As we were putting the finishing touches on our Money Issue last month, I got a call from a money manager here in Edmonton. He and his partner wanted to take me out for coffee and explain about their passive investing philosophy.
If you’ve had a chance yet to read our cover story for this month, “Rethinking Money,” you’ll already know that they were preaching to the converted. Still, Chris Turnbull and Marshall McAllister, who opened an Edmonton office of Winnipeg-based Harrow Partners Private Counsel in the historic Lamarchand Mansion overlooking the river valley last June, have their own, innovative take on passive investing that deviates from the norm of indexing.
McAllister, 33, the quantitative wonk of the two, talked about how, as a portfolio manager with RBC, he became captivated several years ago by the research coming out of the University of Chicago and other schools. That research, though based on the premise of efficient markets, explored how certain kinds of value managers and small cap managers did manage to consistently beat the stock market indices (though usually at the price of higher volatility).
Harrow has developed a number of quantitative tools for assembling low-fee portfolios for high-net-worth investors (with more than $1 million to invest) and small institutions that, like classic index funds, require no management fees for stock-picking. However, unlike index funds, they do not simply reflect the index. That has a couple of advantages, they say, over the exchange-traded funds advocated by Terry Shaunessy and Bruce Sellery in “Rethinking Money.” First, it allows Harrow to create for a client who, say, has a huge position in the oil and gas company he works for, a portfolio that excludes energy as a kind of hedge. Second, it does not require the investor to pay the premium that typically gets added to the price of a stock when it gets included in a major index like the S&P/TSX 60 – simply because all the other index funds have to buy it the same day – which itself is an inefficiency in the marketplace. Moreover McAllister and Turnbull have evidence that their approach can actually beat the index, albeit by a slim margin.
Exactly how the Harrow Partners arrive at their algorithm for buying stocks that reflect the broader market is, to tell the truth, over my head (a lot of it seems to come from academic models). Nonetheless I can say that it’s yet another sign that the investment industry is subject to competitive pressures like any other, and thanks to the growing efficiency of capital markets – as Turnbull put it, “every time Tiger Woods turns on a light switch we all know about it” – there will be more and more options for investors to lower their fees and possibly increase their returns at the same time. The days of the brokerage or mutual fund company charging $2,500 a year to manage your $100,000 portfolio – and still fail to match the index in performance – are numbered.
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The Edmonton CFA (Certified Financial Analyst) Society, at least, has the guts and good humour to hold the investment experts within its ranks to account. I was the society’s guest at its 32nd annual Forecast Dinner on Jan. 20, when as usual they trotted out three of the most respected Canadian prognosticators to give their take on where markets were headed, but not before first showing video and forecasts of the previous year’s speakers, which only highlighted how far off the mark even these wise men can be.
Among the 2010 speakers, Gary Smith, chief economist at Alberta Investment Management Corp., admitted how the consensus is now almost evenly split between the deflationists and the inflationists – leading him to adopt the mushy middle view of moderate growth for 2010.
Gary Chapman, managing director of Canadian equities at Guardian Capital LP, took a more bearish view, observing that governments and central banks were just substituting new, unsustainable imbalances (deficit spending, currency devaluation) for old ones (trade skews, consumer debt). Plus, he added ominously, there is the “known unknown” of tension over Iran’s nuclear ambitions which could disrupt oil exports from the Persian Gulf. Finally – and particularly worrying to an Alberta audience – he hinted that the United States could become a dumping ground for cheap liquefied natural gas simply because it has the most storage capacity.
Cheer up, though, and remember how often wrong such forecasts are. The results of last year’s forecast ballots from attendees were telling. My then-fellow editor from Alberta Oil, Patrycja Romanowska – not the hundreds of bona fide analysts in attendance – ended up winning for having the best guess of what the price of oil would be on Dec. 31, 2009. In January 2009 she predicted the year-end WTI price would be US$80 a barrel. The actual closing price was $79.46.
Fifty-four cents off. Not bad, Patsy.
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