We last spoke with Bruce in September, when he acted on our counsel to trim his weighting in bonds and add to equities.

Bruce and Courtney’s portfolio rose roughly 2% in 2011 (its aggregate value at year-end was approx. $346,500). While Bruce isn’t popping any champagne, he realizes that their portfolio fared quite well considering its bias towards equities (which had a weak year).

At the end of December, their asset mix was:

Savings Fund – 10%
Income Fund – 26%
Equity Fund – 26%
Global Equity Fund – 22%
Small-Cap Equity Fund – 16%

The couple contributed $10,000 each to their RSP accounts this week. They want to keep on track with their strategic asset mix (SAM), so they didn’t add anything to the Small-Cap Fund (which had drifted higher, from 12% to 16% of their portfolio). They each invested $5,000 in the Equity Fund, $2,500 in the Global Equity Fund and $2,500 in the Income Fund. They had a tough time adding to the Global Fund given the mess in Europe, but they realize its place in their portfolio. They also understand that valuations for global stocks look attractive.

Bruce and his wife also contributed $10,000 each to their Tax-free Savings Accounts (TFSAs). They didn’t get around to adding to their TFSAs in 2011, so they had extra contribution room this year (reminder: you can contribute $5,000 per year to a TFSA. Unused contribution room carries forward). They used the Savings Fund in their joint investment account as the source of funds for the contributions.

The contributions slightly increased the Equity Fund’s overall weight in their portfolio to 27%, while the weight of the Small-Cap Fund was reduced to 15%. Bruce and Courtney’s bond weighting remains at the low end of their SAM range, following our advice that stocks currently represent better value. The couple continues to hold roughly 10% of their portfolio in the Savings Fund. As a reminder, the purpose of this cash is two-fold: 1) as a source of funds for a vacation property; and 2) as a source of dry powder if the market experiences a notable decline.

With their investments front of mind, Bruce and Courtney took care of one last piece of housekeeping – they RSVP’d for our Annual Client Presentation. They’re interested in hearing Steadyhand’s assessment of the markets. And they really like our cookies.

Last week we published a report on how to assess your portfolio’s performance (How is Your Portfolio Doing?).

Today we’re releasing a supplementary report that uses the framework to assess the performance of the Steadyhand Balanced Income Portfolio, which is a hypothetical model portfolio (comprised of our funds) used by a large number of our clients.

Assessing performance can be an arduous and confusing task. Not anymore.

I’ve read a few interesting books lately on some of the top technology visionaries of our time. They include Paul Allen (Microsoft), Larry Page & Sergey Brin (Google) and Steve Jobs (Apple). The books were all good reads (Idea Man, In the Plex, and Steve Jobs), although the Microsoft and Google tomes are a little too technical at times for those like me who know little about programming.

One thing jumped out at me about all of these trailblazers – they are/were extremely passionate about what they do. They’re geeks. They have an eccentric devotion to programming/creating/designing and are so engaged in their trade that nothing else matters to them. They don’t let traditional barriers get in their way, aren’t afraid of failure, and don’t compromise on what they believe in. Along the way, they’ve built some exceptionally cool stuff and changed the way we work and play. And there’s only more to come.

Google and Apple have been successful at developing software and products that are hugely complex at the back-end, yet simple and intuitive for the end user. This is a tremendous accomplishment. It’s something the wealth management industry should try to emulate every day.

Investing has its complexities at the back-end. Financial analysis is akin to the engineering that goes behind search algorithms or touch screen interfaces. Unlike Google and Apple, however, the industry does a poor job of making the user experience simple and efficient. There is no shortage of resources at the back-end (equity analysts, portfolio managers, etc.), but few firms put much thought or effort into making the customer experience simple and understandable.

Investing remains a complex activity to many people because the industry wants it to be perceived that way. It shouldn’t be. Investors don’t need hundreds of choices, undecipherable reporting and non-stop economic forecasts. They need a few sensible fund options, a clear investment approach, and plain-English reporting.

Allen, Page, Brin and Jobs threw out the old blueprint. They brought innovative thinking, fearlessness, simplicity, and a focus on the user experience to the table, with a touch of craziness. We could all use a little more geek in us.

Early last year we published a report on how to assess your portfolio’s performance. The paper laid out a framework for evaluating your investments, focusing on five areas: gathering the facts, reviewing the market environment, analyzing the numbers, assessing the potential for future returns, and determining when to take action.

The report was well received by investors and won the Best Stewardship Initiative at the Canadian Investment Awards last month (read more).

Today we’re releasing an updated version of the report. All the market returns have been updated to December 31, 2011, and we’ve made a few small refinements.

We’ll also be publishing a supplementary report next week that uses the framework to assess the performance of the Steadyhand Balanced Income Portfolio, which is a hypothetical model portfolio used by a large number of our clients.

Assessing performance is a key element of investing. Our goal is to provide a practical framework to make the task less onerous.

By Scott Ronalds

2011 was a great year for bonds and a not-so-great year for stocks. Interest rates declined further (10-year Government of Canada bond yields ended the year below 2% for the first time in a century), leading to strong price gains in government bonds, and to a lesser extent corporate bonds. Debt concerns in Europe and political lollygagging weighed on investor confidence and most stock markets around the world had a poor year. Double-digit losses were common in Europe and Asia, while the Canadian market dropped 9%. The U.S. was a lone exception and eked out a small gain.

In this podcast, we review the performance of our funds and highlight some of the key messages from our Quarterly Report.

Download, subscribe via iTunes or RSS, or listen now:

From our Quarterly Report:

It’s a remarkable time to be an investor. After decades of overspending in the Western world, we’re watching Europe melt down and the American empire decline faster than expected. The debt burden is slowing the world economy and accelerating the power shift from West to East. And while we watch with amazement, the fear factor grows.

When you look at your Steadyhand results, however, you might not think 2011 was so remarkable. Despite all the negative noise, political ineptitude and market volatility, our client returns weren’t far off of their long-term expected levels. Balanced portfolios were up between 2% and 5% (depending on the particular fund mix) ...

Read Tom’s full brief and the rest of our report here.

As we start a fresh new year, there’s no shortage of Top 10 Lists (we’re guilty, too). They can get annoying and repetitive, even for a David Letterman fan. But some are worthy of passing on, even posting on the fridge. Here’s one you should staple to the front of your next investment statement.

Top 10 New Year’s Investing Resolutions (by Larry Swedroe).

Another year, another 120 blog postings. We had some thoughtful, informative, helpful, useless, controversial and scathing posts last year, based on the emails and comments we received.

Below is a list of our most popular posts in 2011, as judged by you, the readers (well, actually judged by Google Analytics according to which postings received the most views).

1. What Now – Part II (August 10th)
2. The F-Bomb (June 22nd)
3. Monthly Income Funds: Some Useful Math (January 12th)
4. When Fear Rules the Markets, It’s Time to Say Buy (August 20th)
5. My TFSA Strategy (February 14th)
6. Investing Certainties in an Era of Economic Doubt (October 1st)
7. Steadyhand vs. ETFs (November 7th)
8. What to do About Japan – Part II (March 17th)
9. How is Your Portfolio Doing? (January 20th)
10. Hocus Pocus But no Magic (March 7th)

Thanks to all our loyal readers! We look forward to keeping you well informed in 2012.

(As a reminder, you can subscribe to our blog via email or RSS)

Michael Nairne, president of Tacita Capital, wrote a good piece in the Financial Post last weekend, titled A Gift From Risky Markets, which looks at historical stock market returns and valuations (dating back to 1825) and provides some perspective on the level of long-term returns investors can expect going forward.

If you got stiffed this holiday season or are looking for a little cheer as the bills come rolling in, this short article may be just the elixir you need.

It’s bureaucracy like this that prevents smaller firms (like Steadyhand) from offering their funds nationwide. Canada is one of few countries that doesn’t have a national securities body, which has been cited as a weakness in our system by many observers. Instead, investment firms have to deal with 13 different regulators (one for each province and territory).

The cost of filing a prospectus, and the associated regulatory expenses of dealing with each province individually, is extremely expensive. It’s the key reason why we only offer our funds in five provinces. As we grow, we hope to make our offering available in every province, but at this stage in our development, the costs are too prohibitive.

As a young business, it’s disheartening to turn down interested investors in Quebec, the Maritimes and the Territories (where the inquiries have been growing steadily). Unfortunately, the news today suggests we’re not going to see a national regulator anytime soon. Bah, humbug.

By Scott Ronalds

Is it over yet? It was a rough year for the stock markets, as ugly economic headlines, debt problems, and political gridlock instilled fear in many investors. Bonds were once again the asset class of choice, despite their scrooge-like yields.

Here at Steadyhand, we’re feeling a little merrier than the average investor – and it’s not just because of Bradley’s secret nog. Most of our funds have fared much better than the overall market, and we achieved some notable accomplishments over the year.

In this year’s Holiday Letter, we reflect back on some of the 2011 highlights.

Happy Holidays!

The year-end distributions for all our funds (with the exception of the Savings Fund) will be declared on December 15th and paid on December 16th. The Savings Fund will pay its regularly-scheduled monthly distribution on December 31st.

As a reminder, distributions represent the mechanism whereby mutual funds transfer to unitholders any interest and dividend income and realized capital gains they have accrued over the course of the year. Most investors choose to re-invest distributions into additional fund units, but clients can also opt to receive them in cash.

Remember that immediately following a distribution, the price of a fund drops by an amount equivalent to the payment. However, you will receive additional units in the fund which are equivalent in value to the amount of the distribution. The end result is that the value of your investment doesn’t change, but you own more units in the fund at a lower unit price.

For example, assume you own 100 units in a fund that is valued at $10.00/unit (your investment is worth $1,000). If the fund pays a distribution of $0.10/unit, its price will drop to $9.90 following the distribution. However, if you follow the common practice of re-investing your distributions, you will receive an additional 1.01 units in the fund ($0.10/$9.90), so the value of your investment remains unchanged (101.01 units x $9.90/unit = $1,000).

The estimated distributions for our funds are as follows:

• Income Fund: $0.19/unit
  
• Equity Fund: $0.05/unit
  
• Global Equity Fund: $0.06/unit
  
• Small-Cap Equity Fund: $0.95/unit

Please note that these are only estimates and are subject to change.

Important: The estimated distribution for the Small-Cap Equity Fund is higher than normal, as the fund generated more capital gains than in previous years. The amount may be reduced in the coming weeks, but investors considering purchasing additional units in the fund in non-registered accounts may wish to delay any purchases until after the distribution has been declared on December 15th.

If you have any questions about distributions, feel free to give us a call at 1-888-888-3147.

With the holidays around the corner, shopping is in the spotlight. It got me thinking …

We’re used to high price tags on the wet coast. We’ve got the most expensive housing market in Canada (if not the world, based on some measures). A bottle of wine typically costs more than in any other province (Tom insists, the world). Gas prices often rival the highest in the country. And high-priced yoga wear and lavish lattes fly off the shelf.

Yet, Vancouver is home to some of the lowest cost mutual funds in the country. Steadyhand, PH&N and Leith Wheeler are commonly recognized as low-fee leaders for active management (while also providing advice). Sky high real estate and low cost mutual funds makes for an interesting dichotomy. Must be something in the water.

By Scott Ronalds

A dirty little secret in this business: when a fund has an ugly performance record, it can be buried by merging it into another fund.

Fund mergers occur all the time (see Fund Company Calls the Cleaner). The latest track records to be swept under the rug belong to a handful of under-performing Investors Group funds (see below).

Given Investors Group’s dizzying array of over 500 products (in numerous classes and series), these mergers will largely go unnoticed by investors.

Morningstar Canada published its updated Stewardship Grades for 26 fund companies yesterday. The grades are designed to help investors further research, identify, and compare fund companies that do a good job – or a poor job – of aligning their interests with those of fund shareholders.

Stewardship Grades were first introduced in 2004 in the U.S., and a study published earlier this year found that funds with top grades were more likely to survive and deliver competitive risk-adjusted returns.

Morningstar introduced their Stewardship Grades in Canada last spring (see our blog on the topic), and Steadyhand scored favourably. In fact, we were the only company to receive a perfect score (8 out of 8) along with an “A” grade.

We’re proud to announce that we received an overall A grade once again. Of the 26 companies graded, four received the top mark (click here for the full list).

There are four components considered in the grading process: Corporate Culture, Manager Incentives, Fees, and Regulatory History. Morningstar made some slight changes to their process this year, motivated in part to better align the Canadian methodology with the approach employed by their U.S. fund analysts. The firm now assigns more weight to the Corporate Culture and Manager Incentives components. Steadyhand scored A’s on Culture and Incentives.

We’re unhappy that we scored a B on Fees this year, although we do understand that some other 'direct’ companies have lower fees before our fee rebate program kicks in.

Morningstar notes, “The Stewardship Grade goes beyond the usual analysis of strategy, risk, and return. It helps investors to assess a fund based on the degree to which the fund's parent – the management company offering the fund – has its interests aligned with those of fund shareholders. The methodology also examines whether shareholders can expect their interests to be protected from potentially conflicting interests of the management company.”

We pay little heed to industry ratings and awards that focus on short-term performance, but the Stewardship Grades address important intangibles that are not captured in a review of past performance alone.

I feel for the twentysomething generation. Good jobs are tough to come by, home ownership is out of reach for many (in Vancouver and Toronto, at least), skinny jeans are deemed fashionable for men, and a weekend camping now means pitching a tent downtown.

What’s more, young investors are avoiding risk at an alarming rate. A recent article in the Wall Street Journal (The Young and the Riskless) highlights a survey which showed that 52% of investors in their 20s agreed with the statement: “I will never feel comfortable investing in the stock market.” (only 29% of investors of all ages agreed with the statement)

The piece suggests: “Investors who eschew risk at such a young age might be setting themselves up for disappointment. Without the compounding effects that come with investing in equities for a long time, stock-less investors might find it nearly impossible to accumulate a big enough nest egg to retire at all, let alone in their 60s.”

We’re all aware that the stock market has been turbulent over the past several years, and that the economic headlines aren’t exactly rosy. But investors in their 20s who intend to avoid stocks altogether are making a mistake. A big one. Over a 30-40 year investment horizon, stocks will almost certainly outperform cash and bonds. This is especially true using today as a starting point – stock valuations are attractive on many measures and bond yields are close to historically low levels. Big short-term swings in the market are hard to stomach and can be particularly damaging for older investors, but the twentysomethings should use volatility to their benefit.

Young investors, no doubt traumatized by the events of the past few years, need to step up and take some risk (i.e., invest in stocks) if they want a phat portfolio down the road.

By Scott Ronalds

Exchange-traded funds (ETFs) are growing in popularity and with good reason. They’re simple, low cost, transparent and provide market-like returns. But … they’re not for everyone.

In a newly published paper, we compare the experience of an ETF investor (Jake) to that of a Steadyhand client (Julie). We focus on four areas: administration, communication, advice and most importantly, returns.

We’re doing the comparison because nobody else has evaluated or compared the two investor experiences and we think it’s important as ETFs become a more prominent fixture in the investment landscape.

For investors who are frustrated with the returns and business practices of the traditional wealth management companies, ETFs are a good option. For many of the frustrated, however, Steadyhand is a better fit.

For further details on the position and its responsibilities, click here.

If you are interested in applying for this position, please contact us via email only at jobs@steadyhand.com.

In preparing our Quarterly Report, I compiled some numbers that speak for themselves:

• Global stock markets had their worst quarter since Q4 2008
  
• Greece was down 42%. Italy, France and Germany were all down 25%. Canada was down 12%. Japan was down 11% (all in local currency terms)
  
• Almost every major European market has a P/E below 10 and dividend yields are commonly north of 4%
  
• The loonie hit $1.06 US in July and ended the quarter at $0.95
  
• Oil fell 17%
  
• Base metals fell by more than 20%
  
• The Government of Canada 10-year bond yield dropped from 3.1% to 2.1%
  
• The US Treasury 10-year bond yield dropped from 3.2% to 1.9%
  
• The DEX Universe Bond Index was up 5.1% - its highest quarterly return since 1996
  
• North American sovereign bond yields are at levels not seen since the 1940s

For stock investors, it was an ugly quarter. Bond investors, on the other hand, had a heyday. Looking ahead, it seems pretty evident where the opportunities lie. Hint: it’s not government bonds.

By Scott Ronalds

It was an ugly quarter for stocks, with most major markets suffering double-digit declines. The bond market, on the other hand, had its strongest showing in 15 years (government bond yields now stand at levels not seen since the 1940s).

Our funds declined, but held up better than the market. Their focus on high-quality, non-speculative companies helped dampen negative returns.

In this podcast, we review the quarter in further detail and highlight some of the key takeaways from our Quarterly Report.

Download, subscribe via iTunes or RSS, or listen now:

The passive (indexing) vs. active management question is a polarizing debate, but it shouldn’t be. The bottom line is that both strategies have merit when they’re done right.

As Morningstar USA’s President of Fund Research (Don Phillips) notes, credible voices within the index community are being drowned out by a vocal fringe – the indexing extremists. In an article first published earlier this year, Phillips suggests these individuals grossly overstate the indexing case, and that “many of the fund world’s recent stumbles – the misguided expectations surrounding leveraged and inverse ETFs and the poor performance of many commodity products – have come under the indexing banner.” This coming from someone who admits that indexing is a good way to invest and acknowledges to holding much of his personal assets in index funds.

There’s a paragraph in the middle of the article that’s particularly telling as to the state of the debate (in the US, at least):

“At some point, however, many index fans went from making the honest and helpful argument that indexing is good to making the hyperbolic and divisive case that anything other than indexing was not only bad, but also morally suspect. Extreme index supporters went from asserting that indexing beats the average fund to implying that it beats all funds. Ironically, they've advanced this claim during a decade when indexing has experienced unusually weak results. For the 10 years through the end of 2010, the Vanguard 500 Index fund placed in the 49th percentile of the large-blend category--hardly in keeping with its perceived dominance. The dichotomy between the facts and their assertions hasn't humbled the true believers, however. Their words have grown more extreme, as seen in a recent statement from an ETF provider that likened active fund managers to big tobacco companies, claiming that active management was as dangerous to investor wealth as tobacco is to our health.”

As a proponent of active management (undexing), I found Phillips’ article refreshing, although I’m sure it will raise the hackles of many indexers. If nothing else, the ongoing discussion is sure to be entertaining.

By Scott Ronalds

Wil Wutherich, the manager of our Small-Cap Equity Fund, is in town this week on a research trip. We booked an afternoon of his time to discuss the fund. Since we've covered his investment process in previous sessions and his philosophy is well documented on our site, Tom sat down with him to talk stocks.

Download, subscribe via iTunes or RSS, or listen now:

By Scott Ronalds

As a kid, my family and I used to go on a summer holiday every year to Savary Island (a small island about 200 km north of Vancouver). It’s a bit of a hidden treasure, with white sand beaches, warm waters and an abundance of shellfish. There was no electricity, few cars and fewer rules (don’t bury your sister and be home for dinner). We loved it.

I was back on the Island this summer and few things have changed. The tennis court still has a shoddy wood floor, there’s still no electricity (save the odd generator) and the water is just as welcoming. There are a few more boats and cars now though, which gets the old guard steaming, but we won’t go there.

Surprisingly, the owner of the cabin we used to rent dropped by one day with something we left behind 30 years ago – a copy of Canadian Business magazine from June 1981. It cost $2 and had my dad’s name and office address on the front. I took it to the beach one afternoon to flash back to what was going on in the Canadian business world when I was seven years old and the only thing that mattered was how big a fort my gang could build on the beach before the tide swept it away. Aside from some laughable ads from the top word processors of the day, an article on money market funds caught my eye.

The piece led off by noting that most Canadians were investing their spare cash in bank accounts or GICs: “Both these vehicles are safe and now yield a generous, though by no means princely, 13% to 15% a year.” Ah, the good old days! The author goes on to pitch the virtues of money market funds, “where you can earn 16% or more on your money … it’s a game that takes some getting used to but the rewards can be substantial.”

At the time, there were only two such funds in Canada (compared to 99 in the U.S.), the AGF Money Market Fund and Guardian Capital Money Market Fund. The former was yielding 16.7% and the latter 16.4% at the time of writing. (And to think I was wasting my allowance on Dr. Pepper and Bazooka Joe) Neither fund, however, had caught on with investors. The author suggested the major factor holding the funds back was that “Canadians don’t share the dis-satisfaction many US investors have with banks and trusts ... to most people, it seems a lot easier to just throw their money in the bank.”

Today, there are over 300 money market funds in Canada, most of which are yielding 1% or less (after fees). Further, the banks now have a disproportionately large share of the overall mutual fund industry. Canadians still love their banks. With their huge branch network and distribution channels, many investors still feel it’s a lot easier to turn to the banks for their savings and investing needs.

The more things change, the more they stay the same.

As summer winds down, I find myself longing for a Dr. Pepper and some of those generous, but by no means princely, 13-15% returns.

By Scott Ronalds

We often remind our clients that they don’t need to do much once their portfolios are set up, as our managers do most of the heavy lifting. While it may sound like lip service, it’s a phrase that carries weight.

In times of heightened volatility, such as the past two months, it involves capitalizing on opportunity. The manager of our Equity Fund, CGOV, noted recently that opportunity has been plentiful as a result of investors fleeing stocks due to negative economic events, margin calls and sheer panic.

A recent article in Barron’s (Buy Stocks, Not Economic Data) sums up nicely how investors are being increasingly barraged with economic data and how it should be interpreted when making long-term investment decisions:

“The fact is that macroeconomic data and policies to influence the economy are having little impact on what's really important to equity investors, corporate performance. Yet rarely has there been more attention focused on macroeconomic data and policy decisions. Clearly, the solution is to focus with blinders on what really matters to equity investors — earnings and dividends, and the price they pay to participate in those sums.”

While the economic backdrop remains uncertain, CGOV is investing in profitable, growing businesses, not U.S unemployment numbers or Spanish GDP figures. In the manager’s words, “We are confident that Ritchie Bros will still be conducting auctions in all economic environments and that Suncor will keep producing oil.” Recently, they have added to a number of companies that have seen their share prices decline based largely on panic, including TD Bank, Home Capital Group, Suncor, Insperity and Novartis. The profits of these companies will face little impact from a downgrade in the U.S. government’s debt or new austerity measures in Greece. CGOV also recently added Mead Johnson to the fund, a dominant global player in children's nutritional products and infant formula. They’ve admired the company for a while and the market pullback has provided a purchase opportunity.

The manager has been able to boost returns by trading around core positions. In other words, adding to holdings on share price weakness and trimming on strength. Or, put more succinctly, profiting from the emotions of others. The chart below illustrates a few examples of how they have been able to benefit from an active management approach of trading around their core positions throughout the volatility of the past few years – the heavy lifting in action.

Last month we introduced Bruce, a forty-something investor with a balanced portfolio (tilted towards equities).

Bruce spent the last three weeks of August on vacation and tuned out the noise in the markets as best he could. The single malt helped. While catching up on his reading this week, however, he came across two pieces by Tom which encouraged him to make an adjustment to his portfolio (What Now? Part II and When Fear Rules the Market, it’s Time to Say ‘Buy’).

Upon reflection, he decided to reduce his position in the Income Fund by 5% (of his overall portfolio’s value) and invest the proceeds in our equity funds.

Recall that Bruce’s portfolio at the beginning of the year was broken down as follows:

• Savings Fund - 10%
  
• Income Fund - 30%
  
• Equity Fund - 24%
  
• Global Equity Fund - 24%
  
• Small-Cap Equity Fund - 12%

As at August 31st, his fund mix was:

• Savings Fund - 10.1%
  
• Income Fund – 31.4%
  
• Equity Fund – 24.0%
  
• Global Equity Fund - 21.9%
  
• Small-Cap Equity Fund - 12.6%

Even though his current mix hadn’t drifted significantly from his strategic asset mix (SAM), he felt it was a good time to take some profits out of bonds (Income Fund) and add to stocks. Sticking with our suggestion, he trimmed 5% from the Income Fund. Straying somewhat from our advice, however, he added 2.5% to the Equity Fund and 2.5% to the Small-Cap Fund. He understands the Global Fund’s role in his portfolio’s diversification, but has a sour taste for anything Europe and didn’t add to the fund.

With his portfolio now tended to, Bruce can focus his energy on finding an excuse to get out of the Keith Urban concert his wife’s trying to drag him to at the end of the month.

Tom was on BNN this morning discussing how we think about asset allocation and portfolio positioning in volatile markets. It’s all about being ‘approximately right’ rather than exactly wrong. In other words, you’re never going to pick the top or bottom of the market, so it’s key to stick to your strategic asset mix (SAM) and make modest adjustments when valuations and sentiment are at extremes.

Currently, sentiment is flashing fear, bonds are expensive and stocks are cheap. It’s a good time to lighten up on bonds and buy equities – within the context of your SAM. If you have any questions on how this advice may apply to your situation, give us a call at 1-888-888-3147.

Watch the clip here (6:00 min)

Nalco, the world’s leading water treatment company, recently entered into a merger agreement with Ecolab (a provider of cleaning, food safety and infection prevention products and services). CGOV, the manager of our Equity Fund, sold the stock following the announcement. They originally purchased shares in Nalco in the summer of 2009 and by the time they sold the stock late last month, it had gained over 85%.

We initially reported on Nalco in March, 2010. We highlighted the stock because it was an example of an opportunistic investment. The company scored top marks in three areas that CGOV pays close attention to – cash flow, competitive advantage, and management. Nalco also carried a large amount of debt, however, which was a notable strike against the company.

This follow-up posting is a summary of how the investment played out.

A new CEO, Erik Frywald, took the reins as chief executive of Nalco in 2008. His mission was to increase the company’s revenue growth from existing levels of 3-4% per year to a target of 6-8%. He also set new productivity targets and aimed to reduce the company’s debt.

After gaining a level of comfort with the new CEO and watching his words turn into actions through better financial results and an improving balance sheet, CGOV purchased the stock at a price they felt was significantly below its true value.

Nalco was positioned in the right markets (energy, mining & mineral processing, chemicals & fertilizers, etc.) and Frywald and his team were able to increase revenues by raising prices on their products and winning new business. The company’s balance sheet also improved as a result of refinancing high-cost debt at more attractive terms, and cost cutting. The stock appreciated significantly and CGOV’s investment thesis proved correct.

Following news of the proposed merger, the stock gained nearly 30%. CGOV sold it at roughly $36. At a buyout price of $38.90, the stock still had upside potential of 8%, but if the merger falls through, they believe there is downside potential of 30%, so they felt the sale was the wise course of action (the merger is expected to close in the fourth quarter). If the stock continues to fall in a jittery market, the manager would consider buying it again.

Nalco is a story of buying into a business with a wart or two on it at the right price. While the bulk of the holdings in the Equity Fund have stronger balance sheets and more consistent earnings growth than Nalco did at the time of purchase, there are a few other companies in the Equity Fund that represent similar opportunistic plays, meaning they have attractive attributes and operate in a desirable industry, but have a strike against them which can range from debt issues to problems with a segment of their business to overly-negative sentiment (e.g., Kinross Gold, Manulife Financial). The end result won’t always be as profitable, nor come as fast as it did for Nalco, but when it does the water tastes that much sweeter.

One of the richest men in the world wishes he was taxed more. Warren Buffett paid $7 million in federal taxes last year, which equated to 17% of his taxable income. Surprisingly, this was the lowest rate of any of the 20 employees in his office.

In a rare plea in the New York Times, Buffett is asking Congress to stop pampering the super rich. “My friends and I have been coddled long enough by a billionaire-friendly Congress”, he notes. His advice to Washington is to leave rates unchanged for 99.7% of taxpayers and raise taxes on Americans making more than $1 million, with an additional increase in rates for those making $10 million or more.

As for the potential backlash, he believes the super-rich will take it in stride:

“I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them … Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.”

America needs to reduce its deficit, urgently. Its second richest citizen is willing to do his part, and feels that his bridge and poker buddies wouldn’t mind sharing in the sacrifice either. If nothing else, it’s an interesting message to Congress.

By Scott Ronalds

Meet Bruce. He shares several traits of investors who we deal with every day. In many ways, he is representative of a typical Steadyhand client. In this blog series, we’ll follow his investing journey and provide periodic updates on the decisions and challenges he faces.

Profile

Age: 42
Status: Married
Children: 2 (ages 8 and 10)
Occupation: Software Engineer
Residence: North Vancouver
Likes: The Boss, Running, Single Malt, Modern Family
Dislikes: Windows 7, Cucumbers, Sammy Hagar, Riesling
Steadyhand Client Since: December 2010
Investments:

• RRSP: $170,000 (Bruce); $100,000 (Courtney)
  
• TFSA: $12,500 (Bruce); $12,500 (Courtney)
  
• RESP: $20,000
  
• Non-registered: $75,000 (Joint)

Bruce is a married forty-something software engineer with two pre-teen kids. His wife, Courtney, works part-time in marketing and the couple makes a combined annual income of approx. $180,000. They own a house in North Vancouver worth roughly $750,000 (with a mortgage of $250,000). Bruce has been investing since the glory days of the early 1990s, but it was just over the past few years that he began to take greater interest in and control of his financial situation. The market downturn of 2008/09 was the catalyst.

Background

Bruce discovered Steadyhand through Tom Bradley’s column in the Globe and Mail. After following the company for a year or so, he and Courtney decided to transfer their RRSPs, TFSAs, and a portion of their non-registered investments to the firm in late 2010. They continue to hold an RESP and joint investment account at a discount broker (Bruce owns a few technology stocks that he follows closely).

The couple had dealt with an advisor at a brokerage firm for several years, but Bruce felt he wasn’t getting a lot of value from the relationship as he was paying for service that he wasn’t getting, he owned too many products, and transparency was lacking. He was tired of dancing in the dark. Bruce felt confident in his abilities to oversee his own portfolio and knew that Steadyhand could provide him with investment advice or at times act as a sounding board for his decisions.

Financial Goals

Bruce would like to retire in his early to mid-60s. Between now and then, he has some key financial goals. In order of importance, they are:

1. Put his kids through university (if they choose).
2. Purchase a recreational property (he has always wanted to own a cottage in the Okanagan, but has been increasingly looking at California and Arizona given their battered real estate markets and the strong Canadian dollar).
3. Grow his portfolio to the $1.5 million mark in today’s dollars (not including his house).

As for non-financial goals, Bruce would like to complete the New York Marathon. To Courtney’s dismay, he’s also expressed an interest in commercial space travel (Virgin Galactic), and would love to jam with the E Street band. As he often tells his wife, crazier things have happened.

Portfolio

Bruce and Courtney are comfortable taking some risk in their portfolio. They have an investment time horizon of 20+ years and do not anticipate any recurring income needs (from their portfolio) until they reach retirement. Their portfolio was hit hard during the market downturn of 2008/09 but they rode out the financial crisis without making any adverse knee-jerk investment decisions, and have since recouped their losses. That said, they aren’t comfortable with a 100% equity portfolio, as they have learned to appreciate the value of diversification in moderating volatility.

After consulting with us, they decided on a strategic asset mix range for their overall portfolio of 65-70% equities / 30-35% fixed income. Bruce has been discouraged by U.S. and overseas stocks and has developed a ‘home country bias’ due to the stronger returns that Canadian stocks have delivered over the past decade. We suggested that he shouldn’t ignore global equities, however, as they should be an important part of any balanced portfolio and currently offer compelling value. The couple took our advice and executed it as follows:

• Savings Fund – 10%
  
• Income Fund – 30%
  
• Equity Fund – 24%
  
• Global Equity Fund – 24%
  
• Small-Cap Equity Fund – 12%

This is a slight variation of our hypothetical Balanced Equity Portfolio (a position in the Savings Fund was added to the mix). The resulting asset mix is roughly 33% fixed income, 32% Canadian equities, and 35% foreign equities. For tax efficiency reasons, the Income Fund and Savings Fund are held in the registered accounts (RRSPs and TFSAs).

The cash position (Savings Fund) was recommended as a source of dry powder and liquidity in the event that: (1) bonds experience a rise in yields (and drop in prices) or stocks pull back following a period of strong gains; or (2) Bruce requires an early down payment for a vacation property.

The couple’s investments with Steadyhand totaled $340,000 at the beginning of the year ($270,000 RRSPs, $25,000 TFSAs, $45,000 joint investment account). At this level of household assets, their annual all-in fee is roughly 1.10%.

Bruce and Courtney have their financial house in good order. There are sure to be bumps in the road and decisions to make, however, as life plays out. We’ll keep you posted on their progress.

I was reviewing a new client’s portfolio last week and I stumbled across the Manulife Simplicity Balanced Portfolio. It’s a fund-of-funds product, meaning it holds a basket of mutual funds. In this case, the Portfolio holds 18 funds (as of December 31, 2010), which are managed by 13 different firms (manager in parentheses):

• Manulife Canadian Large Cap Value Equity Fund (MFC Global)
  
• Manulife Canadian Bond Fund (MFC Global)
  
• Manulife Canadian Universe Bond Fund (CIBC Global)
  
• Manulife Canadian Fixed Income Fund (Addenda Capital)
  
• Manulife International Equity Fund (Templeton)
  
• Manulife Mawer World Investment Class (Mawer Investment Mgmt.)
  
• Manulife Mortgage Backed Fund (MFC Global)
  
• Manulife Canadian Large Cap Equity Growth Fund (McLean Budden)
  
• Manulife Fixed Income Plus Fund (Alliance Bernstein)
  
• Manulife U.S. Equity Fund (Alliance Bernstein)
  
• Manulife Small Cap Value Fund (Foyston, Gordon & Payne)
  
• Manulife Global Equity Fund (Capital Guardian)
  
• Manulife Growth Opportunities Fund (MFC Global)
  
• Manulife U.S. Small Mid-Cap Equity Fund (Goldman Sachs)
  
• Manulife U.S. Diversified Growth Fund (Wellington)
  
• Manulife Canadian Equity Value Fund (Scheer Rowlett & Assoc.)
  
• Manulife Canadian Equity Fund (MFC Global)
  
• Manulife Canadian Large Cap Growth Fund (Greystone)

The fee on the product is 2.59% (3.13% for the segregated version). While the managers are reputable and experienced, there are nonetheless 13 cooks in the kitchen. I haven’t done the math, but I’m guessing there are well over a thousand stocks in the Portfolio, likely with a fair degree of overlap between managers. Over-diversification is a real danger here. No matter how much statistical analysis is done, with seven Canadian equity funds, six foreign equity funds and five fixed income funds, it’s difficult for products like this to not just be very expensive index funds.

This doesn’t look like a simple dish to me. Maybe that’s why it comes at a premium price.

By Scott Ronalds

At Steadyhand, we think we’ve got the best business model and investment philosophy around. We offer investors access to talented and experienced investment managers (who are typically only available to the ultra-wealthy) and straight advice. We invest alongside our clients, charge low fees and provide timely & transparent reporting. Further, simplicity is a pillar of our company.

But ... we’re also biased in our assessment, and there are certain things about our business that we can improve upon. Here’s where we’d love to hear from you. In the comment box below, let us know what aspect(s) of our business we can enhance. Is our service/advice offering unclear? Is our fund lineup too limited? Do our reports and blogs put you to sleep? Do you want to hear more from our managers? Would you like to see more tools on our website? Is there too much paperwork in getting started? Does Tom need a new pair of glasses? You get the point. Don’t hold back.

By Scott Ronalds

It was a skittish quarter for stocks. The Canadian market had a rough spring, as commodity-related stocks gave back some of their gains from earlier in the year. The U.S. and Japanese markets were largely unchanged, while Europe was mixed. Bonds, on the other hand, had a strong quarter, as investors embraced safety and yields declined further.

Our funds held up relatively well, given our managers' focus on high-quality companies and lack of exposure to the mining sector.

In this podcast, we review the quarter in further detail and highlight some of the key takeaways from our Quarterly Report.

Download, subscribe via iTunes or RSS, or listen now:

Fund (as in mutual) has become a dirty word. I was reminded of this the other day when Tom was lamenting over all the negative connotations associated with mutual funds.

What was once a beautiful concept – investors pooling their money in a shared vision of investing in stocks, bonds or other assets through the expertise and guidance of an experienced professional – has been tainted by high fees, over-diversification, poor performance, index hugging and questionable client-manager alignment. Not to mention a lack of sex appeal.

But the mutual fund is still the most effective vehicle for most individuals to achieve their investment objectives. It just has to be structured right.

In an environment of record low bond yields, high-flying (and free-falling) IPOs, volatile commodity prices, and exotic ETFs, investors may soon be longing once again for experienced, professional management at a reasonable cost. As dull as it may be.

I for one can think of a few other four-letter words that may prove to be much more offensive in coming years. Bond, debt, and gold come to mind.

By Scott Ronalds

We’ve all dealt with it and it drives us insane. Calling a toll-free number and following an automated voice prompt. Just give me a damn human voice!

Pretty much every big business uses them. Yet, I don’t know of a single person who likes responding to synthetic voice instructions or let alone finds the process helpful and efficient. A website now exists that lets you enter a company’s name to find tips and shortcuts to speak directly with a human. Check it out, www.gethuman.com. If you enter United Airlines, for example, you’re told to “ignore the talking voice and press 0 at each prompt – three times”. The search results also tell you that the average wait time to get through to a human at United is 6 minutes.

Somewhere along the way, something went wrong with customer interaction. The fact that gethuman.com even exists proves just how far we’ve fallen. According to the financial decision makers, it’s all about costs and scale. But are costs and scale more important than human interface and an efficient client experience? The banks, airlines, cable companies, utilities, etc., sure think so.

Here’s a tip if you’re trying to get through to a human at Steadyhand. Call 1-888-888-3147. Press nothing else. Average wait time: 2-5 seconds. Chris, Sher, myself, or if need be, Tom will pick up.

Get human.

By Scott Ronalds

Our Global Equity Fund has had a poor stretch of performance since early 2010. The fund’s manager, Edinburgh Partners Limited (EPL), is the first to admit this. While they don’t manage the fund with a close eye on what the index is doing, any sustained period of under-performance is cause for concern. There are occasions when a dispassionate, comprehensive review is required. This is one of those times.

The manager recently prepared a detailed analysis that examines: (1) the portfolio’s structure and performance; and (2) market valuations. Here are the key takeaways.

Portfolio Structure and Performance

• Investors have been focused on growth prospects in the developing markets. Specifically, companies with exposure to emerging market consumption and commodities have performed well. These companies have not been limited to the emerging markets, as a number of European and U.S.-based luxury goods, automotive and engineering companies have shown strong price performance.
• EPL agrees with the consensus view that the emerging markets are poised to grow at a much faster pace than the developed markets. They believe, however, that the majority of companies were already pricing in this differential.
• While companies with the highest growth rates may have good prospects, their valuations imply that their profit margins will continue to rise and sales growth will continue to accelerate. Yet, margins are already at peak levels and sales growth is likely to slow in a world with a significant debt overhang. Investors are thus paying a premium for growth and/or making unrealistic assumptions about what is achievable over the next five years.
• The portfolio’s investments are concentrated in companies whose long-term forecasts are achievable in a slower growth environment. Included in this group are: (1) companies with attractive emerging market exposure that trade at reasonable valuations (Unilever, Heineken); (2) “mature” technology companies (Cisco, Applied Materials); (3) European companies in unfashionable businesses such as banking and insurance (UBS, Aviva); and (4) select Japanese companies (still viewed as the cheapest major market in the world).

Market Valuations

• The portfolio currently has a pronounced “value” bias. It is concentrated in stocks with low price-to-earnings (P/E) multiples, low price-to-book value ratios, and slightly higher dividend yields.
• The current structure reflects where EPL is finding investment opportunities today and is not how the portfolio will always look. In some periods, it will have more of a focus on companies with strong growth potential, if such growth is not being valued appropriately. EPL feels strongly, however, that investors are currently overpaying for growth. In fact, the portfolio exhibits the most extreme “value bias” in EPL’s history.
• Importantly, although the portfolio has an extreme value orientation, it does not hold a large proportion of cyclical stocks (which include paper and mining-related companies, among others). Such stocks can exhibit volatile price swings.
• Based on current valuations, higher growth stocks are trading at a 40% premium to value stocks. They will need to grow earnings at a higher-than-normal pace over the next five years to achieve fair value in the manager’s view. Value stocks, on the other hand, only require earnings growth of roughly half their historical long-term rate to achieve fair value, which would come with attractive price appreciation.

EPL believes that if their forecasts are broadly correct, strong absolute performance can be expected from the portfolio over the next five years. Valuation differences (between growth and value stocks) look to be particularly stretched and while the timing of the reversal can’t be predicted, history suggests that when the axis tilts, it can happen in a very short space of time.

By Scott Ronalds

I learned last week that the HealthShares Dermatology and Wound Care ETF has been shut down. A shame, really. Seemed like a solid backbone for a portfolio. Investors who like their ETFs sharp and narrow need not fret, however, as the Direxion Daily Agribusiness Bear 3X Shares ETF is still around (for the time being).

Forbes magazine recently came up with a list of the 15 most outrageous ETFs. Along with the aforementioned, the iShares S&P North American Technology-Multimedia Networking Index Fund, the PowerShares Autonomic Allocation Research Affiliates Portfolio and my personal favorite, the soon-to-be-launched Market Vectors Mongolia ETF, also made the list. Without a doubt, there are some cracks in the ETF halo.

Not only are these products obscure, they can be dangerous for investors not knowing what they’re getting into. As Forbes notes, “Such is the way of things in the byzantine world of ETFs, where offerings have exploded in recent years. Nearly 900 ETFs have been launched over the past five years, leading to a preponderance of funds that straddle the line from obscure to downright bizarre…”

Clearly, bizarre sells well these days. How else do you explain Lady Gaga, The Sister Wives and Charlie Sheen? We’re all a little intrigued by the ludicrous; the last place it belongs, however, is in your portfolio.

In Connor, Clark & Lunn’s latest outlook, they assess the recent pullback in commodity prices. After a sharp run-up that began in early 2009, many commodities have been in retreat recently. Silver has grabbed the headlines, falling over 30% since late April, but copper, gold, oil and many others have been sinking as well.

Is this dramatic reversal the end of a bull market or just a correction in an ongoing upward trend? CC&L looks at four factors in their assessment: (1) supply/demand, (2) liquidity, (3) technical conditions, and (4) the U.S. dollar.

From a supply/demand perspective, the enduring debt problems in Europe, supply chain issues in Japan, slow GDP growth in the U.S., and a deliberate slowing of economic growth by the authorities in China all point to a weakening in final demand for commodities.

As for liquidity, there is growing concern that the coming end to the recent phase of quantitative easing (‘QE2’) will take away a major source of buying (demand).

From a technical perspective, a lot of speculators may be taking some chips off the table because of the huge gains that have been realized over a short period of time. As well, sentiment may be changing as investors react to increased margin requirements. Further, CC&L notes that the recently announced Glencore IPO ($65 billion) is seen by many as a cashing-out by the largest group of commodity insiders.

Finally, the recent strengthening in the U.S. dollar (against major global currencies) is one of the key factors in the unwinding of a lot of commodity positions. Ongoing weakness in the U.S. dollar has been an important source of strength for commodities (the greenback is negatively correlated to commodity prices), but a reversal of this trend could be detrimental for prices.

CC&L feels the end result is that commodity prices will probably enter a wider trading range until the economy takes a more definitive turn (either up or down) or there is a major move in the dollar.

These factors suggest that the tailwind behind the commodity bull market could change direction in the near term. This isn’t to say that the long-term trend will be downward. A convincing case can be made that a growing world-wide middle class will be a hearty consumer of natural resources. Indeed, the China and India stories are hard to ignore. Commodities have historically been a volatile asset class, however, and there is seldom a one-way street in price movements. Moreover, history has shown that the downturns can be particularly punishing.

It is for these reasons that our funds are positioned cautiously in the sector. Our managers own very few precious metal stocks and have stayed well away from the more speculative areas of the market where valuations are hard to justify. Their focus instead is on oil & gas producers, which is a sector where they continue to see strong fundamentals and good long-term growth prospects.

“If I’m curt, then I apologize. But as I understand it, we have a situation here and time is of the essence.” - Newman

I’m a Seinfeld junkie. One of my favorite episodes was “The Muffin Tops”, in which Elaine’s former boss (Mr. Lippman) decides to open a business that sells muffin tops. He runs into a problem, however – he can’t get rid of the undesirable bottoms. Cue Newman, a.k.a. The Cleaner, who is hired to make the problem go away (by eating the muffin stumps).

It looks like Newman has paid a visit to AGF. The fund company purchased competitor Acuity in February and is acting fast to get rid of the unwanted offerings in its lineup. This involves merging 9 Acuity funds, pending approval by unitholders and regulators – 8 are being merged into AGF funds and 1 is being merged into another Acuity fund.

We don’t view fund mergers in a positive light for a number of reasons. For one, the fund being merged is often repositioned or assigned a different mandate, meaning that an investor’s original reason for buying it may no longer be applicable. Second, the common practice is to merge an underperforming fund into one that has a better record or falls into a more popular category. In other words, the fund company may simply be chasing performance. Further, a fund merger can remove a weak performing fund from a company’s lineup and thereby mask a history of poor money management. (For more on the topic, see our article Patience in Investing – The Exception)

We don’t have an axe to grind with AGF, but their latest round of mergers does illustrate our point. A few observations:

• 6 of the 9 Acuity funds are being merged into a fund that falls into a different fund category (based on Morningstar data).
  
• 8 of the 9 funds being culled have a worse 3-year performance record than the fund they’re being merged into (we looked at 3-year performance, as most of the funds do not yet have 5-year numbers).
  
• 6 of the 9 Acuity funds have been in existence for less than 5 years (were the managers given a suitable time horizon to achieve their objectives?).

With the purchase of Acuity, AGF acquired an additional 50+ funds to incorporate under its umbrella of close to 200 products. One positive of the mergers is that AGF is removing some of the clutter from the investment landscape. In our view, companies offer far too many funds, many of which have extensive overlap and/or mandates based on the latest trend. Our industry would be well served to grab a few more quarts of milk for Newman and set him loose on all the muffin bottoms.

The following is a recap of Edinburgh Partners Limited’s (EPL) investment in Carlsberg. It’s an example of a turnaround opportunity, which is a common theme in our Global Equity Fund.

To re-state the obvious, the recession and credit crisis of 2008/09 impacted many businesses around the globe. Corporate earnings and profit margins took a hit, and poor consumer sentiment and investor fear were damaging factors for many stocks.

As is often the case, over-reaction led to opportunity. Businesses that could weather the downturn and restructure by cutting costs and improving efficiencies looked like good bets.

Carlsberg was one such opportunity. The stock dropped nearly 70% in a two month span in late 2008 after the company cut its sales and earnings forecasts and the credit crisis was rearing its ugly head. Yet, Carlsberg presented a reasonable outlook for 2009 (and in fact reported decent earnings for 2008). Their stated focus was on increasing cash flow, controlling costs, “protecting earnings”, reducing capital expenditures, boosting sales in emerging markets and accelerating debt repayment.

The company faced another setback in the second half of 2009 in one of its key markets, Russia, where the government proposed a hefty excise duty tax that would lead to price increases and a feared ‘trading down’ trend to less expensive local beers.

At the time, Edinburgh Partners was eyeing the stock as a good turnaround opportunity. Their thesis was that significant earnings growth could be expected from margin improvement in European markets, sales growth in emerging markets (especially Asia) and from reducing debt. And while Russia presented uncertainty, the manager felt the risks were sufficiently factored into the stock price. Carlsberg was cheap in EPL’s view, and they purchased the stock in the fall of 2009.

Edinburgh Partners uses a 5-year earnings forecast model as part of their analysis and typically have an investment time horizon of 3-5 years or longer. The Danish brewer was an exception; it was sold after one year. By the summer of 2010, Carlsberg was well along the path of recovery. It had achieved double-digit growth in operating profits, strong revenue growth in Asia, and higher margins in all regions. Further, the decline in Russian volumes was smaller than expected. The stock had rebounded sharply on the improved results.

Carlsberg had delivered on its objectives faster than Edinburgh Partners had anticipated. By the fall of 2010, the stock had gained roughly 70% since their first purchase (in October ’09). The outlook for the company was still positive, but the stock was no longer cheap in EPL’s view and they sold the position.

Today, the manager is finding a similar opportunity in Heineken. The stock has been weighed down by weak European growth, but the company has significantly broadened its access to higher growth markets with the purchase of FEMSA’s beer unit (Dos Equis, Tecate, Sol). Further, Heineken is the world’s leading premium beer brand, and it trades at a lower valuation and offers a higher dividend yield than Carlsberg. The manager doesn’t anticipate the turnaround will be as brisk as Carlsberg’s, but the story is nonetheless appealing.

Although Carlsberg and Heineken are European-based companies, both have significant exposure to markets outside the continent. While Europe is out-of-favour due to the sovereign debt issues in the region, many investors are overlooking companies that have an old world address but a global reach. In EPL’s view, this negative sentiment is presenting attractive investment opportunities.

A final word on Heineken: it’s the preferred lager of this author, which should provide a good boost to short-term revenues so long as the Canucks don’t take a premature bow out of the playoffs. Early signs are encouraging.

By Scott Ronalds

Stock markets pushed forward in the first quarter despite some strong headwinds, including revolutions in North Africa, the earthquake and tsunami in Japan, and lingering sovereign debt issues in Europe. It goes to prove that the linkage between headlines and market returns is anything but precise.

In this podcast, we review the first quarter of 2011 and highlight some of the key messages from our Quarterly Report.

Download, subscribe via iTunes or RSS, or listen now:

Tom was on BNN earlier today discussing how Steadyhand’s funds are positioned to tap into the global recovery and growth in the emerging markets.

Unlike some managers, our approach isn’t focused on loading up on mining stocks and direct plays on China. Rather, we want exposure to profitable, growing businesses with a broad global reach at the best prices we can find.

In our view, this means concentrating on energy (oil), technology and consumer-related stocks, among others. We also believe it’s wise to have healthy exposure to companies outside Canada. In particular, our managers are finding value in European and Japanese companies that have a leg in the emerging markets.

Some call it a contrarian approach. We call it balanced.

Click here to watch the clip.

By Scott Ronalds

Wil Wutherich, the manager of our Small-Cap Equity Fund, is in town this week on a research trip. We booked an afternoon of his time to review the fund and get some further insights on some of the stocks in the portfolio.

Download, subscribe via iTunes or RSS, or listen now:

By Scott Ronalds

If you drive by 3rd & Burrard in Vancouver, you’ll sometimes hear a loud reverberating sound coming from a stand-alone building nestled between the car dealerships and art galleries. Don’t be alarmed. It’s just us screaming our investment philosophy and industry observations from the rooftop. Some of our neighbours (and competitors) find it annoying, while other observers find it refreshing. We simply find it necessary, if not a little therapeutic, in this crowded landscape.

Today the bullhorn is pitching the virtues of concentration – a key tenet of our philosophy. We believe that by focusing on a limited number of stocks (20-30), portfolio managers have a much greater understanding of the businesses in which they invest and a higher level of conviction in their best ideas. A fund with a vast number of holdings stands little chance of outperforming the market, as it runs the risk of simply mimicking it. Perhaps Warren Buffett said it best, "Wide diversification is only required when investors do not understand what they are doing."

Concentrated investing isn’t for everybody. There will be periods when our funds move in cycles of their own and will be out-of-synch with the index. This can feel lonely at times, but if you are seeking to beat the index over the long run, you need to ignore it over the short term. You need to be concentrated.

Morningstar (USA) published an interesting piece the other week on the topic (Focused Foreign Funds Are in an Exclusive Club). They report that most funds don’t follow a concentrated approach: “Just over one third of actively managed domestic [U.S.] core funds held fewer than 50 stocks recently.” Further, they found that only 6% of foreign (large-cap) funds held fewer than 50 stocks.

How have those concentrated foreign funds fared? Quite well. According to the author, a much higher proportion of ‘focused’ funds produced top quartile returns than their less-focused counterparts over the past 10 years.

Our equity funds are among the most concentrated of their kind. Our Small-Cap Equity Fund currently holds 17 stocks, our Equity Fund holds 25, and our Global Equity Fund holds 39. One thing you’re assured of at Steadyhand is concentration.

As we watch the horrific destruction in Japan, we are well aware that our Global Equity Fund owns a number of businesses in that country. Roughly 20% of the fund is invested in Japanese stocks.

At this time, we don’t have any information or insight to pass along beyond what is available in the public media. It goes without saying that the loss of lives and property is tragic. It’s worth noting, however, that the market’s short-term reaction to natural disasters frequently assumes a more dire impact than is often the case. As we consult with Edinburgh Partners (the manager of the fund) in the coming days, we’ll be sure to provide an update on the situation.

Tom discussed Longleaf Partners’ annual letter to shareholders in a blog posting yesterday. Today, the grand-daddy of all shareholder letters is in the news – Warren Buffett’s. I’m beating Tom to the punch for a synopsis, as his posts in previous years have been a little ‘drawn-out’ (The Buffett Letter #1, The Buffett Letter #2, The Buffett Letter #3, The Buffett Letter #4). I promise to keep it tight.

This year’s letter to the shareholders of Berkshire Hathaway was released on the weekend. As usual, it’s getting plenty of attention in financial circles. Some of the noteworthy items being highlighted include Buffett’s:

• Bullish view on America (“The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective ... America’s best days lie ahead.”)
  
• Desire to make a big acquisition (“Our elephant gun has been reloaded, and my trigger finger is itchy.”)
  
• Confidence in a housing recovery (“A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point.”)

There are a few reminders of Buffett’s investment style that stand out:

“Fund consultants like to require style boxes such as “long-short,” “macro,” “international equities.” At Berkshire our only style box is ‘smart.’”

“At Berkshire we face no institutional restraints when we deploy capital. Charlie and I are limited only by our ability to understand the likely future of a possible acquisition.”

Buffett’s success in beating the market over the past 45 years has come from a long-term perspective (“At Berkshire, our time horizon is forever”), an independent viewpoint and an unconstrained approach.

By Scott Ronalds

At our recent client presentations, there was a subtle shuffling of feet and an air of unease when the topic of Japan came up. Japanese stocks have been an area of increasing interest for our global manager (Edinburgh Partners) and we laid out the reasons why:

• Japanese stocks are cheap on several measures.
  
• The proverbial story of an overvalued stock market and stagnant economy is outdated. Despite an ugly aggregate picture, there are key areas of strength and businesses worth owning.
  
• The future for China lies in increased consumption and Japan holds strong market leadership in consumer electronics and manufacturing/automation.

Yet, investors still love to hate Japan. The country’s stock market has trended downward for two decades, its economy has sputtered and its demographics are unfavourable (the population is the oldest in the developed world). The warts are easy to see, which is why most investors prefer to ignore the region.

Lately, however, Japanese equities are raising some eyebrows. As mentioned, Edinburgh Partners likes the prospects of select stocks and feels there is cause for optimism. The firm’s CEO, Sandy Nairn, has scripted a précis on why he believes the market is worthy of investment. You can download the summary here (a warning, though – it’s 19 pages long and quite technical).

Warren Buffett plans to visit the country soon and noted last spring that he’d like his company (Berkshire Hathaway) to make a big acquisition in Japan in coming years. His sidekick, Charlie Munger, noted that Berkshire is “quite favorably disposed to doing more in Japan.”

The New York Times also recently published an article titled Japanese Stock Market is Getting New Respect which suggested that fire-sale stock prices are slowly attracting more investors. The piece quotes a New-York based manager: “Japan is by far one of the cheapest markets in the world … it’s so universally hated, yet it might be one of the world’s best-performing markets over the next five years.” The article cites some interesting facts:

• Nearly two-thirds of the 1,700 companies listed on the Tokyo exchange have price-to-book ratios below 1 (meaning if one of those companies was dismantled and sold off for parts, it would fetch more than its market value).
  
• Despite a recent up-tick, the market is still more than two-thirds off its 1990 peak.
  
• Some companies are starting to raise dividends and have announced share buybacks to counter longstanding investor complaints that companies hoard too much cash.

Further, the author suggests that Japanese export-oriented companies seem like a less risky way to invest indirectly in the Chinese growth story, and if the inflation emerging in other countries spills into Japan, it could help reverse depressed prices, which would be positive for the market.

The Japanese market has been down-and-out for 20 years – enough to discourage many investors. But stocks are cheap and the country is well-positioned to benefit from increased consumption throughout Asia. Our global manager sees Japan as fertile ground for value. It appears that the country is slowly starting to get a little love from other managers too. We recognize that the Japanese story is an uneasy one for some investors, but we strive to be transparent in our communications. Our discussions on unloved investments may lead to more feet shuffling and unease at future client presentations. Thus, we’re thinking of serving wine beforehand – which may tie in nicely with our conversation on France.

The manager of our Equity Fund, CGOV, recently published a short piece that addresses a timely topic – inflation. With commodity prices rising across the board, investors may be curious as to how certain companies are affected by this trend.

CGOV references five portfolio holdings to illustrate how some companies will benefit from rising prices while others will feel the pinch.

The manager’s key takeaway is that the Equity Fund is well positioned to withstand an environment of rising commodity prices, as roughly 25% of the portfolio is invested in commodity producers (e.g. Suncor, Potash Corp and Crescent Point) and several companies have sufficient pricing power that enables them to pass through rising input costs to their customers (e.g. Unilever and Nalco).

Click here to read the full report.

If you don’t have a Tax-Free Savings Account (TFSA) yet, get on it. It’s a rare government sponsored plan that encourages the sheltering of investment income and gains from tax. For a primer on these savings vehicles, check out a blog we posted at the time of their introduction.

TFSAs were established in 2009, which means that you now have $15,000 in contribution room (three years’ worth) if you haven’t yet opened an account.

There has been considerable debate in financial circles about whether it’s more advantageous to contribute to an RRSP or a TFSA when saving for retirement. If you have a low income, the TFSA may be the route to go; whereas higher income earners may benefit more from the upfront tax deduction afforded by RRSPs. In my opinion, investors should contribute to both types of plans, if possible.

As for my strategy, I’ve sold some of my non-registered investments and invested the proceeds in my Steadyhand TFSA. I triggered a small capital gain in the process, but the future tax-free growth will more than offset the small tax liability.

All of my TFSA contributions have gone into our Small-Cap Equity Fund. I look at all my accounts (RRSP, TFSA and Investment Account) on a consolidated basis when reviewing my asset mix, and have modified my RRSP contributions to keep my overall mix in check.

While I own all three of our equity funds, the Small-Cap Fund will likely produce the greatest capital gains over time, which is why I’m holding it in my TFSA. This strategy makes sense for me because I don’t intend to tap into my account in the short-term. The other fund that would be a good candidate for the plan is our Income Fund, as it generates a stable stream of income that would be sheltered from tax, but I hold a smaller proportion of this fund in my RRSP.

This strategy may not be suitable for everyone, but it works well for my situation. If you’re grappling with a strategy of your own, give us a call. We’re happy to be a sounding board.

Morningstar’s David O’Leary recently wrote a research report on our Small-Cap Fund. The piece, titled There’s a Lot of Potential in this Obscure Fund, is available on Morningstar’s website for subscribers to their premium service.

Morningstar also published a short video yesterday in which David and a colleague review the fund. Key points of discussion include the portfolio’s tight level of concentration, the manager’s investment style, and how the fund is different from many of its peers. Small, unconstrained and ‘quirky’ are the main themes. If we’ve piqued your interest, you can watch the clip here.