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Why value investing has never been more tempting, Rosenberg’s highest conviction call, and a TSX transformed – The Globe and Mail

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Billionaire hedge fund manager and venture capitalist Cliff Asness kicked off an intense discussion regarding the underperformance of value investing strategies with “Is (Systematic) Value Investing Dead? published on May 8.

Mr. Asness’ analysis is complicated, befitting his quantitative investing style, covering the usefulness of valuation techniques like price to book in a market environment dominated by high profit margin technology companies.

The conclusion of the piece was that value investing was far from dead, and it got me thinking very seriously about adding a value component to my portfolio. He writes, “Value is exceptionally cheap today, and it gets cheaper (and becomes clearly the cheapest ever) the closer our analysis gets to realistic implementations. Measured in the most realistic way (for us) neither tech bubble nor the global financial crisis can lay claim to the cheapest ‘value of value’ anymore. Sadly, looking back, and wonderfully … forward, today has that honor.”

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The phrase “value of value” refers to the cheapness of value stocks relative to the market as a whole. So, in other words, value stocks are now the cheapest they’ve ever been relative to growth stocks.

Domestically, fund manager Kim Shannon published “Waiting for Dawn” on the website for Sionna Investment Managers, the asset management firm she founded.

As a valuation-conscious fund manager, Ms. Shannon is of course a biased observer. Nonetheless, the short paper provides useful context. It notes that the current period of value investing underperformance is the longest since the Great Depression. “Today, value is more undervalued relative to growth (on a total annualized return basis) compared to any other time period since 1936, cheaper even than 1940 or 2000,” she writes.

Ritholtz Wealth Management’s Josh Brown, who I also featured earlier in the week, published “Value Investing is Immortal” on Tuesday. Mr. Brown writes “Value investing is immortal. It cannot die. Perhaps the way it’s been traditionally practiced is dead. The metrics that the value discipline has been based upon are not and have not been relevant for a long time.”

Mr. Brown goes on to warn about value traps, stocks that are cheap for good reason – the profit outlook is deteriorating faster than valuation multiples – and that point is well taken.

It is Mr. Asness’ research I find most compelling and I’m now officially interested in a value investing strategy for my portfolio. I’m not sure what form it will take – a small position in a long short hedge fund seems most likely off the top of my head – but I’ll report to readers if a transaction takes place.

— Scott Barlow, Globe and Mail market strategist

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This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

The Rundown (for subscribers)

Five major points for investors right now (and the highest conviction call)

David Rosenberg summarizes his five major points to investors at this historic moment in time. And yes, the famed economist known for his bearish take on markets is actually bullish on something.

Gold and tech stocks lead TSX rebound from March selloff

Beneath the surface of the stock market’s near-miraculous rebound since March, seismic shifts have altered the fortunes of the companies within Canada’s benchmark index. The S&P/TSX Composite Index is now down just 17 per cent from its peak in February, before the COVID-19 pandemic took hold. That qualifies as a mere garden-variety correction in terms of total market losses. But at the level of individual stocks, the swings have been more on par with the pandemic’s powerful global impact. Tim Shufelt reports

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The subtle message delivered by negative interest rates: Policy makers have no options left

Growing talk of negative interest rates in Canada and the United States is stirring fear about what such a dramatic move by central banks might mean for savers and investors. The biggest danger, though, may be something more subtle. If North American central banks did drag rates into negative territory, it would signal they are ready to double down on what they have already been doing for several years, with generally unimpressive results. Ian McGugan tells us more. (Also see: Once taboo, investors begin to imagine negative U.S. rates)

A new way to tell if your adviser adds value or dead weight

There’s now a math formula for measuring the value of an adviser. Rob Carrick tells us how it works, and how you can calculate it.

Others (for subscribers)

TSX stocks that have cut dividends since the start of the coronavirus crisis

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Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: CFO invest over $300,000 in this large-cap consumer staples stock

Number Cruncher: Six dividend-paying midstream energy companies trading at bargain-basement prices

Number Cruncher: Fifteen U.S. big cap stocks with strong balance sheets

Others (for everyone)

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Why sustainable equities have been outperformers during this crisis

Globe Advisor

How the rise of e-commerce can lift these two Canadian stocks

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation – a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: On March 25, the Federal Government advised that that RRIF minimum withdrawals could be reduced by 25 per cent for 2020. I receive minimum monthly payments from a RRIF and a LIF administered by a major bank’s brokerage. I called them to find out the procedure to take advantage of this 25 per cent reduction. They didn’t have a clue as to what to do and admitted they had lots of inquiries, but the management had not given them any direction. This is totally unacceptable. Can you advise what the procedure should be?

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Answer: You’re right, it is unacceptable. The procedure should be simple: you call your broker or plan administrator and tell him/her you want to take advantage of this relief and to adjust your RRIF and LIF payments accordingly. It should not be more complex than that. All I can suggest is that you contact the brokerage manager and make your displeasure known. A simple memo from the top should be all it takes.

–Gordon Pape

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

Should you use ETFs that use currency hedging when seeking foreign stock exposure? Andrew Hallam will have some research that points to a definitive answer.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Click here share your view of our newsletter and give us your suggestions.

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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Foreign Investment Review – A Warning In The Time Of COVID-19 – Government, Public Sector – Canada – Mondaq News Alerts

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Canada:

Foreign Investment Review – A Warning In The Time Of COVID-19

To print this article, all you need is to be registered or login on Mondaq.com.

The Canadian government, concerned about the impact of
COVID-19 on corporate valuations, has issued guidance that it will
pay particular attention to foreign direct investments of any value
(meaning, even investments that are not subject to review under the
Investment Canada Act (the “ICA”)).  The
government’s announcement does not amend the ICA, nor any
thresholds for review.  But it does issue a warning that the
government intends to use the tools it has to review investments,
including the national security review provisions under the
ICA.

While the enhanced scrutiny is to apply to any acquisition
of an interest in a Canadian business involved in public health or
the supply of critical goods and services to Canadians or to the
Government of Canada, all foreign investments by state-owned
investors, regardless of value, or private investors assessed as
being closed tied to or subject to direction from foreign
governments, are also considered targets for such
review.  

One can expect that Canadian companies involved in
manufacturing needed supplies to address COVID-19 healthcare
requirements (for example manufacturers of personal protective
equipment), or companies involved in vaccine research or other
health technology would be of particular concern.  As to
critical goods and services, we can look to the Government’s
own Guidance on Essential Services and Functions in Canada during
the COVID-19 pandemic for assistance.  In that guidance, the
Government cites energy and utilities, information and
communication technologies, finance, health, food, water,
transportation, safety and manufacturing. 

The first real test, however, of the Government’s
application of its enhanced review will be a gold miner, TMAC
Resources Inc., which operates the Doris gold mine in Nunavut’s
Hope Bay.  In a deal announced two weeks ago, China’s
Shangdong Gold Mining Co. Ltd. will pay just over C$207 million for
TMAC, which has been struggling financially.  TMAC is listed
on the Toronto Stock Exchange and has lost significant value since
its IPO.  Control and the majority equity interest in Shandong
is owned by the Chinese Government.  Whether Shandong can
establish that the acquisition is of net benefit to Canada, and
particularly so with such declared enhanced scrutiny, remains to be
seen.  There has been certain concern expressed by the
security community in Canada about Beijing’s control over
critical metals and minerals.  Gold is, in volatile financial
circumstances, a safe haven investment. 

As a general caution, foreign buyers should consider the
guidance from the Canadian government on the ICA.  Foreign
investment is still recognized as beneficial with a compelling case
for the transaction.  But at the least, potential acquirors
should be alive to the potential for a greater degree of review,
and should consider the time-frame for review and when to submit an
application for review, including a pre-closing notification under
the ICA. 

Originally published May 25, 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Government, Public Sector from Canada

COVID-19: Cross Country Update (May 11, 2020)

Miller Thomson LLP

Today Prime Minister Justin Trudeau announced support for large and medium-sized businesses so they can keep their workers on the payroll and survive the COVID-19 pandemic.

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Should Mark and Meredith invest their surplus or pay off their mortgages? – The Globe and Mail

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Mark and Meredith, seen here, should catch up on their TFSAs first, lower the extra payments on their original house and invest the difference.

Lars Hagberg/The Globe and Mail

As a military couple, Mark and Meredith have relocated seven times in the past 10 years, so they’re looking forward to moving back to their original home – now rented out – when they eventually retire.

Mark, an officer with the Canadian Armed Forces, is age 44 and earns about $142,400 a year. Meredith, an employee at the Department of National Defence, is 47 and earns $72,660 a year. Her income has suffered from long spells in places where no work was available. They have a 12-year-old daughter, two houses and substantial mortgage debt.

Mind you, they’ll be well-fixed when they retire from the military. At the age of 55 Mark will be entitled to a defined benefit pension, indexed to inflation, of $116,000 a year plus a bridge benefit of $12,838 to the age of 65. From 65 on, he will get $134,623 a year.

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At 58, Meredith will also be entitled to a DB plan: $35,427 a year plus a bridge benefit of $988 until she’s 65. After that, she will get $39,315 a year.

First, though, they want to pay off their mortgages. They’re not sure which one to tackle first or whether they would be better off investing their surplus funds. “My husband thinks that it would be better to invest extra dollars [in financial markets] because our mortgage interest rates are low,” Meredith writes in an e-mail.

We asked Robyn Thompson, president of Castlemark Wealth Management Inc. in Toronto, to look at Mark and Meredith’s situation. Ms. Thompson is also a certified financial planner.

What the expert says

Mark and Meredith have $2,715 a month in surplus cash flow that they can use for debt repayment, investing, or increased lifestyle spending, Ms. Thompson says. They are using $1,000 of this to make prepayments to the mortgage on their original family home, now rented out.

In addition to their two properties, they have investment assets in their various accounts totalling $305,515, with 60-per-cent equity, 30-per-cent fixed income and 10-per-cent cash. Both have unused RRSP room that they are carrying forward to reduce taxes payable on their retiring allowances (a taxable, one-time payment on retirement in addition to their pensions) – $80,000 for him and $25,000 for her.

The couple would like to retire at the age of 55 with an annual after-tax income stream of $72,000 in today’s dollars (or $106,234 at retirement, indexed at 2 per cent), the planner says. When they do, they plan to move back to their original house and rent out their current residence.

Complicating matters is the fact that they have, at different times, declared one property or the other as their principal residence, Ms. Thompson says. “This will create a taxable capital gain on the property that is eventually sold,” she notes.

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For example, renting out part or all of a principal residence changes its use to an income-earning property. So capital-gains tax may apply for the period during which the property was used to earn income. Mark and Meredith would still be able to claim the principal residence exemption for the period in which they used the house as their primary residence.

“It is therefore critically important for Mark and Meredith to keep detailed records of when and how each property was used along with receipts for any improvements made, no matter how minor,” Ms. Thompson says.

Given their substantial income and relatively modest living expenses, Mark and Meredith will be able to achieve their short- and long-term financial goals, the planner says. “They have some catching up to do with their tax-free savings account contributions and prepayments toward the mortgage, but they are in a rock-solid financial position,” she adds.

The couple’s investments have done well, delivering an annualized rate of return of 8 per cent going back to 2013, Ms. Thompson says. The value of their portfolio shrank somewhat in early 2020 as a result of the stock-market meltdown triggered by the COVID-19 pandemic, the planner says. “But they have a long time horizon and view the market downturn as a short-term event.”

Their portfolio consists mainly of Canadian and U.S. large-cap, blue-chip stocks, exchange-traded funds and a small mutual-fund allocation. They use an investment adviser to whom they pay 1.65 per cent a year. The adviser does not provide planning or tax services.

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The registered education savings plan for their daughter is allocated 50 per cent to fixed income and 50 per cent to equities. Using a 4.5 per cent expected rate of return and a 2 per cent inflation rate, at their current contribution rate the RESP will grow to $73,028 by the time their daughter starts university at the age of 18.

Now for the mortgages. Mark and Meredith are paying 1.95 per cent interest on the $468,560 mortgage on their original home (rented out for $36,000 a year). Their current mortgage payment on the original house is $40,685 annually. In addition, they are making an extra payment of $1,000 a month, or $12,000 a year.

When the mortgage comes up for renewal next year, the interest rate could well be higher, the planner says. She assumes a 2.39 per cent interest rate at renewal. Instead of paying $1,000 a month, they could cut their prepayment to $500 monthly and redirect the surplus cash flow of $6,000 a year to their tax-free savings accounts, where they have unused contribution room. There the investments are forecast to grow tax-free with an expected real rate of return of 4.5 per cent annually, the planner says. “They will still have the property paid off by [Mark’s] age 55.”

As for the house they are living in now, they plan to rent it out for $2,000 a month after they retire. Rather than paying off the $215,000 mortgage, the planner recommends they continue with it, deducting the mortgage interest along with the other expenses. They could use the net cash flow first to contribute to their TFSAs and then invest any surplus in a non-registered, balanced portfolio.

“Meredith’s first inclination is to pay off the mortgage as fast as possible,” Ms. Thompson says. “This is not always the best option in a low-interest rate environment.” For Mark and Meredith, using cash flow to maximize TFSA contributions makes more sense at this point, the planner says. “With a properly diversified, balanced portfolio, the after-tax compounded annualized rate of return on their investments inside the TFSA is likely to exceed the compound interest payable on their mortgage.”

At Mark’s age 56, the first full year they are both retired, Mark and Meredith will have after-tax income of $169,160 a year. After-tax lifestyle needs and the mortgage payment on the rental will total $120,408 a year, giving them plenty of room to expand their goals if they choose to.

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Client situation

The people: Mark, 44, Meredith, 47, and their daughter, 12

The problem: Should they invest their surplus or pay off their mortgages?

The plan: Catch up on their TFSAs first. Lower the extra payments on their original house and invest the difference. Leave the mortgage on the second house when they retire.

The payoff: Making the best use of their money.

Monthly net income: $16,160 (includes gross rental income).

Assets: Cash $7,000; emergency fund $20,000; her TFSA $52,300; his TFSA $30,815; her RRSP $96,905; his RRSP $80,375; RESP $38,120; residence $450,000; rental $750,000; estimated present value of his DB pension plan $2.36-million; estim. PV of her DB plan $863,000. Total: $4.7-million

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Monthly outlays (both properties): Mortgages $4,570; property taxes $990; water, sewer, garbage $115; home insurance $150; electricity, heat $215; maintenance $895; garden $100; transportation $780; groceries $800; clothing $180; gifts, charity $315; vacation, travel $1,250; other discretionary $30; dining, drinks, entertainment $700; personal care $30; club membership $15; pets $15; sports, hobbies $120; other personal $450; health care $25; disability insurance $370; phones, TV, internet $130; RESP $200; TFSAs $1,000. Total: $13,445

Liabilities: Residence mortgage $215,000; rental mortgage $468,560. Total: $683,560

Want a free financial facelift? E-mail finfacelift@gmail.com.

Some details may be changed to protect the privacy of the persons profiled.

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Legault won't rule out another investment in Bombardier – Montreal Gazette

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QUEBEC — Premier François Legault has not ruled out another government bailout of struggling Bombardier Inc., which announced Friday it plans to eliminate 2,500 jobs because a slump in demand for business jets.

But Legault said if his government did proceed, it would not make the same “mistakes” of the former Liberal government, which chose to invest in the C-Series program and not Bombardier in general.

He said he also would obtain guarantees on the preservation of jobs, the head office and make sure the company’s executives not pay themselves fat salaries and bonuses.

The former Liberal government of Philippe Couillard invested $1.3 billion in Bombardier’s C-series program, which was later sold to Airbus. Quebec still holds its shares in the firm, which were valued at $700 million in the last provincial budget.

Legault Friday seemed to suggest in his remarks that the money is lost.

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