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The Death Of Active Management
In 2004, famed Sequoia fund manager Bob Goldfarb provided his friend Louis Lowenstein a list of investment funds that became known as the "Goldfarb 10." These were supposed to be the premier investment managers in the market; they all practiced the timeless "value" approach to investing made famous by Graham & Dodd's Security Analysis written 70 years earlier.
First, a little background. Even in 2004, investors were coming around to the idea that active management as an industry was not creating any value relative to their risk-adjusted (controlling for stock, small cap and value exposure) benchmarks. But there was this lingering belief that a few exceptional managers remained, and that they could (#1) be spotted in advance and (#2) be relied upon to generate above-average future returns. Goldfarb, who had navigated Sequoia to exceptional results over the years, was at least as qualified as anyone in the industry to compile such a list - probably more so.
What the Goldfarb 10 members could claim is that they all held up extremely well during the 2000-2002 tech stock collapse; anyone can look backwards and see who did well and who did not. But value stocks in general performed extremely well, and a rising tide lifts all boats. Could these managers continue to produce extraordinary results going forward without such favorable conditions, or would the legacy of the Goldfarb 10 be the final nail in the active management coffin?
We now have almost 13 years between the origin of the Goldfarb 10 and today. There are two lessons from this exercise which I'll summarize below after the data.
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5 Core Dividend Stocks - Your Portfolio Building Blocks
At any point in your investing journey, you should identify what your core dividend stocks are as they represent the building blocks for your long-term success.
Rarely do we just hold 5 stocks in a portfolio. We probably reach at least 10, 20 or even 40 stocks at some point. Failure to identify the core holdings for your portfolio as early as possible will probably create more fluctuations in your holdings than necessary. The fluctuations will cause unnecessary expenses and potential missed opportunities.
I will outline my 5 core holdings but I have also asked my readers what they believe their core holdings are and I am sharing the results further down.
What is a Core Dividend Stock?
We need to first identify what a core dividend stock, or holding, is to be able to select one. My definition is defined as:
An investment that you can hold forever
An investment you can always add money to and feel confident it will pay back in time
A business that has been time tested
An investment you want to hold through in retirement
5 Core Dividend Stocks
My core dividend stocks were not the stocks I started with. It took some time to establish my core holdings and it evolved as I evolved my dividend investing strategy.
Royal Bank of Canada - TSE:RY, NYSE:RY
Royal Bank (TSE:RY) (NYSE:RY) is the largest Canadian company in market capitalization and is also one of the most profitable companies in Canada.
The large banks in Canada have an oligopoly only challenged by credit unions and co-operatives such as Coast Capital Savings. Customers are still willing to pay the bank fees at the major banks which continues to fill their coffers.
Royal Bank operates in 5 major segments with personal and commercial banking its largest.
52% of Net Income - Personal & Commercial Banking
23% of Net Income - Capital Markets
13% of Net Income - Wealth Management
7% of Net Income - Insurance
5% of Net Income - Investor & Treasury Services
Fact Sheet:
Opportunity Score: 71%
Stock Price: $76.34
52 Week Ratio: 72.47% ($64.52 - $80.83)
P/E: 11.50
Dividend Yield: 4.24%
10 Year CAGR Dividend Growth: 10.12%
Sector: Financial Services
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Apple: iPhone 7 Rumors Aren't Rumors Any Longer
On Thursday morning, Mark Hibben published an article - Apple: Nikkei Declares iPhone 7 Dead Before Arrival - where he dispels Nikkei’s claim that the Apple’s (NASDAQ:AAPL) iPhone 7 will do badly.
Nikkei comes to this conclusion because of the iPhone’s lack of novelty. Mark Hibben challenges this conclusion because he thinks that the present iPhone 7 rumors are not to be believed. That Apple always changes the design of the iPhone significantly after an “s” cycle, and as so the rumors about a rather unchanged iPhone 7 must somehow be wrong.
As a side note, Hibben also challenges the camera bulge and inconsistency in the rumors regarding that detail.
I will, in this article, clarify why Hibben is likely to be wrong regarding his assertion that “A fresh design is the least Apple can do.”
The Rumors Are, At This Point, Not Rumors
My argument is very simple. At this point in time, the rumors regarding the iPhone 7 are past the rumor phase.
These rumors should more reliably be termed “leaks.” While some of what you see in the rumors are indeed renders, a lot of what you see are actual prototypes and actual parts. Indeed, Hibben himself showed one such prototype, which was not a render, it was a physical phone held in someone’s hand:
This reality, that we’re dealing with leaked prototypes and parts, stems from the fact that it takes a good while to arrive at both the final product and production process. This is not unlike producing a car (though faster). Well before the car reaches the public, you can already find prototypes going about in the wild, and leaks of them in the specialized press.
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TORONTO — Ontario is setting up a new body to pool and manage public sector pensions.
The Liberal government announced that the Investment Management Corporation of Ontario was established July 1 and is set to be up and running by next spring.
The government says the fund is expected to lower administrative costs and help improve return on investments, but participation will be voluntary for broader public sector organizations.
The Ontario Pension Board — which administers provincial government employees’ pensions as well as those of workers at government agencies, boards and commissions — and the Workplace Safety and Insurance Board are founding members, with combined investment assets of about $50 billion.
A spokeswoman for Finance Minister Charles Sousa says the new corporation “will not require any financial support from the Ontario government or the Ontario taxpayer and will operate at arm’s length from the government as a member-based non-profit corporation.”
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Interprovincial trade deal may come as soon as this summer from Whitehorse summit talks
OTTAWA — A long-awaited federal and interprovincial free-trade agreement could finally be reached during talks planned for later this month.
“We want to get the most comprehensive deal as possible. We don’t want to set a date,” said Philip Proulx, a spokesman for Federal Economic Development Minister Navdeep Bains.
“We’re hoping to have a deal by the summer.”
A major issue at the July summit is expected to be the awarding of government procurement contracts. Alberta has previously stated it wants to give local companies priority for contracts to help rebuild the northern city of Fort McMurray, which was heavily damaged by wildfires that also disrupted oil production in the area.
But a spokesperson for Alberta’s Economic Development Minister Deron Bilous denied a media report that the procurement issue would be a stumbling block to an eventual internal trade deal.
“Canada’s premiers asked internal trade ministers to work together to finish a new, inclusive, Agreement on Internal Trade for their approval,” Jean-Marc Prevost told the Financial Post in an email Tuesday. “Rather than negotiating through the media, we look forward to discussing our position at the trade minister’s table.”
There has been speculation that Alberta would seek an exemption on procurement contracts to give 20 per cent of those projects to local companies.
The Council of the Federation — representing Ottawa and provincial and territorial governments — will meet in Whitehorse July 20-22.
“We will keep working to finish the job the premiers asked us to do. Our goal is to get the best deal for Alberta, which includes improving trade across the country and respecting specific needs of each jurisdiction,” Prevost said.
The federal and provincial governments have been working to update the Agreement on Internal Trade, which was signed in 1994 and came into effect a year later. It marked the first coordinated push for broaden and streamline interprovincial and territorial trade rules.
Three provinces — British Columbia, Alberta and Saskatchewan — already have their own free-trade bloc, the New West Partnership, which came in effect in 2013. It has since had seen some success in blending professional accreditations, government procurement and labour mobility.
Even so, limited progress has been made among regional governments to continue to bring down barriers to the free-flow of goods, services and trades.
Energy initiatives, as well, have proven to be divisive, with opposition to the Northern Gateway pipeline from Alberta to the West Coast and the Energy East plan that would take oil from the West to the Atlantic.
The creation of a national securities regulatory body also remains a work in progress, with British Columbia, Ontario, Saskatchewan, New Brunswick, Prince Edward Island and Yukon still the only signatories.
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90% of Europe, Canada trade deal could be in force by next year, says trade minister
OTTAWA — Large parts of a free trade deal between Canada and the European Union should come into force next year, Canada’s trade minister said on Tuesday, even though the EU’s executive commission opted against fast-track approval.
“This is a really important and great next step,” Chrystia Freeland said in a interview.
The commission, facing increased popular suspicion about big trade deals, said on Tuesday it would give member states’ national parliaments the right to approve or reject the free trade agreement.
But Freeland said she expected the European Parliament — a separate body which groups legislators from all 28 EU nations — to ratify the deal early next year.
Under EU rules this means that around 90 per cent of the agreement, which she described as a “push back against angry populism,” would come into force provisionally.
Freeland and Foreign Minister Stephane Dion both plan to travel to Europe this month to push the merits of the deal, which proponents say could increase bilateral trade by a fifth.
But free trade is becoming a harder sell for governments amid a shift towards protectionism, which helped fuel Britain’s vote last month to leave the EU as well as the rise of U.S. Republican presidential contender Donald Trump.
“It’s important for Europe and for the world that we show it’s possible to do great, progressive trade agreements,” said Freeland, citing worker and environmental protections in CETA, or the Comprehensive Economic and Trade Agreement.
“This is Canada and Europe’s push back against the angry populism we’re seeing in so many parts of the world.”
If Britain does leave the EU it will need to renegotiate dozens of trade deals it has access to as part of the 28-nation bloc. The talks would also include Canada, assuming the EU parliament ratifies CETA next year.
Freeland though was cautious when pressed about how Canada would handle trade relations with a non-EU Britain, saying there were too many uncertainties at present.
“Britain has a lot of decisions it has to make … it’s important to give Britain and the EU some breathing room and time to sort out their relationship,” she said.
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Companies expect only marginal sales growth over the next year: Bank of Canada
OTTAWA — Canadian business sentiment remained subdued in the second quarter, as the drag of cheaper oil and modest domestic demand cancelled out the boost from foreign demand, the Bank of Canada said on Monday.
The central bank’s quarterly Business Outlook Survey is the latest sign the economy is still struggling with the energy sector slump. The bank is widely expected to leave policy unchanged at its July 13 interest rate announcement.
The survey, concluded before Britain’s shock vote to leave the European Union on June 23, reported a sharp divergence between companies hit most directly by low oil prices and those not affected by the sector’s woes.
“The Bank of Canada’s wait-and-see stance is well justified by these results, but they aren’t yet worrisome enough to give thoughts to another rate cut,” Avery Shenfeld, chief economist for CIBC Capital Markets, wrote in a report to clients. The central bank cut interest rates twice last year.
Expectations for the next rate hike have been pushed back to the first quarter of 2018, according to a Reuters poll of primary dealers last week, who expect Brexit to weigh on Canada’s economy.
The overall balance of opinion on investment in machinery and equipment pointed to modest increases in the next 12 months, said the survey. Firms tied to the energy sector and affected regions planned to curtail investment spending, while even exporters unaffected by low oil prices were looking forward to only modest increases in investment.
Firms generally planned to add jobs over the coming year but hiring intentions remain below post-recession levels. Companies that are part of the energy supply chain are looking to cut jobs while the service sector is looking to hire.
Businesses expect only a marginal acceleration in sales growth over the next 12 months. A weaker Canadian dollar should boost growth of export sales, the survey said.
“For many firms, however, foreign demand is insufficient to offset weakness coming from their domestic customers and, in some cases, refocusing sales efforts towards export markets is proving difficult,” the survey said.
Businesses said credit conditions eased over the past three months, with firms citing improved market receptiveness to new debt or equity issuance.
A separate survey of senior loan officers also found that overall business lending conditions tightened slightly in the second quarter. The reports of tighter conditions were concentrated among firms with energy sector exposure.
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The pound plunges to 31-year low, even lower than right after the Brexit vote
The pound fell to its weakest level in three decades against the dollar, surpassing lows reached in the aftermath of Britain’s vote to leave the European Union.
Sterling sank to its lowest since 2013 against the euro. It briefly pared its losses as Bank of England Governor Mark Carney outlined more tools to contain the fallout from the U.K.’s decision to quit the bloc. Speaking in London, he said his concerns about pound declines had been borne out since the Brexit vote, while adding that the weaker currency should help exporters.
Sterling is tumbling amid increasing signs that the U.K. vote is weighing on investor confidence. Scotland-based Standard Life Investments suspended trading in its 2.9 billion-pound (US$3.8 billion) fund this week, after seeing an increase in redemption requests “as a result of uncertainty for the U.K. commercial real estate market.” Data published by YouGov Plc and the Centre for Economics and Business Research on Tuesday indicated that pessimism about the economic outlook almost doubled following the June 23 referendum.
“There’s a lot of nervousness in the sterling market,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt.
The pound dropped as much as 1.3 per cent to US$1.3115, the lowest since 1985, and was down 1.2 per cent at US$1.3134 as of 12:45 p.m. London time. The U.K. currency slid 1.2 per cent to 84.91 per euro, after touching 84.93 pence, the weakest since October 2013.
Carney Speaks
In its bi-annual Financial Stability Report, published Tuesday, the BOE cut its capital requirements for U.K. lenders and pledged to implement any other measures needed. In a press conference to explain the report, Carney said the central bank’s post-Brexit plan is working but warned that officials can’t fully offset the volatility triggered by the referendum result.
The pound soon resumed its slide after the new measures were announced.
Almost three quarters of economists surveyed by Bloomberg expect the U.K. to slide into recession. Investors are also digesting weaker-than-anticipated data which suggest the referendum was hindering the economy even before the shock vote to leave. Reports this week have shown U.K. construction unexpectedly shrank at the fastest pace since 2009 in June, while growth in services output slowed.
“The pound is reacting positively to news that U.K. banks and the banking system are well supported,” Viraj Patel, a currency strategist at ING Groep NV in London, said while Carney’s press conference was still going on. “But aside from” implementing some necessary measures to ensure stability, “we’ve learnt that the BOE are as much in the dark as we are.”
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Mark Carney to the rescue: Bank of England governor’s Brexit crisis plan the only one U.K. has to work with
Mark Carney has unveiled his four-point plan to cope with the Brexit crisis and it’s just about the only one Britain has to go on.
From the moment on June 24 when the pound first hit a three-decade low, to his Bank of England press conference on Tuesday, the U.K.’s Canadian-born technocrat-in-chief has shone a path forward for the country at a time when no elected politician is around to do so. With sterling plumbing new depths, confidence slumping and contagion spreading to real-estate funds, the governor remains the country’s primary linchpin of stability.
The former Goldman Sachs Group Inc. investment banker, a veteran of the 2008 market storm, will chair an initial meeting of the Monetary Policy Committee on Wednesday, as the BOE’s crisis response enters a new phase of trauma therapy for a battered economy. Officials still in firefighting mode are also poised to make a sober assessment of the policy outlook, based on scant data that’s so far pointed to a slowdown.
“The bank can be expected to take whatever action is needed to promote monetary and financial stability, and as a consequence, support the real economy,” Carney said Tuesday. “These efforts mean we can all look ahead, not over our shoulders.”
Contingency Planning
That forward-looking approach has defined the BOE since the vote outcome became clear — just after 4 a.m. on June 24 — and the pound slumped to its lowest level since 1985. In the hour that followed, as Carney arrived at the bank and policy makers huddled to ponder the consequences, the so-called Old Lady of Threadneedle Street swung into a contingency plan officials had spent months preparing — including the testing of currency swap lines between key central banks.
“We’ve been in close contact,” Carney said. Officials have been “making sure that the networks we’ve built, whether they’re through swap lines or other mechanisms were in place, could be used.”
Before the vote, the BOE organized diaries to ensure key staff stayed in London. So as Group of 20 officials gathered in Xiamen, China on the day before the June 23 referendum, the U.K. sent lower-level staff and its deputy governors stayed at home. A BOE spokesman declined to comment on the schedules of the institution’s officials.
Blindsided
That meeting ended without alarm, underscoring the confidence among the close-knit fraternity of central bankers that Remain would win. Instead, they were blindsided, according to officials who spoke to Bloomberg for this story, many of whom insisted on anonymity because of the sensitivity of their roles.
“As the messages started coming through on my phone, I saw the results were going the other way,” said South African Reserve Bank Deputy Governor Daniel Mminele, who was catching up on the news at 5:30 a.m. London time on June 24 after landing home from the G20. “Just 12 hours before, when I boarded the plane, things were looking rather different.”
Two senior euro-area central bank officials who were watching the matter closely went to bed, reckoning things were fine — though one said he awoke early with a sense of foreboding. With the Bank for International Settlements due to hold its annual gathering in Basel the weekend after the vote, some central bankers had already arrived in Switzerland and had been doing some sightseeing, according to one of them.
Market Statement
In London, as policy makers assessed the situation on the morning of June 24, results were still coming in, but they could see the outcome was clear. Shortly after the pound’s drop, U.K. Independence Party Leader Nigel Farage was calling on Prime Minister David Cameron to quit. Investors sought reassurance.
They got it. Within three hours, before U.K. bonds had started trading, the BOE issued a statement declaring it would take all steps to meet its responsibilities. Less than two hours later, and just minutes after Cameron had resigned, Carney was filling the power vacuum with a live broadcast address to the nation, saying that as much as 250 billion pounds ($324 billion) were available to support the financial system.
As officials at the BOE scurried around in a state of intense activity, it wasn’t business as usual in Basel either. Speaking panels were rescheduled, officials were distracted, phones kept on ringing, and people came in and out of the chamber.
Soon Carney was there as well to offer reassurance. On June 25, he told his international colleagues that while the result may have been unexpected, the BOE was prepared. He flew back to London the next day. The BIS declined to comment on its meetings.
The agenda was now dominated by crisis management. Carney and Federal Reserve chair Janet Yellen both canceled trips to the European Central Bank’s annual forum in Sintra, Portugal, as the panel they were speaking on was scrapped. BOE Chief Economist Andy Haldane pulled out of a Financial Times event in London.
Political disorder spiraled. Cameron’s exit was matched by shadow cabinet resignations in the opposition Labour Party, culminating in a no-confidence vote against Leader Jeremy Corbyn. Against that backdrop on Tuesday, June 28, the Financial Policy Committee, responsible for the banking system’s stability, met for a quarterly gathering. A week later they announced they’d decided to cut lenders’ capital requirements to spur lending.
On Wednesday, June 29, Carney summoned the chiefs of the biggest U.K. banks to offer reassurances. Officials then announced he would deliver a speech on Thursday.
Westminster Drama
Even the governor may have struggled to anticipate the upheaval continuing on the other side of London. On the morning before that speech, Leave campaigner and lawmaker Michael Gove announced a bid for the Conservative leadership — which might make him prime minister — undermining his former ally Boris Johnson, who then scrapped plans to do the same.
Carney, standing in the BOE’s Court Room before a hastily invited audience of journalists and members of the finance industry, delivered a two-pronged message. He pledged to support the economy, and defended his own position, including his pre-referendum warnings of the dangers of a vote to leave.
“What we said in terms of the risks to the economic outlook, in terms of the risks to financial stability — does anyone in this room not think that those risks have begun to manifest?” he asked. “So we did our job.”
Another Resignation
The FPC met again on Friday, July 1. On Monday, as political upheaval extended to the leadership of UKIP with the resignation of Farage, and as Johnson published a newspaper article calling for a plan from the government, the governor was putting the final touches to the BOE’s own plan. Its first priority is to identify financial stability risks “and be straight with the British people.”
With the election for the Conservative leadership likely to last for some weeks, even after Theresa May took a clear lead in the first round of voting, and signs of strain at some commercial real-estate funds, stability threats remain — but the immediate dangers in the aftermath of the vote have been anticipated and pre-empted. The U.K.’s statistics office said Wednesday that inflation figures — published on August 16 — will be the first data to shed light on how the outcome of the Brexit vote is affecting the official data.
“Mark, his whole team, but also other central banks in Europe particularly were ready to provide liquidity to the market,” John Gieve, who was BOE deputy governor for financial stability during the 2008 crisis, told Bloomberg Television. “Everyone was prepared, to some degree, to avoid immediate instability. And that seems to have happened.”
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European stocks rise as oil advances toward US$48, pound rebounds
Stocks rebounded from one-week lows in Europe and Asia as oil advanced after industry data showed U.S. crude stockpiles fell. The yen strengthened with gold as concern over the fallout from Britain’s vote to leave the European Union supported demand for haven assets.
The Stoxx Europe 600 Index rose for the first time this week and emerging markets gained amid a subdued outlook for higher U.S. rates after Federal Reserve minutes showed officials were losing confidence in the economy’s ability to withstand a hike. Crude approached US$48 a barrel, while gold neared a two- year high. The pound rebounded from a 31-year low.
Fed policy makers cited concern that job creation was faltering as they kept rates unchanged the week before the U.K.’s referendum, according to minutes from the June meeting. While services data signaled on Wednesday the U.S. economy may have been gaining speed before Brexit, payrolls figures on Friday will be key to perceptions of where the Fed stands on its original plan to potentially raise rates twice this year.
“Markets are looking to nonfarm payrolls tomorrow as the first solid data point following the last Fed meeting to give guidance,” said Daniel Murray, head of research at EFG Asset Management in London. “There is that balancing act for the Fed in that they are quite right to be vigilant and observant of the U.K.’s position, but at the same time the direct impact on the U.S. economy is probably going to be quite small.”
Stocks
The Stoxx 600 climbed 1.6 per cent at 6:44 a.m. in New York, halting the longest losing streak in three weeks. All 19 industry groups advanced, with a gauge of banks climbing 1.6 per cent as a group after closing at the lowest level since 2011 on Wednesday.
Danone jumped 4.3 per cent after agreeing to buy WhiteWave Foods Co., a U.S. maker of soy milk and plant-based foods, for about $10 billion. Associated British Foods Plc rallied 8.5 percent after raising its annual profit forecast, saying a weaker pound will boost the value of profits earned outside its home market. Marks & Spencer Group Plc fell 1.3 per cent after reporting a deterioration in clothing sales.
Futures on the S&P 500 Index were little changed following a 0.5 per cent advance in the U.S. benchmark on Wednesday. Reports Thursday on June private payrolls from the ADP Research Institute and weekly jobless claims are the last employment data before the government’s monthly jobs report on Friday. American employers probably added 180,000 workers to payrolls in June, following an unexpectedly small increase of 38,000 in May, the least in almost six years, economists said before Friday’s report.
The MSCI Emerging Markets Index gained for the first time in three days, rising 1.1 per cent. Samsung Electronics Co. contributed the most to the advance, climbing 2 per cent, after reporting its biggest operating profit in more than two years, bolstered by demand for its Galaxy S7 smartphones. Benchmarks rose more than 1 per cent in Hong Kong, Hungary, Poland and South Korea.
Currencies
The yen strengthened 0.2 per cent to 101.12 per dollar, taking its post-Brexit rally to 5 per cent. Bank of Japan Governor Haruhiko Kuroda said in a speech to his bank’s branch managers Thursday that the country’s consumer-price index is likely to remain slightly negative for the time being. He also said he is monitoring risks and will add stimulus should it be required.
The pound rose 0.6 per cent to US$1.3014, after touching US$1.2798 a day earlier.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, fell 0.1 per cent following a 0.2 per cent drop on Wednesday. Futures put the probability of the Fed raising interest rates by December at 12 per cent, down from 50 per cent at the time of the U.K.’s June 23 referendum.
The Fed minutes “play into our core view that the Fed will now delay a further rate hike until December, at the earliest,” Kymberly Martin, a markets strategist in Wellington at Bank of New Zealand Ltd., said in an e-mail to clients. “The market is certainly pricing in ‘gradual’ rate hikes.”
The MSCI Emerging Markets Currency Index advanced 0.4 percent, headed for its first increase in four days. South Korea’s won jumped 1 per cent, and South Africa’s rand gained 0.4 per cent. China’s yuan strengthened 0.16 percent, after sliding to the lowest level since November 2010 on Wednesday.
New Zealand’s dollar strengthened 1.3 per cent after central bank Deputy Governor Grant Spencer said further interest-rate cuts could pose a risk to financial stability.
Commodities
Oil extended gains as data from the American Petroleum Institute, an industry group, showed the nation’s crude stockpiles dropped by 6.7 million barrels last week, easing a glut. The U.S. Energy Department will release its own inventory data at 4 p.m. New York time Thursday. West Texas Intermediate rose 1 per cent to US$47.89 a barrel and Brent gained 0.9 percent to $49.26.
Gold rose 0.1 per cent to US$1,365.35 an ounce, extending gains from the highest closing price in three months.
Global gold holdings topped 2,000 metric tons for the first time since July 2013 amid rising demand for havens from the fallout from the U.K.’s vote to quit the European Union. Assets in bullion-backed exchange-traded funds rose 4.1 tons to 2,001.4 tons on Wednesday, according to data compiled by Bloomberg. That’s larger than the gold reserves held by China, the world’s top consumer.
Corn, which entered a bear market on Tuesday, rose for the first time in seven days. The price climbed 0.6 per cent to US$3.43 a bushel in Chicago.
Bonds
German bonds were little changed, after 10-year yields touched the lowest level on record on Wednesday. The yield on similar-maturity Spanish bonds added three basis points to 1.20 per cent while that on Italian 10-year bonds added two basis points to 1.27 per cent.
Japan’s two-year bond yield dropped one basis point to an all-time low of minus 0.345 per cent. The nation’s 10-year rate was minus 0.28 per cent, near the record of minus 0.285 per cent reached on Wednesday.
The yield on U.S. Treasuries due in a decade increased one basis point to 1.38 per cent, after sinking to an unprecedented 1.32 percent in the last session. Billionaire bond investor Bill Gross said Wednesday that sovereign bonds are “too risky” with yields in many developed markets near all-time lows.
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Dominion Diamond to invest in Ekati mine extension after long strategic review
TORONTO — Dominion Diamond Corp. has greenlighted a big investment in its Ekati mine in the Northwest Territories after completing a strategic review that determined the company should focus on its internal projects.
The Yellowknife-based firm announced on Wednesday that it plans to spend US$647 million to develop the “Jay” diamond pipe at Ekati. Jay is the largest of the expansion opportunities at the mine, and chief executive Brendan Bell noted that it will extend the mine life enough for the company to pursue other growth options. Otherwise, Ekati would be poised to close in a few years.
“This bridge to future growth opportunities is really important for us to cement,” Bell said in an interview. “Now we’ll focus on additional exploration.”
Last year, Dominion hired investment bankers to study strategic alternatives for the company, including an outright takeover. Bell confirmed that Dominion did receive some “inbound interest” and also looked at acquisition opportunities. The company went through some turmoil in this period as well, as it was targeted by an activist investor and ultimately agreed to make changes to its board.
Bell said the review process was highly productive, and the entire board emerged from it bullish on the company’s internal growth prospects.
However, the potential economic returns of the Jay development were disappointing to some investors. Dominion laid them out on Wednesday when it released results from a feasibility study.
“Jay does not appear to be the most attractive project in the world, which is not a complete surprise,” BMO Capital Markets analyst Edward Sterck said in a note.
At current diamond prices, the feasibility study projected that the internal rate of return on the project is just six per cent, which is a weak number for such a large investment. But as prices rise, so does the return. Dominion is assuming diamond prices rise 2.5 per cent per year, which would bring the return to a solid 15.6 per cent.
“We believe 2.5 per cent price appreciation into the future is a reasonable number,” Bell said. “That’s historically what it’s been.”
He also noted that the company will take time to try to optimize the project. He is confident that there are opportunities to improve the financial returns.
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Another round of CPP mythbusting, courtesy of Keith Ambachtsheer
Debate on public policy issues of the day is, by any measure, a good thing. The back and forth between various experts can lead to a greater understanding given that wisdom does not reside on just one side of the debate.
By any yardstick, Keith Ambachtsheer is a pension expert. The 74-year old is the director emeritus of the Rotman International Centre for Pension Management, and has spent virtually his whole career in the field. Three decades back, he started a consulting firm — KPA Advisory Services – that has advised “on the design, governance, and investment policies of retirement income systems.”
This week Ambachtsheer, who got his PhD in 1969, dove into the public arena when he issued a “readers’ guide” to the recently announced CPP expansion. He also took particular aim at a recent article by the Fraser Institute whose thesis was that “the case for CPP expansion is weak and built on flawed arguments not supported by the facts.”
That article, written by Charles Lammam and Hugh MacIntyre, referred to five myths. Ambachtsheer makes the case that “when the five myths are placed in their proper factual context, it is the Fraser’s Institute’s arguments that turn out to be flawed.” Here are some of Ambachtsheer’s own myth breakers:
The two savings myths
He agrees with the Fraser Institute’s views that most Canadians retiring today will be able to maintain their living standards, but thinks the real focus of the program is down the road. For him the CPP expansion is about “today’s young people,” who will have considerable student debt but won’t have generous workplace pensions or decades of strong financial and housing markets. That group needs “all of the retirement help we can give them to have a reasonable shot at retirement security 20, 30, 40 years down the road.”
As for higher CPP contributions displacing private savings, Ambachtsheer agrees that it is “plausible … but beside the point.” For him, “the point is the quality of CPP retirement savings versus those in other retirement savings channels.” He then contrasts CPP’s performance with that of high-fee mutual funds that are “predictably producing average results materially below market returns.”
The low cost myth
While the Fraser Institute called out the myth that the CPP is a low-cost investment manager, Ambachtsheer argues value must be taken into account as well. Based on work done by CEM Benchmarking, he found that the CPPIB is indeed an “average cost” and not a “low cost” investment manager.
He makes that conclusion by focusing on internal and external costs (but excluding transaction costs) in part because many entities in his database don’t produce such a number. In this way there’s an apples to apples comparison.
For Ambachtsheer, the key economic question is whether the payoff is big enough to justify the additional expenditures over a lowest cost alternative. The answer is a definite yes: over the last five years CPPIB has generated an extra $16 billion (or 1.5 per cent of additional return) in additional net “value for money.”
And that compares very favourably with the gains for how mutual funds investors where over the past 15 years — according to a recent study investors underperformed the market by three per cent a year.
So what’s next? On Wednesday, Lammam said, “we will be responding in due course.”
#Rotman International Centre For Pension Management#Retirement Planning#Keith Ambachtsheer#Investment Funds#Investing Pro
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Canada’s pension funds eye greenfield federal infrastructure investments
Canada’s biggest pension funds are prepared to finance the construction of major new federal government infrastructure projects, according to senior fund sources, marking a shift from their traditional strategy of avoiding development risk.
Officials with the top funds, which manage $1.1 trillion in assets, are seeking to reduce that risk, telling the Canadian government they would like it to provide guarantees on future returns and assurances on costs.
“We think we can create incremental value by taking on the ‘greenfield’ risk of building the assets,” a senior executive at one of Canada’s three biggest public pension funds told Reuters, speaking on condition of anonymity due to the sensitivity of the talks.
Canadian funds have traditionally preferred buying ‘brownfield’ assets that have already been built and have predictable revenue streams, rather than take on potentially higher risk from ‘greenfield’ assets that have yet to be built.
But like their global peers, the Canadian funds face an increasing challenge in finding assets that generate adequate returns.
“‘Greenfield’ does come with a different kind of risk than ‘brownfield’ but it’s a source of value and, by doing it, you’re less susceptible to this rollercoaster ride of what’s going on in the equity markets,” the executive said.
Canada’s Liberal government was elected last year pledging to spend billions on infrastructure such as public transport, affordable housing or renewable energy to help stimulate the economy.
Reuters reported in February that the government had opened talks with the funds about investing in the projects, the details of which have yet to be revealed.
Bankers say private funding for the projects could amount to several times that from the public purse, meaning Canadian pension funds could invest tens of billions of dollars.
Canada’s biggest pension plans, which include the Canada Pension Plan Investment Board (CPPIB) and Ontario Teachers’ Pension Plan, pioneered a strategy of directly investing in infrastructure, funding roads, bridges, rail, airports, utilities and pipelines as an alternative to bonds and equities.
Their move into ‘greenfield’ investments also places them ahead of international rivals.
Four Canadian funds are now among the top 10 global infrastructure investors. By contrast, U.S. pension funds such as the California Public Employees’ Retirement System (CalPERS), began investing directly in infrastructure much later and have invested less.
Britain’s decision to leave the European Union has pushed some government bond yields to record lows and fueled equity market volatility. Competition for global infrastructure assets is also intensifying.
Executives stressed that while the government might be keen for them to participate, they will only do so if the terms are right. The funds, including the CPPIB which invests on behalf of the national pension plan, have traditionally been fiercely protective of their independence.
But they also noted they are under-invested in domestic infrastructure, and local deals would reduce currency risk given they pay out benefits in Canadian dollars.
“Canada is the home country for our beneficiaries and of course we would have to look at suitable projects if and when they are ready,” said Cressida Hogg, CPPIB’s Global Head of Infrastructure.
For its part, the Canadian government, which declined to comment on the talks, faces a tricky balancing act. It needs to ensure taxpayers are not left with a hefty bill if projects go wrong, but also avoid a public backlash if pension funds are seen to have been treated too generously.
Ontario Teachers’ CEO Ron Mock said in June that talks were progressing, with the government keen to move ahead, but warned it was too early to say when the projects will come to fruition.
“I wouldn’t put a time frame on it at this point but what I would say is we are seeing a lot of movement. We’re seeing at a federal level that they’re taking this seriously,” he told Reuters.
Some Canadian funds have already begun to take some ‘greenfield’ risks. Caisse de depot du Quebec, Canada’s second biggest public pension fund, agreed in April to invest C$3 billion building a new public transport system in its home province. And Ontario Teachers’ has begun making ‘greenfield’ investments in wind, hydro and renewable energy.
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William Watson: This is what Canada would look like if we believed in Trump-style protectionism
The prime minister paused. “I put this question to every member of this House: Can Canada in a protected world be other than a protected country?” A single voice answered “Yes,” to which the PM responded: “Then if that be so, it merely means that we are inviting all the protected countries of the world to destroy our own. There is no gainsaying that.”
It was June 1,1931. Conservative prime minister R. B. Bennett was delivering his first budget speech. The brave dissenter was Edward James Young, a Manitoba farmer, MP for Weyburn, and a Liberal, at a time when Liberals were resolute free traders.
The Bennett budget brought steep increases in tariffs on about 200 items, from hogs and coal to magazines and cars. Importing used cars would be prohibited “except as settler’s effects or travellers’ vehicles,” while the tariff on imported luxury cars, those costing more than $2,100, was to go as high as 40 per cent. Tariffs on less costly cars were only slightly lower. Duty drawbacks — i.e., remissions of duty for products used in producing cars — were to be sharply curtailed so as to help Canadian producers of tires, rearview mirrors, gearshift lever knobs and so on.
The context was a worldwide Depression in which countries were desperately trying to preserve jobs and incomes by keeping other countries’ goods out — while simultaneously pushing their own exports. Not an easy trick.
As everyone knows but many seem to be forgetting, most notably Donald Trump, global protectionism did not end well. Sensible people understood right away it wouldn’t work. Others needed a few more years of Depression to be persuaded. In 1934, the Roosevelt administration, which caught on early, got Congress to give the president authorization to negotiate trade deals. Beginning with a deal with Canada in 1935, FDR started the push to economic liberalization that culminated in the General Agreement on Tariffs and Trade and the World Trade Organization and coincided with the greatest economic expansion in our species’ history. (Admittedly, GDP data for the quarters immediately following the invention of the wheel aren’t very reliable.)
Consider an alternate universe. Suppose somehow the Depression ended with the world continuing on with tariffs as they were in 1931. What if our car tariff had stayed at 40 per cent for 85 more years, right up to today?
We’d probably have an auto industry. Canadians would want cars so we’d produce some. But not many. We certainly wouldn’t be selling many in other countries, who, in this alternate universe, would also keep their car tariffs high, as well as their tariffs on tires and rearview mirrors and gearshift-lever knobs. Because it would be impossible for Canada to build a very big and (therefore) efficient car industry for only our own small market, industry productivity wouldn’t be very high, which means neither would industry wages.
With a 40 per cent import tax, cars would be much pricier than they are now and there would be far fewer varieties. There would be lots of varieties worldwide. You just couldn’t afford them. In America you might be able to, since U.S. companies could achieve greater efficiencies than most (resulting in lower prices) thanks to their large internal market — assuming protectionism didn’t spread to the state level.
Mind you, if we maintained the less punitive British Preferential Tariff of 1931, we might have access to as many Austins, Vauxhalls and Morrises as we wanted. Not a Vauxhall in every garage, perhaps; they’d still be expensive. But maybe one on every block.
It’s true that in a highly protected Canada there would be more industries to get jobs in. That happens when countries try self-sufficiency. Canada would likely need its own watchmakers and computer manufacturers. But the jobs wouldn’t pay as well and, adding lower wages to higher product prices, the people who held them would be much poorer.
Nor, as one Conservative Albertan contributor to the 1931 budget debate made clear, would a protected society necessarily serve the interests of what today we call the 99 per cent: “The effect of the tariff which we have in this country is simply to say to the manufacturers and industrial men of Canada, ‘Come ye, all and sundry, and we will show you, through acts of Parliament, how you can make money and become rich by trading on the necessities of the people.’ … In my opinion they would do well to rely upon their ingenuity and their own resources instead of looking to the government for favours.”
An Ontario Liberal put it even more strongly: “This government is striking a death blow at the purity of the political life of this country. Parliament will soon become a sink of corruption. Honourable members will come here not to represent the national interests but rather to support the special interests of particular industries. Never were truer words spoken than those of the British chancellor of the exchequer who said: Once begin a policy of protection and you are on a slippery slope which leads to a bottomless pit.”
The slide into the bottomless pit is an image worth conjuring. But, image aside, the point is that although there clearly have been costs to the economic liberalization we’ve had since 1935 there would be even greater costs from undoing it.
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Indigo focusing on ‘phygital’ strategy as real estate hard to come by: CEO
TORONTO — Buoyed by a year of solid financial results while other large book chains have suffered and shut down, Indigo Books and Music is focused on the “phygital” future, says chief executive Heather Reisman.
The buzzword is one of the company’s top strategic priorities to embed into its corporate culture, along with expanding the business and rolling out its new large-scale store model, combining the words physical and digital.
“It’s just understanding how the customer is moving between doing something in the digital environment and completing it in a physical environment,” or vice-versa, Reisman said Wednesday after the company’s annual general meeting of shareholders.
Examples include digital art installations in the retailer’s bricks and mortar stores, using technology to help shop in store, or buying books and gifts online and picking the items up in a store.
“It sounds simple — buy online and pick up in store — but there is a lot behind it to make the experience great for the customer when they come in,” Reisman said.
“Or if you are (an Indigo staffer) interacting with a customer in a store and looking at a book, you might want to read longer reviews on the book and go right to the online site.”
Trying to optimize a store-based retail business while accommodating a rapidly expanding mobile and online channel is a growing challenge for large retailers.
Canadian Tire, for example, has introduced a glossy paper catalogue that interacts with customer’s mobile phones.
The transition has worked well thus far for Indigo, which has remodelled its business over the years to incorporate a thriving general merchandise business that includes gifts, home décor, toys and electronics.
In the fiscal year ended April 2, Indigo’s same-store sales, which exclude year-over year square footage changes, rose 13 per cent at Indigo and Chapters superstores and 11 per cent at the retailer’s Coles and Indigospirit small-format stores.
Reisman, who has said Indigo sees room to open six or seven more of its large superstores across Canada in the coming years, also confirmed the retailer is still looking for real estate in the cutthroat U.S. market, where players such as Borders have failed. She first spoke of her desire to open stores in the United States three years ago, but said Wednesday that the company would be in a much better financial position to do so now.
“We have always been open to it,” she said. “This is not something that we will announce tomorrow. It’s very dependent on real estate. Real estate is hard to come by.”
Reisman has no store closures planned in Canada for this year and has signed leases to open two new small store locations.
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What you need to know before markets open
U.S. stock index futures were little changed on Thursday as investors awaited a host economic data that would provide clues on the strength of the economy and determine whether the Federal Reserve would be able to raise interest rates this year.
* After a roller-coaster ride sparked by Britain’s June 23 vote to leave the European Union, investors in the United States are looking for signs of the health of the economy and the possible impact of the vote on quarterly earnings.
* Investors will keenly watch for the June payrolls report on Friday, especially after a shockingly weak May report threw the Fed off track from its plans to raise interest rates in the near term.
* U.S. economic data in the past weeks, including manufacturing and services data, have been mixed.
* While the cautious Fed is not expected to raise interest rates anytime soon, strong economic data will give the central banks reasons for its next move when it meets on July 26-27.
* The ADP national employment report for June is expected at 8:15 a.m. ET (1215 GMT) on Thursday. The data, which acts as a precursor to Friday’s report, is likely to show that 159,000 jobs were added in the month, compared to 173,000 in May.
* Initial jobless claims data for the week ended July is expected to show an increase of 2,000. The report is expected at 8:30 a.m. ET.
* Investors are also getting ready for second-quarter earnings, which are expected to fall 3.9 per cent from a year earlier, according to Thomson Reuters data. First-quarter earnings had fallen 5 percent.
* Oil prices rose for the second straight day as U.S. crude oil inventories fell and the dollar weakened.
* However, the rally in gold prices continued and U.S. Treasury bond yields were still under pressure indicating a weak appetite for risk.
* Wall Street closed higher on Wednesday as investors cheered the Fed’s comments which indicated that it would not raise rates soon and strong U.S. data pointed at some economic improvement amid global glum.
* PepsiCo’s shares rose 2.2 per cent to US$108.20 in premarket trading, after reporting a second-quarter profit that beat analysts’ estimate.
* Whitewave Foods jumped 19 per cent to US$56.45 after Danone said it would buy the organic food maker for US$12.5 billion, including debt.
Futures snapshot at 6:59 a.m. ET:
* Dow e-minis were down 14 points, or 0.08 per cent, with 18,894 contracts changing hands.
* S&P 500 e-minis were down 3 points, or 0.14 per cent, with 158,485 contracts traded.
* Nasdaq 100 e-minis were down 3.75 points, or 0.08 per cent, on volume of 18,295 contracts.
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