We often talk about change, as if everyone understands the dictionary definition in pure context. Change can be subtle (use of Becel over butter), evolutionary (steam locomotive to diesel engine), or disruptive (more on that later). Today, changes that seem to be more topical are categorized as social and technological changes. Often rooted in the same foundation, a technological change is the process of constant improvement, whereby innovation, disruption and convergence result in a shared diffusion of new technology in industry or society.
Putting this in perspective, sometimes there are real life inflection moments that bring this to light. I was talking with my 10 year old daughter the other day. She was reading a book (unknown title) and she read something that engaged her to ask me a question. The question was simple, yet provided some context of the change, in the world around us. To paraphrase, the question went like this, “Daddy what is a Walkman?” I laughed a bit when I heard the question, because her question was remarkably innocent. I told her that it was a machine that played music when Daddy was younger, like an iPod. She took this at face value and read on.
Today, I think most households would be hard pressed to find a working Walkman laying around, just waiting for a cassette to be placed in it, for one’s listening enjoyment. Looking back, it seemed like this technological change happened almost overnight. The original Sony Walkman made its debut in 1979. The technology, at the time, was intending to replace 8 tracks and vinyl. Given its introduction timeline, the 1980’s could be defined as the Walkman decade. Sony then expanded the product line up to include: solar powered units, water resistant units and even a dual cassette drive! However, the ending to the story was anything but romantic. By the beginning of this century Sony was being displaced by new technology, when Apple introduced the iPod Nano in 2005. The Walkman became a relic, and, as detailed above, most kids today don’t even know what it was.
Living in the Moment
Sticking with the theme of kids, any parent reading this can attest that their kids are living in the moment. Whatever is happening right in front of them at the time, draws most, if not all of their attention. These kids are certainly not thinking about 10 years from now, what their lives may be like or how their investment portfolio will be doing. Why would they? They are just living in the moment.
The world, interestingly, has become focused on the moment as well (short term thinking). Technology can be partially to blame for this. At any given moment, in almost any part of the world where there is a mobile signal, one can be fully informed and up to date on anything from stock prices, the latest fashionista brands, to the global price of pork bellies (mmm BACON). Every second, of every day, there is someone willing and able to provide constant updates and information. In the investing world, living in the moment has taken on new meaning.
Many years ago, our family lived in the Bathurst and Finch area of Toronto. I remember there was a McDonalds near the corner of Bathurst and Steeles. At the time, 40 years ago when I was a kid, there was not much other than farm fields north of Steeles Avenue. I suspect, the local farmer who owned those fields, would have never imagined his fields would evolve to the neighbourhoods we see today or the bustling centers for commerce, that have replaced the corn fields.
Or consider, maybe the farmer was a long term, patient investor. Maybe he knew over the decades, that Toronto would grow up and out, and that his corn fields would yield much higher prices than he had ever thought of. While no doubt he was technologically, less “plugged in”, he likely did not know or care what the price of his Royal Bank stock was at every second of every day. Maybe he knew, that over time, the company would continue to pay him reasonable dividends and ultimately, it too would grow with the growth of Toronto and other parts of Canada. Maybe that farmer ignored what was going on in the world around him, and just focused on growing his corn and maintaining his long term approach in Royal Bank. Some will call this discipline. Others may suggest luck. At the time, I was living in the moment and just happy to be at McDonalds enjoying a Happy Meal. But some days, I wonder about what happened to that farmer who held all that land.
Yeah, So What!?
Yes times have changed, and most certainly will change again in the future. There is a constant deluge of information coming at us, with regard new products: ranging from low volatility, smart beta 2.0, factor based investing etc. These are all promoted on the premise that they can assist with the new normal of volatility times. We are also seeing a lot of opinions and predictions for 2016 – varying from the price of oil, and what will the OPEC cartel do, the ending level for the price of Apple or the S&P 500 in 2016. These opinions are from deeply scholarly, smart PHD types writing long theses, with supporting charts and insights on why they are right and how things will play out. BMO, Barclays, Goldman, Morgan Stanley etc., all want to tell us how 2016 will be and how we should now posture ourselves. This reminds me of a bad video release of Hot Tub Time Machine. But I digress…
Consider some of the broader thinking as we set up for 2016 (quoted but unsourced to protect the innocent):
- S&P 500 will likely suffer its first calendar year loss since 2008 – but longer term, the outlook remains bright
- Look to Financials and IT for real returns, avoid commodities
- The bull market remains intact, but corrections are necessary
- Value will outperform Growth
- Canada could surprise – I suppose given that the TSX is down about 8% this year any move to the positive will be well received
- Global volatility – will stick around
- Historical Asset Class returns should be reduced – think zero to negative returns for bondholders
The list can and will likely go on and on. Who’s right? Who’s wrong? It is impossible at this point to answer that question. Suffice to say 2016 will most likely remain a grind, as 2015 was. Wait, there in itself was another prediction.
Shifting Demographics – Begat a shift in Investment Policies
We remember the mid-1990s when some of the first energy investment trusts came to the market. In 1996, Shinning Bank was an energy trust that came as an installment receipt. This installment receipt had you pay $6 for the first piece, and were on the hook to pay another $4, one year later. The $6 first installment came with a dividend of $1.20! Meaning an implied yield of 20% for holding the paper for a year. The price of oil averaged $20.46 in 1996. Two years later, and Oil prices drop more than 40% to $11.91. Ultimately, investors in the original IPO worth $53M in 1996, saw the company being bought, less than a decade later in 2007, for $1.7 Billion. Crazy really, looking back. However, this set the foundation for a lot of early investors in understanding the nature of commodity sensitive investments and patience.
Today, we are starting to see similarities, as the price of oil has decreased by more than 60% from highs of $107 in the summer of 2013, to the current lows near $40. As a result, many companies in the energy patch have reduced or cut dividends. This should be considered normal course. In the early days of these investment vehicles, companies did little hedging of production; meaning the dividends paid from cash flows were widely volatile. Today, the story is different with most companies using deep hedging practices to smooth out cash flow from a pretty bumpy underlying asset.
This recollection about the history of one specific income trust gets back to the old axiom of “getting paid while you wait”. Today’s shift in demographics has a large pool of retired investors looking to monetize their retirement nest eggs. They are not necessarily comfortable with relying on a mandate to grow capital in order to meet their retirement lifestyle. For some, the story has always been in place; however, for others, this story is being challenged because of interest rates at historical lows. How low you ask!?
You think rates are low here in Canada – Ask a German investor what they think!
The chart below gives you a clear impression of just how low interest rates have become – the world has gone mad! If you are investing in German bunds (bonds), it will cost you money for the comfort of investing in these bonds for up to and including 7 years. Yes you read it correctly, you do not get paid any coupon on these bonds. You actually have to pay, in order to own them. Put in $100 in the bond and get something less than that, when they mature. Wait, this is where it gets good. This is a GUARANTEED return, albeit a negative return. Those investors looking for certainty are the ones buying these investments!
Source: VIP Wealth Solutions & Bloomberg
When we look at the chart above, we are reminded of the farmer and what a common sense person might think of this chart over the longer term. Will investors continue to buy bonds that provide negative returns? From our point of view, we cannot imagine a world where this continues forever. The rates on bonds will change. They will become positive again and German investors will likely be better for it. For now they are negative, so we watch and learn just how crazy things can remain.
The Holiday Season Is Upon Us
Every year we look at giving back and this year is no different. We have chosen to support individual families in need around the Toronto region this year. We looked at sending out seasonal greeting cards but we decided that expense would have better use on someone’s dinner table and under their tree this year.
The season is often one of giving thanks and we are reminded of how fortunate we are here in Canada. We are not being forced to walk out of the country with only the possessions we can carry on our backs. Nor are we in the middle of what appears to be an ongoing conflict zone. There is little getting in our way of economic prosperity and we have a reasonable health system.
Over the years, we have built and continuously strive to improve, the disciplined, rules based process in which we utilize as stewards of our client’s capital. This has fostered many trusted relationships that ebb and flow with the nature of our global economies. This we know will never change. It is part of living in the moment.
We would like to thank all of our new and longer established clients for the confidence they have entrusted with our team over the years and remain thankful for the ongoing support.
Wishing everyone a safe and prosperous holiday season and Happy New Year.
Thank you for your continued support and referrals.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.