I was sent a link to an article from 2007 by Keith Ambachsheer and Rob Bauer titled Losing ground: Do Canadian mutual funds produce fair value for their customers?:
The study specifically compares the net excess returns produced by a large sample of Canadian mutual funds with domestic equity mandates against the net excess returns produced by a large sample of the domestic equity components of Canadian pension funds. An important study finding is that, over the nine-year period from 1996 to 2004, the Canadian equity components of Canadian pension funds outperformed their Canadian equity market benchmark by an average +1.2% per annum, net of expenses. Over the same nine-year period, Canadian equity mutual funds with domestic mandates underperformed their Canadian equity market benchmark by an average -2.6% per annum, net of management fees, but before any applicable sales charges. Any such sales charges would reduce mutual fund net returns even further.
Very sweet, but nowhere does the article attempt to attribute reported outperformance of Canadian pension funds, which I suggest was due to enormous post-Tech-Wreck outperformance overcompensating for pre-Tech-Wreck underperformance. In addition, it does not attempt to address the outperformance itself, which any first-year B-School student will be pleased to tell you cannot be persistent.
The authors then ask:
Why would Canadian mutual fund investors subject themselves to an average wealth-loss of 3.8% per annum relative to implementing the same basic investment policy through Canadian pension funds? Or equivalently, why would Canadian mutual fund investors pay an average 2.75%(or more including sales charges)for an investment service that is available to Canadian pension fund participants for an average 0.25%, and which produced inferior investment results even before the far greater expenses?
… but of their four hypotheses, only one seems plausible:
Mutual funds are sold, not bought: the market for investment management services is highly asymmetric, with the buyers of these services knowing far less about what they are buying than the sellers know about what they are selling. Information economics predicts that in such a market buyers will pay too much for too little. Research results from the field of behavioural finance support this conclusion. This research shows people to be generally unsophisticated, inconsistent, hesitant, and even irrational regarding financial matters, which creates the opportunity for the for-profit financial services industry to proactively step in and sell their products and services at too-high prices.8 The veracity of his third explanation is supported by the findings of a recent survey of 1865 Canadian mutual fund investors. When asked why they had bought mutual funds, 85% said they were persuaded by “someone who provided me with advice and guidance.”9 In our view, it is the combined effects of informational asymmetry and behavioural dysfunction on the part of the customers, and opportunistic acuity on the part of the suppliers, that best explains the findings summarized in Table 1. Mahoney(2004)reaches similar conclusions in a paper titled “Manager-Investor Conflicts in Mutual Funds.”
This emphasis on prices is reasonable, but there is no attempt to reconcile the fees charged with the performance gap. In addition, the authors conveniently ignore the investment environment of the first half of their period: tech sold! Dividends were old-fashioned; managers had a choice between throwing a good portion of their mutual fund assets into tech or, alternatively, just stay home and catch up on sleep. Without tech on offer, nobody would come to the office and the ‘phones wouldn’t ring.
All this is meant to tout the idea of Government Investment Management:
We favour a middle way: the “paternalistic libertarian” approach currently in the process of being adopted in the UK. The basic idea is to create a number of arm’s-length, expert, pension delivery organizations, and then to automatically enroll the entire non-covered part of the workforce into one of them. People can elect to opt out if they do not wish to participate.
…
A key assumption in these calculations is that the pension delivery organizations operate in the sole best interests of plan participants, with expense ratios of 0.3%.
I wonder if Mr. Ambachsheer is involved with the proposed Ontario Pension Plan? It sounds rather similar …
The battle to make life easier for incompetent bond investors is heating up:
The Canadian Securities Administrators, a coalition of the country’s provincial and territorial securities regulators, announced last month it’s starting a review of transparency in the $390-billion corporate bond market. The CSA questioned whether the private sector-led transparency model currently in place is working, and if more active regulation is needed.
The move comes as bond trading falls under closer scrutiny worldwide with the top regulator in the U.S. calling for more public information on private trading, and the European Union seeking to build a system to publicly disclose prices in real time.
Unlike stocks, bonds aren’t traded on public exchanges but as private transactions with securities dealers acting as middlemen, giving the brokerages — many of whom are owned by banks — an informational advantage.
It’s historically been more profitable for firms to trade bonds than stocks because the debt markets are less transparent, making it easier for brokers to take a bigger fee for each exchange.“We have a sort of oligopolistic banking system where the banks kind of set their own rules, and there’s been a lack of transparency in the bond market forever,” said Ed Waitzer, chairman of the Ontario Securities Commission from 1993 to 1997 and a senior partner at Toronto-based law firm Stikeman Elliot LLP. “It sounds like the commission is feeling a little bit of heat again because the rest of the world is kind of shining a light on dark markets.”
Yellen is still dovish on rates:
Federal Reserve Chair Janet Yellen told lawmakers the central bank must press on with record monetary stimulus to combat persistent job-market weakness.
“There are mixed signals concerning the economy,” Yellen said in response to questions during testimony to the Senate Banking Committee today. “We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates.”
While her “overall view is more positive,” Yellen said low wages are one sign of “significant slack” in labor markets, even after the jobless rate fell to an almost six-year low.
…
In prepared testimony, Yellen repeated that interest rates are likely to stay low for a “considerable period” after the Fed ends its asset-purchase program, which she said could happen following the October meeting.“A high degree of monetary policy accommodation remains appropriate,” Yellen said in her semi-annual testimony. “Although the economy continues to improve, the recovery is not yet complete.”
She also commented on irrational exuberance:
Ms. Yellen delivered her observation during off-script Congressional testimony on Tuesday. Well, sort of: She was actually singling out social media and biotech stocks – along with lower-rated corporate debt – as pockets of the market that look frothy and are vulnerable to setbacks, particularly when the Fed starts raising its key interest rate.
The fact that a Fed chair would discuss stock valuations of any kind is highly unusual and should push investors into evaluating market conditions after a 190 per cent rally by the S&P 500 over the past five-and-a-half years.
Dubai’s making an effort to attract the hated hedge funds:
When Ahmad Zuaiter started a frontier-markets hedge fund, the former Soros Fund Management LLC money manager chose Dubai over New York and London.
Zuaiter’s Jadara Capital Partners LP and VY Capital Management Co. Ltd. opened in the emirate in the past year, bringing to three the number of hedge-fund firms in the Dubai International Financial Centre, according to Dechert LLP, a law firm that helped establish both companies in the sheikhdom.
“If you want to run a boutique model, the best way is to be located in a centrally positioned hub like Dubai and use it as a nexus to travel extensively and frequently to your target markets,” Zuaiter, 46, said in an interview in his office, close to celebrity chef Marco Pierre White’s Wheeler’s of St James’s restaurant.
…
For Dubai to rival London as a finance and hedge-fund capital, it must overcome concerns about political instability in the region and 50 degree Celsius (122 degrees Fahrenheit) temperatures that drive residents to seek refuge in Geneva and other European cities during the summer. Still, zero tax, office rents one-third the price of London’s West End and an airport that connects with 90 percent of frontier markets make it attractive to startups, Zuaiter said.
It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 19bp, FixedResets up 13bp and DeemedRetractibles gaining 8bp. Volatility was reasonable, highlighted by FixedReset winners. Volume was low.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 3.16 % | 3.15 % | 21,951 | 19.34 | 1 | 0.0000 % | 2,516.0 |
| FixedFloater | 4.17 % | 3.39 % | 29,778 | 18.66 | 1 | -0.2188 % | 4,163.9 |
| Floater | 2.84 % | 2.94 % | 46,108 | 19.90 | 4 | 0.4627 % | 2,782.8 |
| OpRet | 4.00 % | -9.45 % | 80,441 | 0.08 | 1 | 0.4708 % | 2,731.8 |
| SplitShare | 4.26 % | 3.98 % | 48,616 | 4.04 | 6 | -0.1794 % | 3,112.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4708 % | 2,497.9 |
| Perpetual-Premium | 5.52 % | -3.72 % | 79,129 | 0.09 | 17 | -0.0208 % | 2,428.6 |
| Perpetual-Discount | 5.24 % | 5.08 % | 107,470 | 15.23 | 20 | 0.1900 % | 2,579.7 |
| FixedReset | 4.38 % | 3.56 % | 196,859 | 4.61 | 76 | 0.1275 % | 2,566.2 |
| Deemed-Retractible | 4.98 % | 1.49 % | 126,241 | 0.30 | 43 | 0.0787 % | 2,551.9 |
| FloatingReset | 2.66 % | 1.92 % | 107,335 | 0.16 | 6 | 0.3614 % | 2,526.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| CIU.PR.C | FixedReset | -2.89 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-07-15 Maturity Price : 21.71 Evaluated at bid price : 22.17 Bid-YTW : 3.35 % |
| BNA.PR.F | SplitShare | -1.15 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2021-10-08 Maturity Price : 25.00 Evaluated at bid price : 24.14 Bid-YTW : 5.11 % |
| BNS.PR.R | FixedReset | 1.21 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2019-01-26 Maturity Price : 25.00 Evaluated at bid price : 25.93 Bid-YTW : 2.92 % |
| SLF.PR.I | FixedReset | 1.34 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.55 Bid-YTW : 1.75 % |
| BMO.PR.Q | FixedReset | 1.70 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.07 Bid-YTW : 3.08 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BAM.PF.F | FixedReset | 105,916 | RBC crossed 29,100 at 25.52. TD crossed 45,000 at 25.55; Scotia sold 19,500 to Nesbitt at 25.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.55 Bid-YTW : 4.16 % |
| BMO.PR.S | FixedReset | 92,735 | Nesbitt crossed 50,000 at 25.72; TD crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 3.59 % |
| TD.PF.A | FixedReset | 81,916 | Nesbitt crossed 30,000 at 25.52; Desjardins crossed 20,000 at 25.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-10-31 Maturity Price : 25.00 Evaluated at bid price : 25.51 Bid-YTW : 3.58 % |
| BNA.PR.F | SplitShare | 63,860 | Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2021-10-08 Maturity Price : 25.00 Evaluated at bid price : 24.14 Bid-YTW : 5.11 % |
| BNS.PR.K | Deemed-Retractible | 47,640 | Called for redemption July 29. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-14 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : 3.24 % |
| CM.PR.O | FixedReset | 36,835 | TD crossed 10,300 at 25.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.51 Bid-YTW : 3.56 % |
| There were 20 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CIU.PR.C | FixedReset | Quote: 22.17 – 22.83 Spot Rate : 0.6600 Average : 0.4463 YTW SCENARIO |
| BAM.PR.E | Ratchet | Quote: 23.75 – 24.14 Spot Rate : 0.3900 Average : 0.2401 YTW SCENARIO |
| FTS.PR.H | FixedReset | Quote: 21.37 – 21.72 Spot Rate : 0.3500 Average : 0.2617 YTW SCENARIO |
| BAM.PF.E | FixedReset | Quote: 24.83 – 25.07 Spot Rate : 0.2400 Average : 0.1645 YTW SCENARIO |
| IGM.PR.B | Perpetual-Premium | Quote: 25.90 – 26.19 Spot Rate : 0.2900 Average : 0.2159 YTW SCENARIO |
| BMO.PR.K | Deemed-Retractible | Quote: 26.07 – 26.24 Spot Rate : 0.1700 Average : 0.1057 YTW SCENARIO |