Change: A constant in the markets

In this episode of Conversations on Wealth, Chief Investment Officer Craig Basinger identifies three areas of the markets that have changed significantly over time: technology; availability; and investor behaviour. Host Sarah Widmeyer and Craig explore how these themes have evolved and what these changes mean for you as an investor.

Sarah Widmeyer 0:15

Welcome to Conversations on Wealth, hosted by Richardson GMP, a podcast dedicated to helping Canadians navigate the complexities of wealth with a multi-dimensional approach to planning and wealth management.

I’m Sara Widmeyer, Director of Wealth Strategies at Richardson GMP, and this week we’re shifting gears to discuss advances in asset allocation and how clients should invest to reach their goals.

Joining me today is Craig Basinger, Chief Investment Officer at Richardson GMP. Welcome Craig.

Craig Basinger 0:50

Thank you very much for having me, Sarah.

Sarah Widmeyer 0:53

Our pleasure. So, change is certainly a constant in the markets. As the markets continue to evolve, so have the habits of and opportunities for investors. What are some of the biggest changes that investors should be cognizant of?

Craig Basinger 1:09

You are 100% right. If there’s any one constant when it comes to capital markets and investment markets it clearly is change. It can be very gradual over time, but we all often take some time and take a look at what has changed over time and what does that imply for how people should invest. My team and I, we run the firm’s Asset Management division, so we’re pretty closely tied to investing. So we probably spend a little bit too much time thinking about it. But, nonetheless, we have come up with some interesting takeaways on how things have changed over time.

I think there’s probably three buckets that have really changed the most: one is technology, the other is availability, and then also investor behaviors – and this is the way people invest and behave when they invest. On the behavioral side there have been some massive changes and if you went back, in the last 25 years the average holding period for an investor of a New York listed stock – sorry I don’t have Canadian data on this – but for a New York Stock Exchange listed company is two and a half years. That’s their holding period – the average. And of course, you can hide a lot in the average, but interestingly this is over the last 25 years. If you go to the previous 25 years to that, it was about six years. And then if you go to the previous quarter century so we’re getting back into the 60s, and all those good times, it actually goes up to 12 years.

So investor behaviors have changed and you know the markets invariably have become faster, and they are faster moving, and that has changed the way they behave, it has changed the kind of volatility that’s out there, and then variably should also somewhat change the way people invest. Another aspect that’s changed is choice. I looked on my Bloomberg this morning, there’s – within my Bloomberg there’s roughly ninety one thousand individual equities traded in the world. That’s quite a few there’s 138,000 funds or investment vehicles. Now, that is quite staggering and if you ask somebody “well, which one should I buy?” clearly nobody can actually have an answer for you because nobody can actually look at 138 thousand different available investment vehicles and make that decision. But nonetheless, choice has ballooned for investors and that has been a material change over the last decades.

Sarah Widmeyer 3:48

So Craig, I’m sorry I’m going to interrupt you. So, choice: I’m fascinated with the holding period of stocks. I remember my grandmother owned Bell, and she had Bell in her portfolio forever. And in fact, it’s now owned by other family members.

Craig Basinger 4:08

Well, you you should update them. It’s called BCE now. I remember my Northern Telecom stocks, but anyways.

Sarah Widmeyer 4:17

Yeah, Nortel. So, that’s an example of buying and holding and holding forever because they thought they were buying a piece of the company, which is essentially what a stock is. But there was a real concept that I was buying part of that company. So I’m just I’m fascinated. So, two and a half years holding period. I bet you now it’s probably less than a year.

Craig Basinger 4:45

Yeah, it varies. To be fair there’s some moving parts around there because there’s been ETFs that have risen to the forefront, there’s been high-frequency trading that have changed quite a few things. Also interestingly, if you go back to the first quarter century of the 20th century – so that’s 1900 to 1925 – the average holding period was a little over a year. So, if you remember the Roaring Twenties (if you remember reading about the Roaring Twenties) and the stock speculation that was going on back then, the holding period was very short back then as well. Not saying today’s market is similar in a speculation perspective. But people’s time horizon has changed. I think we, as a society, we probably suffer more from short-termism, if we can make that a word, now than we did before. We see it in companies reporting. A company, if they miss one quarter earnings usually they can get a pass. If it’s two quarters, they’re in the doghouse from the analyst community and the portfolio management community. There was a time where you would buy a company because they were creating value and you wanted to own them for 20 years because they were creating that value. I’m just not sure that discipline exists nearly as much today as they used to.

Sarah Widmeyer 6:03

Right, so I interrupted you before you got to your third bucket.

Craig Basinger 6:08

The other one is technology. When I started in the industry – and I’ll date myself, it was the mid nineties – but when I started in this industry, we used to have clients call us for stock quotes. “hey what’s the bid-ask on ABC,” or “where’s that trading today,” and that wasn’t that long ago. I guess it was depending on who you’re talking to, but for me it wasn’t that long ago. And back then people were charged invariably to trade.

The whole advice industry was predicated on, we will earn our revenue when you trade. That too has changed considerably. And maybe that’s also what’s contributing to shorter holding periods, because all of a sudden if you had to pay to trade you might hold onto your Bell much longer or put it in your safety deposit box. Nonetheless, the research available on companies, on funds, on ETFs has exploded. Information is now available on your cell phone. You don’t even need a computer anymore, you can get access to everything. There’s blogs you can read that’ll opine about any company out ther,e that’s free to access that you can just read what people think of something. It’s really that flow and volume of information has dramatically changed over the last 20-30 years.

Sarah Widmeyer 7:34

You brought up an interesting topic around fees. You’re right, back in the olden days people paid to transact securities, and that’s where, from an investment firm perspective, a lot of money was generated through transaction fees. Now the switch has become the trading is relatively less expensive, far less expensive. Certainly, you’re not even being charged per transaction if you’re in a fee-based account. But the fees of switch to value for advice. How has that trend, or has that trend – switching from paying for transaction to now paying for advice and a holistic advice – has that changed investment approaches?

Craig Basinger 8:23

I think it’s changed investment approaches and it’s also increased a lot of the transparency. If you talk to anybody today fees gets top of mind pretty quickly. The fact is fees have come down considerably. If you went back to when people did own Bell Canada to actually transact, it cost money you know somebody who had to write like a blue ticket, it had to go to a vacuum tube, and get down to the exchange, and somebody had to handle it.

Now transactions happen with ones and zeroes on computers and it actually is almost costless from a transaction perspective. What’s happened with that – and that’s good because the cheaper you can do something, the better – where the fees have transpired or moved to is actually on the transparency side they now break them up quite effectively. In some cases people pay for pure investment management. That’s if you’re owning funds it’s like the MER of the fund: it’s paying for the the custody, the trading, which doesn’t cost that much, but then the portfolio management.

And then you have your advice fee that is paying for your Advisor to provide you with fund selection, asset allocation, your financial plan, your estate plan and other aspects like that. So, it’s actually become much more transparent and much more aligned with – relative to what it used to be – because somebody doing a transaction, and then trying to bucket that as all the revenue of an industry, and then trying to parse it out to provide these other services just didn’t make sense. I think from a fee perspective it’s become a lot more transparent and it’s become a lot more aligned with where the actual service is, so that an individual investor can ascertain: are they getting value for that fee whether, it’s at the investment management level, the advice level, the planning level, etc.

The other really interesting thing is, because the the cost of transactions have come down over the last number of decades considerably, has enabled the rise of the ETF’s – Exchange-Traded Funds. I’m generalizing here because now some ETFs are actually actively managed, some are smart beta, there’s all sorts of different factor base, there’s all sorts of different nuances. So, I’m going to generalize. When I say ETF so I’m just going to talk about the broad market ETFs that effectively give people broad market exposure at an exceptionally low investment management cost. That has a huge benefit because you can then parse out some active, some passive and blend things together. From our perspective, we’re firm believers and people should use the the low-cost market exposure ETF’s as a component of their portfolio to bring the overall cost down. There are some markets that are less efficient that potentially a more active manager can either add potential performance enhancement or better control risk, which is more often the case. But nonetheless, it’s enabled this environment that you can actually almost customise your fee profile and still build really fabulous portfolios.

Sarah Widmeyer 11:32

Yeah and I’ve heard of that, where the kind of core and explore. The core, you’re using ETFs where the information exchanges, everyone has the same amount of information available to them. So there’s there’s not a lot of ability for a manager to add value in the broad-based markets. But in the exploration, whether it’s emerging markets or whether it’s a specialized niche, investment niche, that’s where you pay the investment manager to outperform the Alpha. That’s where you you pay for the Alpha.

Craig Basinger 12:11

Yeah, and in a lot of cases I think that that’s the way portfolios have been evolving. Like I said, we like to use ETFs for some broad market exposure, but then there’s other areas that you want to change that profile. And it can be enhanced returns but also, as I mentioned, can be more often controlling risk. If you think back to the – not to pick on the tech bubble – but if you think back to the tail end of the tech bubble, Nortel had a 35-40% weight in the TSX. So, if you’re sitting there going “I just own ETFs because I want the broad market ecposure” Well, you own 40% of one company. Don’t get me wrong, that helped that index crush it for year leading up to the peak, and then the opposite happened after that.

I think there’s two different sides of it, but combining them can really create a much more cost-effective solution. I would say though that it shouldn’t just be cost. That’s one of the dangers that we I’ve seen happen because in our industry people are always competing for assets, and portfolios and that type of thing, and very often they just run in and they compete on costs. They’re going “You’re paying X, I’ll do it for X minus ten basis points.” In reality that ten basis points isn’t going to make that much of a difference over time if the value of advice is somehow impaired.

As I like to put it, and we’ve seen this in US ETFs – it’s actually kind of entertaining – some of the big US ETFs have an MER of nine basis points and then one of their competitors will come out and they’ll have seven basis points. And the nine basis point one will see outflows for a year or two into the competing cheaper one. And you kind of sit back there and you go, two basis points actually even though – it’s pennies – and even though we’re ten years, it isn’t going to make a difference. It’s actually going to matter if I buy it at 10 o’clock this morning or 10:15. That decision is going to have a much more magnified impact than those two basis points. But we’ve all been pre-programmed to only focus on fees in some cases, and I think that can lead people to making bad choices.

Sarah Widmeyer 14:30

Right. You also mentioned as one of your buckets that there’s a huge amount of choice now. I think you referenced 138,000 different funds. Is that good?

Craig Basinger 14:46

Maybe. If you believe in our consumer driven economy and capitalistic model, more choice is always better. But you’re right, there could be too many choices, leads to information overload and choice ambiguity. It’s like, I don’t know, there’s too many to choose from, just give me these three and move on. So I think there is a lot more choice and that can be good, can be bad. I think one of the benefits, though, along the choice lines is if you go back 10-20 years, a whole bunch of different strategies were not available to individual investors that are available today. That includes ETFs at the low-cost end of the spectrum for broad market exposure. When I say 20 years ago they weren’t available to individual investors, they were available to institutions: pension funds, endowments, like large pools of assets did have access to all these different strategies. It just hadn’t made it down to the individual investor level.

You fast forward to today, and that’s just not the case. A lot of the obviously cheap market exposure ETFs are available at very low price points to any investor out there. And then you have alternative strategies: long, short, market neutral, macro, many of these are now available at the individual level. And then you have real assets in things like gold and commodity investing – all these are available to investors now.

Of course that brings us back to the question that you started with: are all these more choices – is it good or bad? And that does get complicated because in a lot of cases, once you start to go out of the plain vanilla and into the, let’s just call them newer asset classes – and this can even be sort of emerging markets and more international investing than people used to do – the more you start to go into these different areas, it does require more homework, more due diligence, a better investment process for ascertaining if it is a good investment process and something that should be added to your portfolio. And with that, given there’s so many to choose from, that is a lot of work and I think that becomes more onerous on investors today.

Sarah Widmeyer 16:56

And I think it also drives us back to value for advice and and making sure that you’re working with a great Investment Advisor that knows what your short-term and long-term goals are, what you’re trying to achieve within the portfolio; may know what your investment biases are; and whose job it is to stay on top of the investment choice to work with you in your portfolio. It’s the one thing that I always worry about with do-it-yourself investors. With all of the choice that’s available, it’s hard to become an expert in any one field. So when you are where with an Investment Advisor, and one of the benefits of working with an Investment Advisor is they have access to all of this information and all of this expertise: you, your team, other research that they can bring to bear to help you achieve both your short term in your long term goals, and help avoid you know running into potholes and being overexposed, perhaps to alternative investments or private equity, or some of these other newer asset classes for the general investor.

Craig Basinger 18:13

Yeah, and I’ll share one other aspect that I think is really important, especially when it comes down to the Advisor. There’s 138,000 investments out there, they all have great pitches, they all look fantastic. If you look at any one of them individually they will show that they are great and that you should own them. But the problem is, that shouldn’t be how you build portfolios.

It would be similar to if you went into the doctor’s office didn’t meet with the doctor and they just prescribed a green pill – “this is the best pill out there, this is the pill you need, I really don’t even know what’s wrong with you but you should eat this pill because that’ll make you better.” That’s the way a lot of the product space is oriented because they’re trying to say that their product is the best. Where in reality, what you need to do is sit down with your doctor tell them, inform them what’s wrong and then have them prescribe which treatment is best for your ailment. I’m not saying doctors are Advisors or Advisors or doctors. But from an advice channel side, it isn’t even just the individual investment that matters, it’s how that investment fits not only to your overall long term and short term plans, but then also how it fits within your portfolio, and the other things you own in there. You can’t do it on a one-off basis, you need this holistic view of all the different investments, how they work together, and then how that is built to give you the best chance of reaching your long-term goals.

Sarah Widmeyer 19:44

I think the analogy works, and it works also that your doctor needs to know all the medications you’re taking because some counteract with other medication. I think we’ve beaten this analogy to death, but I think I think it works. I think it’s a good one.

The 60/40 portfolio – which means 60% of the portfolio is allocated to equities and 40% is in bonds – that used to be the norm depending on investors goals. Actually, I remember 50/50. But 60/40 – how has this traditional approach changed or has it? Does it still hold true, 60/40?

Craig Basinger 20:23

Well I mean, there’s a lot of debate about that out there. I would say that the 60/40, at its core, still rings true. The traditional approach to asset allocation for the core portion of your portfolio still holds today as it did 10, 20, 50 years ago. What has changed is with a lot of the availability of uncorrelated assets and other types of investments…

Sarah Widmeyer 20:49

What do you mean by unlike uncorrelated assets?

Craig Basinger 20:50

Sorry – alternative strategies, commodities, real assets – things that don’t actually move the same way as your…

Sarah Widmeyer 20:56

One zigs, one zags.

Craig Basinger 20:57

Yeah, as your equity portfolio would. Really with all these available different investments it’s opened the door to enhance or, I would say augment that 60/40 approach by making a little bit more institutional type format. In other words getting some access to, whether it’s some alternatives or some real assets to provide a different bit of a mix. I think also it’s worth noting you know we are in an extremely low interest rate environment and the return on bonds isn’t what it used to be. If you go back to when I was answering, giving people stock quotes on the phone, and people owned bonds for the stability that they provided, and they owned them for the income. And now actually, if you look at anybody, most people’s portfolios today, they actually they’ll still be in some bonds hopefully because it does is still a great diversifier if we do run into a recession. But the fact is, they’re now generating more and more of their income from the equity bucket of their portfolio, because that’s where there is more income available, from dividends and the like in such a low yield environment.

I think in this with a low-yield environment that we’re in, I think sort of adding some alternative type strategies as opposed to just building up that bond allocation is probably a more effective way to achieve long term goals.

Sarah Widmeyer 22:20

And what about international markets, emerging markets? Should we be allocated in that 60% bucket, should we have some exposure to those markets?

Craig Basinger 22:29

Yeah, absolutely. Over the years in this industry I’ve come to realize that many Canadians suffer from an immense home country bias. People just own too much of stuff they’re familiar with and if they’re not familiar with it they don’t want to own it, and that is behavioural. That is a familiarity bias, that I would much rather own, even if it’s a small risky company, that I see the store or see their logo somewhere than something that’s much bigger and probably safer that I’ve never seen before.

Sarah Widmeyer 23:03

Craig what percentage of Canada – are we 2% of the world’s economy?

Craig Basinger 23:08

Yeah I mean well there’s a couple different ways to slice that, but we’re small. I wouldn’t use that to dictate the allocation you should have for Canada, primarily because if that was your argument then at some time in Finland you would have owned 70% of your portfolio in Nokia, and that probably wasn’t good for any Finns. Market cap is a derivative of what’s traded on your exchanges, which can be somewhat misleading at times, and there’s also an asset liability matching that you have to take care of if you are going to retire in and stay in Canada. A few people who will because it’s cold. I think that there’s other aspects to bring to bear on that. But nonetheless, we still suffer from this big home country bias, and that’s because we like to buy things that we’re familiar with and that makes us feel more at ease. I think Canadian investors should focus more on international investing in aggregate than they do now. There are better returns, and while we are not positive on emerging markets today and we haven’t been for the last couple years, and probably won’t be until the next recession and bull market starts, we do keenly have targeted allocation long-term to emerging markets because that is where the demographic growth is. And a lot of international companies can tap into that – there’s a lot of growth in those ones as well.

Sarah Widmeyer 24:30

Interesting, okay. Craig, any other final words before we go?

Craig Basinger 24:48

I would say you know, a lot has changed in the investment world: how we invest, how people invest. That being said, some things don’t change. What hasn’t changed over the last 20, 30, 40 years is: determine your long-term objectives, figure out what your risk profile is, what you’re trying to achieve with your money, don’t forget about tax, because many people do and that comes as usually not a positive surprise I’ve noticed, and there are big benefits to actually doing a financial plan and sticking to it – It provides much more clarity on how you’re getting from point A to point B. Do your research and then the easiest one, just don’t let your emotions get the better of you.

Sarah Widmeyer 25:31

And if all else fails find a great advisor that you can partner with and help you achieve your long-term goals. Great, awesome.

Craig I’d like to thank you again for joining us. It’s been wonderful to have you.

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