Take advantage of the leading academic minds in finance to create a world-class investment experience for you and your family
I believe my role as your advisor is to act as a bridge between the growing body of knowledge about how stock markets work and the ability to implement that knowledge to benefit our clients . . . in other words, to bridge the gap between theory and practice. We work hard to stay on the leading edge of the science of investing so that we can immediately implement any new advances in the understanding of how stock markets work. It’s a point of honour to make sure our clients benefit from these advances long before they become mainstream. We spare no effort to remain a leading firm, if not the leading firm, for Canadian investors who want a scientific approach to investing. We stay in the forefront by working in collaboration with the leading academic minds in finance to find new and innovative ways to help you meet your goals.
Some theories look great on paper but are difficult to translate into the real world. Take, for example, the “value stock” premium that so many managers and investors talk about. (Note: value stocks have a low price compared to some fundamental metric like book value, price, sales, dividends etc.). However, like lots of investment strategies that look great on paper or in a computer simulated environment . . . capturing the “value stock” premium has been difficult to replicate in the real world.
The academic component—or the “portfolio design”—of this idea has been around since 1993 when Fama/French introduced the Three-Factor Model based on U.S. data. It was their academic research that quantified just how significant and enduring the “value stock” premium is for investors. We also know from their additional research that a “value premium” exists in international markets (including Canada), and that the value premium is much more pronounced in smaller stocks than larger stocks. Unfortunately, as mentioned earlier, we also know that traditional methods for capturing this elusive premium have fallen short of the mark.
What premium? … and why all the fuss?
Fama and French have recently evaluated whether a “value premium” exists in Canada, so let’s have a look at the results. You may recall my blog entry on “Admired vs. Shunned Companies” (see my December Blog below). Say that a Canadian investor decided to put a dollar into a basket of stocks that continually rebalanced so that he or she owned only the admired (or growth) companies in Canada from 1977 till 2010. That dollar would grow to $15 dollars. A very healthy return.
Counterintuitively, the research also shows that if an investor decided to put one dollar into a basket of Canada’s least admired (or value) companies, and that this basket continually rebalanced so that he or she owned only shunned companies from 1977 to 2010, that dollar would grow to $55 dollars. Yes, that’s not a typo. The market would have rewarded that investor $55 dollars for owning shunned companies versus $15 dollars for owning admired companies.
You can do the math when you consider the difference capturing this premium would make to your portfolio over the course of your investment life (let’s say the average client’s investment time horizon is 35 years or so). $100,000 invested in Canadian value stocks from 1977 to the present would have grown to $5,522,000—versus the $1,566,000 the same investment would have yielded in Canadian growth stocks. That’s almost 4 times greater growth!
So, the multi-million dollar question is: How do you capture that premium in a reliable, consistent and cost-effective way?
It’s important to realize that having an idea or a basic portfolio design is really only the first step in the process. What makes the difference between something being “investable” are the real world issues of “portfolio implementation.” In a nutshell, this is the issue of whether the “expected returns” of the target portfolio can be effectively captured in the real world. In other words, can you successfully take a plan that works on paper and is backed by research into the real world where transaction costs, stock migration, price momentum, trading fees and taxes conspire to defeat the exercise? Well, that’s what we undertook to do.
In November 2009, a group of Canadian advisory firms (including Lowrie Financial) worked in tandem with leading academics and Dimensional Fund Advisors to make the US Vector and International Vector strategies available to Canadian investors. An explanation of these complex strategies would take several columns; but, in essence, they are an effective way to capture more of the value premium in the U.S. and international stock markets. (I’m not a great fan of the “Vector” name because, in my opinion, it doesn’t really describe how innovative this strategy actually is.)
Noting the success of the U.S. and International Vector portfolios, Lowrie Financial, in conjunction with three other advisory firms, approached Dimensional Fund Advisors with a request to research the issue of whether a Canadian Vector Strategy would be viable.
It was not a given that this would be the case, because we faced a different reality in Canada. The Canadian market has a number of major obstacles to overcome compared with other stock markets around the world. For example, it is relatively small and illiquid, and dominated by cyclical resource stocks and large banks. That being the case, the portfolio implementation issues in Canada are significant.
World-Class Investment Experience
After many consultations, and much back-and-forth (which Dimensional refers to as the ”Academic Feedback Loop” outlined in the chart below), we were able to overcome the Canada-specific obstacles. The outcome is that we now have a strategy where we feel confident that we can capture more of the “value premium” in a reliable, consistent and cost-effective way. The specific strategy is called the Canadian Vector Fund and will be available for investment in mid-July.
This strategy gives us another valuable tool to more effectively and reliably meet your long-term investment goals.
It also gives us some additional flexibility to adjust individual asset allocations to either:
- Increase expected returns while maintaining the same level of risk, or
- Maintain the same sort of expected return but reduce risk.
(Note: We define risk as volatility.)
We are continually on the lookout for better ways and processes to capture returns for our clients, and we are very proud to have been at the forefront of making this innovative solution available to them.
As always, our primary goal is to offer you a bridge between the science of investing and your investment success, so that you can take advantage of the leading academic minds in finance to create a world-class investment experience for you and your family.