McKinsey's ink). Notable quote: "... asset classes in mature markets are likely to grow more slowly, more in line with GDP, while government debt will rise sharply. An increasing share of global asset growth will occur in emerging markets, where GDP is rising faster and all asset classes have abundant room to expand." Equity is one of the asset classes they discuss.

McKinsey cites several reasons for thinking that equity in emerging markets will do better:

• high savings rates in those countries mean a lot of money is available to invest and equity is better placed than debt to be the investment vehicle
• these countries have great needs for infrastructure construction
• financial markets in emerging countries are still quite small compared to GDP and thus have much room for growth
• many state-owned enterprises have yet to be privatized

Along with the big constraint of the government and private debt burden in developed economies, McKinsey see higher inflation as a risk. They see little hope of big gains in equities: "These projections give little support to the hope that corporate earnings and valuations will rise again to significantly and sustainably higher levels in mature markets ."

It seems that McKinsey may not be alone in coming to such conclusions. The rebound in Emerging Markets has been much stronger since January 1st, as the iShares' Emerging Markets Index Fund (EEM) has outstripped such developed market ETF indexers such as SPY (S&P500), VGK (Europe) and XIC (Canada) in the Google Finance chart below.

Admittedly, Emerging Markets did fall off much more drastically during the crisis last fall but they have still outdone the developed ETFs from just before the worst moments of the crash, between August 1st last year and today, as this second Google chart shows.

Some ETFs Don't Track Their Index Too Well

Investors like me who merely seek to replicate the returns of a broad index and not to time markets but merely passively track the index often use ETFs to do so. It's probably no surprise that ETFs vary considerably in how well they do the job of tracking the target index. The measure of the deviation from the index is tracking error.

Forbes' ETFs Behaving Badly article and accompanying 20 Best and 20 Worst slide shows describes results of a survey of 505 US-traded ETFs done by Morgan Stanley for 2008. In many of the worst cases the tracking error is several percentage points. The best have really tiny tracking errors.

Many of the worst trackers turned out to have out-performed or done better than the index in 2008. The article explains how some of those came about which gives me the sense that it's likely to keep happening. It's perhaps a nice accident that some results were better than the index in 2008 but in future years an uncontrolled or uncontrollable tracking error could well mean serious under-performance. Just give me the index please!

Most of both the best and worst lists are quite specialized ETFs. It's reassuring to see that among the best are Vanguard's Total US bond market ETF (BND) and iShares US TIPS Inflation-Indexed Bond Fund (TIP). A surprise is that some of the worst are several Vanguard offerings like their Energy Fund (VDE) and a Telecomms Fund (VOX) and an ETF heavyweight, iShares MSCI Emerging Markets Fund (EEM). There are also several bad country trackers, notably iShares' ETFs for Mexico (EWW) and Austria (EWO) and the SPDR S&P China fund (GXC).

Save the Planet: Drink Tea and Beer not Coffee

Move over Carbon. Make way for Water. It's not just carbon emissions that matter. The amount of water used to make things, especially food, is already a big issue and getting bigger. BBC has a neat illustration (without citing the source of the numbers) of water consumption for common household items.

It turns out that a cup of tea (250ml?) requires an amazing 30 litres of water when you add up the whole life cycle from growing the plant to consumption. But astounding as that is, coffee requires more than four times as much - 140 litres. Do you feel environmentally bloated?

Beer checks in at 150 litres on BBC but usually beer bottles contain more than 250 ml so one might argue that drinking beer is more environmentally friendly than coffee. The Waterfootprint.org number for beer is only 75 litres per 250 ml glass.

Of course, total environmental impact goes beyond one dimension and therein lies a serious problem for those who want or are willing to alter their consumption patterns but are wary of jumping onto the latest fad advice that on closer examination turns out to be poorly analyzed. The tea & coffee example seems to have some substance - this credible looking study at Waterfootprint.org corroborates the BBC numbers.

And what about the carbon footprint of tea and coffee? Is tea better there too? My googling was unsuccessful in finding numbers. This discussion on Earth.org.uk about trying to figure it out for tea alone suggests the answer isn't easy to determine.

Water has become such a valuable commodity in such short supply that countries with deficits are turning to renting land in other countries to grow their food, since agriculture usually loses out in competition with industry (see BBC's The pending scramble for water). Maybe the Chinese will want to rent out Saskatchewan?

Good sites: World Water Council, Waterfootprint.org

Book Review: And The Money Kept Rolling in (And Out) by Paul Blustein

A brilliant book in every way - as exciting as a movie thriller, as intricate as a detective story with multiple intertwined plot lines, as gut-wrenching and sad as a human tragedy that could have been avoided, as fair and detailed as a commission of enquiry into a man-made disaster - this book about Argentina's financial and economic collapse in 2001-2002 is a must-read for anyone interested in the current financial and economic crisis. Though written in 2005 before the crisis started, Blustein takes a few pages to talk about relevance to the USA and states outright: "It could happen here. Americans who give Argentina's story fair consideration and conclude otherwise are deluding themselves." ... or maybe, it's already happening here?

The technical reasons for Argentina's accumulation of a crushing debt load on which it eventually defaulted with dire consequences are fairly straightforward. In his words, "They spent more than they should have, taxed less than they should have and borrowed more than they should have..." while living within the dollar-peso convertibility currency system that required much stricter fiscal discipline.

The individual and collective (both organizational and societal) human reasons that created and exacerbated the technical reasons are the really fascinating elements and this is where Blustein excels at digging them out and presenting them in a gripping story. Self-interest, groupthink, willful blindness, self-deceit, avariciousness, stupidity, panic reactions, vanity, political expediency, official misinformation and spinning, ideology, gamesmanship, it is all there in various people and organizations. The author doesn't pull punches in his criticisms but there aren't many who escape blameless. The IMF, Wall Street investment banks, the US government, the Argentine government, even to some degree the Argentine people, share the burden of responsibility.

The book is not an "anti-" diatribe, whether it be anti-globalization, anti-IMF, anti-privatization, anti-Americanism, anti-capital, anti-bailout or even anti-debt (though it clearly shows that too much debt is a recipe for disaster). He says, "Policies such as open trade, privatization, and deregulation were not responsible for the events that brought Argentina to such a pitiful state."

For those who wonder why our governments are currently so anxiously propping up banks and trying to get credit flowing again, "... The nation's banking system was ceasing to perform its vital role as a provider of credit and dispenser of payments, the result being an accelerated contraction in all sorts of economic activity" and "... the shortage of funds spread through the economy like a debilitating virus". The latter is especially in play at the moment. For example, part of the reason for the 45% drop in GM's sales is lack of credit to buyers wanting to buy vehicles even if they are perfectly qualified good credit risks. And look where GM is today. A company with problems suddenly is a company in crisis with insurmountable problems. Same goes for home buyers, if trying to get a mortgage isn't possible, few can buy, prices decline etc.

The helicoptor departure scene in the prologue, where an IMF banker flies out of the country having informed the President of Argentina that the IMF will no longer provide support, abandoning Argentina to inevitable default and collapse, makes a striking image worthy of a movie. Hollywood, where are you?

My rating: Five out of five stars.

A Modest (and Cheap) Proposal for Solving the World Financial Crisis ;-)

The global financial crisis in its current phase apparently boils down to the fact that banks won't lend to each other, to businesses or to individuals as we are told by the BBC, Bloomberg, MarketWatch, the Times, MSN MoneyCentral, etc. Everybody agrees on the problem, even Socialist Worker!

We have seen governments try every inducement - buying off the toxic debt, provide unlimited liquidity, nationalising banks, lowering interest rates. Nothing has worked.

"Nice" is not working. Time for a somewhat harsh solution, but hey, the world's future is at stake and in the past governments have not shied away from being somewhat heavy handed when the occasion called for it (here you can fill in your own favorite example, depending on which country you hate the most).

My solution rests on the fact, at least I believe it to be so, that the banks are run by people. Now, all people have emotions, even bankers, and the one emotion stronger than greed is, you guessed it, fear. Right now, bankers are afraid of lending. So we must replace the fear of lending with a greater fear of not lending.

All the heads of the various governments, being on a first-name basis with all the head honchos at the banks, or so we are constantly told, must therefore have their phone numbers and addresses. Therefore, George (Bush), Gordon (Brown), Stephen (Harper), Angela (Merkel), Nicolas (Sarkozy), Taro (Aso) ... should pick up the phone and "suggest" to bankers that they start lending. I'm sure their people and communication skills will be more than adequate to convey the "accidents" that might happen to them and their families should the bankers fail to change their destructive non-lending policy forthwith. Using certain specialist human resources to back up the suggestion, it would only take one unfortunate uncooperative banker for word to get around and things to change rapidly. Surely that would be a small human sacrifice compared to the untold misery facing millions of citizens who would suffer in the hard recession that is developing as a result of the banking freeze-up.

I don't know the going rates for such specialist resources but it surely is much cheaper than the several trillion dollars already spent by the US alone. And my fee for this suggestion is a standard investment banking rate, discounted by half as my contribution to these difficult times, only $0.001 trillion (and pay that in Canadian dollars please because I suspect the USD will soon be toast).

... later on ... Ha, ha ha! Just found this column by Robert X. Cringely in which he seriously suggests something similar - the heavy he suggests is Jack Welch, famous former CEO of GE.

Bailouts: First the Banks and Now a Country?

We have got used to seeing major financial institutions rescued but now it appears that a country is next - Iceland. The country joined the financial lending frenzy of the last decade and its three investment banks (i.e. not based on retail depositors) have been hugely successful, at least until the "global financial contagion" struck.

Read about Iceland's predicament:
Robert Peston's BBC blog: Markets call time on Iceland
Financial Times.com: Iceland seeks loan to shore up its currency

The three banks have amassed balance sheets that far outweigh the whole country's GDP. A country with a population of 320,000 - the size of Windsor, Ontario - Iceland cannot afford to take over or guarantee the banks and as a result the country itself is in trouble. Maybe it should have stuck to its fishing.

I don't think Warren Buffett would be interested, and European countries are busy dealing with their own bailout problems, so maybe Canada should put in a bid for Iceland? Sure, Iceland is not as warm as the last takeover target, the Turks and Caicos, but it's a start.

... too late the Russians got there first - cost $5.4 billion.

Joking aside, things for the people of Iceland are becoming difficult: hoarding of food,supermarkets unable to import produce, extremely high inflation from the krona's decline, cutting back on leisure spending, inability to travel due to cost. Here's an analysis on the BBC website of the mistakes that led to Iceland's predicament.

And now some of the follow-on effects are manifesting themselves. 1) A whole lot of local government authorities in the UK have large amounts on deposit with Icelandic banks like Landsbanki, now in government hands with deposits frozen, including a bunch in Scotland. What were they doing depositing their money there? Probably chasing higher interest rates. How would such action best be described - foolish, greedy and too risky, getting the best value for government cash, unlucky? Hindsight is always 20/20. No wonder people now ask, where anywhere is a safe store of value? 2) Canadian seafood companies with loans at the suspended animation Icelandic banks may not be able to get replacement loans elsewhere, especially since people in the US have reduced their eating out so sales are dropping. And a planned buy-back of an income fund has had to be put on hold, causing the unit price to plummet. There are too many threads, linkages and surprise consequences for anyone to figure out how it will all sort itself out.

Oct.27 - Iceland asks for $4 billion more in aid, on top of the $2 billion it has already requested, or about $20,000 for every inhabitant. It took 30 years to pay off Montreal's $1.5 billion Olympic Stadium debt, which imposed a burden of only $500 or so per inhabitant. In 2002, the country had only $3.1 billion in total public debt (see Wikipedia's Iceland article). How long will Icelanders be saddled with the burden and how far will its fall in the rankings of GDP per capita?

TD Waterhouse to Offer Online Trading on Global Markets

Rob Carrick spilled the good news in his article Against the Tide in today's Globe and Mail that TD Waterhouse will begin offering online trading in European markets followed by the Far East this fall. Excellent!

This capability has already existed for some time in their UK service, while in Canada, so far as I know, only HSBC InvestDirect currently offers global trading. Hopefully, other discount brokers will follow suit, further enabling international diversification by DIY investors.

Voting for Canadians Abroad

Now that a federal election has just been called, the way to get your money's worth for all those taxes you are paying is to vote. Even if you are out of the country on the date of the election to take place on October 14th, there is a fairly simple way to register and vote by mail (snail mail only, not email alas) by going to this Elections Canada webpage. You need to mail in or fax photocopies of document(s) with proof of identity and a street address (a p.o. box won't do) - e.g. a driver's licence suffices for both.

Since there needs to be time allowed to send in the documents, receive the ballot back by mail, then mail it in before Oct.14th, it needs to be done soon.

Perhaps Elections Canada could consider ways to do this electronically in future. If you can pay your taxes electronically, why not voting?

Update Sept. 23 - Received my ballot today and sent it back to Canada with my vote. That's reasonable response time by Elections Canada considering the mail delay. It should get there in time.

Book Comparison: UK and Canadian Citizenship Test Material

Before you can become a citizen in either of Canada or the UK, you must pass a written test of knowledge about the country. In the case of the UK, those who want to be apply for indefinite leave to remain (i.e. to live in the UK as long as desired without need for further visas, aka permanent residency) must also pass the test.

The purpose of these tests is, as the UK Border Agency explains in its FAQ document, to "... ensure that migrants have an understanding of life in the UK and the requisite skills to allow them to fully integrate.", or, in Canada's case to "... help you prepare to become a Canadian citizen."

How the two books compare? What do they reveal about each country? Are they useful to an immigrant?

Canada's Book: A Look at Canada (2007) - 47 pages
The UK's Book: Life in the United Kingdom - A Journey to Citizenship (2007) - 146 pages

Test Knowledge: - The bar is set much lower in Canada: its test only requires a pass mark of 60% vs 75% in the UK, and if you fail, you can go for an interview with a Citizenship judge who can decide if you meet the knowledge criteria despite the test result. In the UK, fail and you get to try again after paying the £34 fee again (there seems to be no separate fee for Canada's test - It looks to be included with the citizenship application). Plus, if your written English or French is too poor, in Canada they will give you an oral test. Plus, if you are over 54 in Canada, you don't need to take the test at all, whereas it is 65 in the UK. The UK does allow you to take the test in Scottish Gaelic or Welsh ... now I wonder how many people living outside the UK and wanting to immigrate who aren't already citizens can write those languages fluently enough for a written test?

There is lot more to be learned by the immigrant in the UK, despite the fact that only chapters 2 to 6 of the UK book, or 60 pages, is actually test material. A glossary takes up a whopping 30 pages of the remainder, including such obscure terms as "cannabis: an illegal drug that is usually smoked" and "conquered: beaten in battle". But there is only about 40 pages of test material in Canada's book after subtracting a half dozen pages pages devoted to intro material and test suggestions at the end. Those 40 pages contain many photos - just about on every page - and there are many fewer words on a typical page.

Content
Canada book - a combination of politically-correct boosterism and indoctrination on geography and civics written at a grade-school level. Its practical utility is more or less nil, except for explaining how federal voting works.
UK book - practical explanations of all aspects of living, both public/government and private (like buying a house, renting, credit cards, opticians, churches, marriage, employment, sports, driving licenses etc) with web references, addresses and phone numbers. If you do know all this info, then no doubt you will be able to do what you need to cope with life as well as the native-born. But why give and test this info two or even five years after the person has arrived? It's material that someone needs upon or before arrival. In fact, I would recommend this book as a handy all-in-one primer on the practical side of living in the UK for those coming here. For a facts and figures overview of the UK, read the UK Wikipedia entry.

Consider this contrast - the UK book has a section on sports and states that football (soccer for Canadians), rugby, tennis and cricket are the most popular sports. Nowhere in the Canada book does the word hockey even appear. Is that a proper "Look at Canada"? Similarly, the UK book spends several pages detailing ethnicity and religion, whereas the only mention of religion in Canada's book is the phrase "freedom of religion". On the other hand, Canada's book starts off with a chapter on environment and sustainable development where the preaching and talking down to the reader is enough to make one nauseous. The UK book doesn't even mention the environment. At least the Canada book has a map though! One would think the UK to be disembodied country floating in space. Sadly, neither book touches upon literature, fine arts, media, all essential parts of a country I would venture to say.

It seems that to become a UK citizen you need to know the practical "what to do or not do", whereas in Canada you must know the proper way to think and have the correct attitudes.

It is true that advice on practical matters can be obtained on the federal government's Citizenship and Immigration Canada website under Live in Canada Before You Arrive and After You Arrive. Check out the Wikipedia Canada entry for summary and figures.

The Citizenship test itself is thus another way in which Canada is more favourable to immigration than the UK. Maybe it should be no surprise - without immigrants Canada's population would be falling, while the UK has been flooded with migrants from new European Union countries like Poland (who have a right to live and work in the UK and don't need to pass the test) and so doesn't particularly want or need any immigrants from other places (like Canada).

Book Cost and Source: Why should one be obliged to pay anything for the UK publication, which costs £9.99 at the official government publisher TSO? Worse, the government publisher charges more than booksellers such as Amazon, where it costs only £7.52? Why can the UK not publish the document as a pdf like the Canadian book, which is available for free here as a pdf download?

The Test: Now that I've taken the UK's test, I can say that any reasonably intelligent person should be able to pass it on the first attempt with 3-4 hours of studying. If you already have a general familiarity with the answers to the topic areas in the What You Need to Know at the official Life in the UK website, you might even be able to pass without studying at all. Remember that it is multiple choice so it is only testing recognition memory, much easier than having to supply your own answers from nothing. One thing they could state in their background info, which I did not see anywhere, is that the test appears to be customized to the local part of the UK where you live, whether it is Scotland, England, Wales or Northern Ireland. Half the confusion I had studying was keeping straight the different rules for each area like education, water rates etc. It took me all of 5 minutes to complete the 24 questions, including double-checking all my answers, out of the 45 minutes allotted - a skoosh, as the Scots say. Some smarty-pants young woman finished before me, harrumph!

Successful International Funds Transfer with CanadianForex

IT worked!

I finally have done the deed and transferred funds from Canada to the UK using a foreign exchange (FX) dealer - in this case CanadianForex - instead of the bank-to-bank wire transfer method I had used before.

Back in April I posted the results of my research (#1 Options, #2 Fees & Exchange Rate, #3 Extra Services & Practical How To, # 4 FX Dealers into the use of FX dealers to move and convert money and it appeared to be an attractive option in terms of speed, cost and convenience.

I am happy to say that it all went smoothly, the money arrived safely in my UK bank account with no extra fees and within the total 8 business days from end to end, i.e. from my Canadian bank account to my UK bank account. The process was almost completely electronic, online and automated, with only a phone call from the FX dealer, done within minutes of my booking the transfer online, to confirm the arrangement (perhaps a good thing since one must initiate the transfer of funds - also done online through the bank website - from my Canadian bank account to CanadianForex).

Perhaps the only disappointment is that within days of locking in the transfer and exchange rate, the CAD/GBP exchange rate went down from about $2.03 to $1.95. That cost me quite a bit but it was unforeseeable and unpredictable as it could just as easily have gone up. However, I might try booking a forward rate (CanadianForex allows one to lock in a rate for a future transfer up to one year ahead) if it goes down to the low $1.90 level.

It Ain't Just Sports China is Good At

As we watch the Chinese pile up the medals in the Olympics, possibly displacing the USA as the top dog in the sports world, we might also note China's rise in capital markets.

This past January, the McKinsey Global Institute published its 4th annual report on Global Capital Markets and the results are amazing. (The report shows 2006 figures, so things are no doubt different today but it's the best available data.)

Maybe China isn't so democratic but it sure is becoming a capitalist country. In 2006 it ranked second, on a par with all of the Eurozone, in equity issuance and was not too far behind the USA - see this chart.

There has been a massive shift from bank deposits to equity investments in China. In 2004, equity made up only 15% of total capital in China while bank deposits were 72%. A mere two years later, equity had gone up to 30% of the total - see this chart.

And its total financial assets had climbed from a tenth that of the USA to a seventh. That's a huge shift in such a short time.

Last but not least, with their new found wealth, the Chinese are going global shopping, investing their capital in other countries and becoming the world's largest net exporter of capital in 2006. Who knows, they might get a liking for sports teams and buy the Oilers soon, though it's more likely they'll buy the oil sands. Oops, they tried that, didn't like Canada's response and have already pulled out, heading instead for Venezuela.

My investment take-aways:
1) It seems that the action and the growth for investors is coming mainly from places beyond our traditional comfort zone of North America and Europe.

2) However, the report is also interesting as confirmation of the degree of the increasing integration of world capital markets. I believe that means we can expect continuing high correlation of stock market returns across international, making international diversification less viable for an investor.

Some Views of Expected Future Returns

Ever wonder what to enter for the rate of return in those calculators that tell you what you will have accumulated after 40 years of saving and investing? It doesn't take a genius to understand that you can't just will a certain number to happen. Even extrapolating the past returns can be chancy - who says the future will be like the past and how many years of the past do you take?

Here are some forecasts whose credibility you can judge for yourself.

The US Social Security Administration's Chief Actuary Stephen Goss
Presented at the 2005 National Academy of Social Insurance Conference


Portfolio Solutions LLC (Richard Ferri) 30 Year Market Forecast


Canada Pension Plan Chief Actuary Jean Claude Menard
Presentation on Projecting Diversified Investments at the same Social Security Conference


I find it interesting that the forecasted returns on Canadian equity are lower than both US and other foreign countries. Is that Canadian reticence or a reflection of a country in the wrong economic sectors, like commodities, or just bad economic management? Whatever the reason, if accurate, it reinforces the need for Canadian investors to diversify internationally.

Currency Risk in an International Portfolio - Extreme Value Theory

On his Investment Ideas blog post Currency Hedging Necessary? of May 7th, Larry MacDonald cites the Chou funds annual report 2007 letter and several academic studies ((The Performance of Currency-Hedged Foreign Equities by Lee Thomas and (Hedging Currencies with Hindsight and Regret by Meir Statman and Kenneth Fisher) referred to therein saying that removing the risk arising from currency exchange swings is unnecessary. The long term (15+ year) returns were about the same for portfolios with and without hedging, as was the traditional measure of risk, standard deviation.

Is that the end of the story, the definitive answer for the investor who wants to hold a diversified portfolio that includes substantial international holdings? Apparently not.

Gary Klopfenstein and Fred Stambaugh of BancOne Currency Advisors show in Currency Risk Management in International Portfolios that the traditional measure of risk - standard deviation - used in the above studies does not adequately reflect currency movements. Big swings / extreme events in currency occur far more often that standard deviation based on a normal distribution says they should and this causes big, hidden downside risks. Instead they apply Extreme Value Theory and show that portfolio returns can be significantly improved while risk is reduced. This is accomplished not through traditional methods of currency futures or options (assumed in the hedging done in the traditional studies) but through something termed active currency management, which Banc One conveniently offers as the Banc One Currency Advisors Currency Overlay Program (a fancy label is required to market this to the target institutional investors).

Unfortunately, how that works is not described, nor is the study named that purports to show a 0.5% per quarter improvement in returns while eliminating "calamity risk". So it's hard to tell if this is a real prophylactic for a foreign investor or just another magic elixir. And then of course, can the individual investor do something similar or are there reasonably priced products that do so?

Canadian Earning UK Income and The Double Taxation Convention

A reader asks:
"I was wondering if you could help shed some light on the double taxation convention between the uk and canada. Currently I'm working in the UK for over a year, but im still a Canadian Resident. I've been paying my taxes here in the UK, however I found out my accountant wants around 9500 Canadian as well. I'm still considered a resident in Canada because I'm paying healthcare and have bank accounts, but no income made in Canada. I was wondering would the Double Taxation Convention apply to me? And would I just tell his to my accountant to work out?"

It sounds as though you would be considered resident for tax purposes of both countries. In the UK, you are Resident if you spend more than 183 days in a tax year from April 6th to the following April 5th (not the calendar year). In Canada, it depends on your ties to the country, the most important so-called primary ties being a spouse, family/dependents and a home but others like those you mention also being included. The onus and burden of proof to becoming non-Resident seems to be to actively sever ties, otherwise you are likely to be still considered Resident.

When you thus become Resident of both the UK and Canada, the Canada-UK Tax Treaty I wrote about on March 25th comes into play to determine how the two countries divvy up your tax money.

In the case of employment income, the country where you earn the salary gets first dibs and deducts whatever taxes are owing according to its rules, in your case, the UK. Then, because you are also Resident of Canada, you have to report the same income again on a Canadian return, calculate the Canadian taxes owing on the same income by the Canadian rules, claim a credit for the taxes deducted in the UK and if you owe anything more, pay that to the Canadian government. In fact, you almost certainly would owe Canada some more since Canadian tax rates on income are higher than those of the UK (see comparative table here). But that's a good thing since you cannot get a refund from either country if you overpaid according to your "home" country.

The Canada-UK Tax Convention says that the UK can tax your employment income earned in the UK in article 15.

For convenience, I've made a table that summarizes the different ways that the Treaty deals with various types of income and taxes, like dividends, capital gains, pension payments, annuities and interest.


Maybe the $9500 is the extra your accountant figures you owe the CRA. Any good accountant should be aware of the treaty so you should be able to get confirmation from him/her about the above.