Indexing vs Active Management, Trimark Canadian


Date: 24-Apr-98 - 2:53 PM
From: Andrew Buck

Hello fellow investors,

I have invested in this fund for about a two years. Does anyone have any advice whether I should look into a different fund. How this one compares with whats out there. Any advice at all would be greatly appreciated. I also have investments in Spectrum United American Equity, is this a good choice.

Thanks in advance for your help, Andrew.

Date: 24-Apr-98 - 3:35 PM
From: Dogwood

Go to the globefund site and see how it compares to the other funds in its group.

Date: 24-Apr-98 - 3:41 PM
From: thbox


You're going to get all kinds of advice, so I'll get my licks in early.

I think Trimark is a GREAT company. If you're invested in the Canadian equity funds, you can't be real pleased right now, because their recent performance has been mediocre (to put it mildly.) On the other hand, Bob Krembil hasn't suddenly lost his marbles, and my view is that his investment approach is very sound over the long-term. The markets are currently quite 'frothy' and Krembil's approach of "buying growth at reasonable prices" doesn't do well when the markets are inflated. When the markets inevitably cool off, Krembil's discipline will reward the faithful.

Ignore all the comments you'll hear about the size of the fund limiting its potential. For funds with high portfolio turnover, or that focus on smaller, illiquid and speculative securities, size makes a difference to the efficacy of the investment approach. For funds with low portfolio turnover, that focus on larger capitalization investments, size is a non-issue.

One of the factors that particularly appeals to me is the fact that Krembil has been in the business for a long time. He's got a fifteen year track record at Trimark, and before that he made a name for himself running the (sadly now defunct Taurus Fund) while he was at Bolton Tremblay (now taken over by the faceless gnomes at BPI) Investors are all too ready to buy a fund managed by a fresh-faced MBA/CFA who has no experience in a REAL bear market, and I suspect the chickens will come home to roost in droves when the inevitable slowdown arrives.

FWIW, this is the only Cdn equity fund I own, and I have NO plans to move. If Krembil retires, I will have to reevaluate my position, but until that time arrives, DON'T SWEAT IT.

(remember, ignore those who tell you size is an issue......they're from the dark side) :-)

Date: 24-Apr-98 - 4:55 PM
From: rge

thbox, at least you put your money where your mouth is, I will say that. Nevertheless you keep extolling the virtues of the Trimark funds such as this one (which I own) and trash Altamira Equity (which I also own). I bought both funds becasue they received high recommendations from most pundits, and they are both performing poorly, with Trimark doing worse than Altamira. Maybe Krembil hasn't lost his marbles, maybe Mersch has. In any case, performancewise it is six of one and half a dozen of the other. At least with Altamira I'm not locked into another five years of back end loads!

Date: 24-Apr-98 - 8:03 PM
From: thbox


I don't think I've ever suggested Mersch has sugddenly come down with a case of the stupids. What I have said is that his investment approach isn't well suited to large funds, and since he runs a large fund (although not so large as formerly) his choices are: change investment approach, or accpet less stellar performance. If he changes his investment approach, he may well "rise again" but his track record to date cannot be evidence of his likely success under any new approach.

WRT Krembil, his current poor performance is a function of his disciplined approach, and since that approach is unlikely to be influenced by fund size, I suspect that when the froth of the markets clears, Krembil's performance will improve.



Date: 24-Apr-98 - 8:08 PM
From: compounder

Andrew - suggest you have a look at PH&N's and/or Bissett's Canadian equity funds. Very low MERs and very consistent performance. I don't think either firm believes in the philosophy of "when in doubt sit on your cash or buy gold." If you like cash get in a money market fund or, if you like gold get in a precious metals fund.

Date: 25-Apr-98 - 11:41 AM
From: Reg Borrow

HI thbox, I see we agree on something. It goes back to the reason why people invest in mutual funds to begin with. They want to avail themselves of "Professonal Money Management". When they start treating mutual funds like stocks, they defeat the purpose they availed themselves at the start.

It amuses me as I sit back & see the comments by many. If they really knew Bob like U seem to and I know from having known him over 15 years myself personally they would sit back & just watch him perform his brand of magic.

To try to think anyone on this forum has anything up on him and feel they know a little more than he does is like trying to tell Einstein he may be a little out on his formula E=MC/2.

Date: 25-Apr-98 - 11:50 AM
From: A Einstein

"like trying to tell Einstein he may be a little out on his formula E=MC/2."

ektually vat I sed vas:

E = mc2

Date: 25-Apr-98 - 2:19 PM
From: rge

Reg, I have little doubt that Bob knows more about investing than virtually anyone on this forum, but can't that be said of all the fund managers? Do you mean to tell me that Frank Mersch (everyone's pet peeve, it seems) knows less than most of us and still earns giga-bucks per year? My point is that some managers are treated with a particular reverance and some are not. According to you and thbox, Krembil is in the first category. I hope for my sake you are both right. I'm not giving up on him, (5 more years of deferred sales charges disinclines me to jump) but this Doubting Thomas will be looking to stick my fingers in the holes!

Date: 25-Apr-98 - 3:00 PM
From: Reg Borrow

Hi rge,

I can't comment on Frank because I haven't met the gentleman but I think even Frank will admit when it comes to Bob Krembil he's a lightweight.

Date: 25-Apr-98 - 9:50 PM
From: Jimbob

This question is just for discussion purposes. Don't any of you trimark love bugs go squirrely, but has anyone considered that we may be in a new paradigm. You know what we've all heard for some time about fundamentals never being this strong, at the same time for so long and for the forseeable future. If you compare some very respected funds such as Fidelity Int Port, Templeton Int. Stock, AGF Int Value or Scudder Greater Europe to Trimark it comes out the loser by between 20 to 60%. Most of these gains have been in the last 3 years but the difference is compelling. I realize some of these comparisons are not as international as Trimark but Trimark does have a large american content so should have done better than some. If stock picking is Krembils game it would appear that there are many who do better. All of my comparisons may not be quite fair but they aren't flavor of the month funds either. Okay boys I've got my helmut on and I'm going underground. Have at it.

Date: 26-Apr-98 - 10:52 AM
From: thbox


The expression "new paradigm" is pretty darn fancy, but . . ..what does it mean? There is an argument that investment analysis in the "knowledge-based" economy requires a "new paradigm", because the old benchmarks in ratios like p/e are ill-suited to judging the long-term strength (or viability) of industries that do not depend on huge capital infrastructure, but I don't think that's what you mean here.

There are a couple of problems with your "comparisons". The first is of course the apples/oranges comparison. The Trimark fund invests disproportionately in the US (nothwithstanding its "global equity" designation, but the Templeton Inter'l Fund invests anywhere BUT the US (and Canada). Comparisons of these two funds are meaningless - they are usually understood as complements to one another. The Scudder fund speaks for itself, so really you're looking at the AGF International Value Fund and the Fidelity International Portfolio.

Charles Brandes, who runs the AGF fund apparently has a very good track record, but I haven't yet had an opportunity to investigate it (although your post reminds me I should). Fidelity's fund may or may not have a good track record, but the distinguishing feature of the Fidelity fund is that its management is not continuous: it has had a variety of managers.

My own view is that when people invest in a mutual fund, what they're really doing is choosing a manager for their money. By far the most important criterion is the ability of the person "pulling the trigger" (together with the support team of analysts.) If the person calling the shots at a fund isn't the person responsible for the track record, who cares whether the track record is good, bad or indifferent - it can't possibly give me any guidance to the current manager's prospects for the future.

Having argued that the manager is the central issue, I would then argue that there are a number of considerations relevant to evaluating mgmt.

The first is that every manager's approach works better at some times than at others. This is partly the value/growth argument (although that's too simplistic.) In the current investment climate, momentum investing seems to do very well. Conversely sector rotators seems to be struggling right now, as the market run has outlasted virtually every forecast. (See the abysmal showing of Elliott & Page's Equity Fund in 1997, which is run by sector rotators Nereo Piticco et al). There is (at least) one other dimension in this investment approach typology though. Every manager has a "default" position. Ned Goodman and Bob Farquharson are both (ultimately) resources focused: they know that part of the business best, and they tend to emphasize it in their funds. Krembil tends to be more industrially focused. One or the other isn't 'better' - they're just different, and even if all used the same 'value' approach, their portfolios would look very different.

The second is that the cyclical nature of portfolio management performance makes discipline essential. Whatever approach the manager employs, he/she has to stick to it. If the manager constantly changes the approach he/she uses, then whatever track record he/she has is rendered meaningless because the investor can never know if the next change in approach will "hit" or "miss" the moving target. We've all heard of Frank Mersch's various stylistic "flips" as he attempts to reconect with his earlier success.

The third consideration is the manager's ability in a variety of market conditions. With nearly 1700 funds in Canada right now, there are all together too many managed by wet-behind-the-ears MBA / CFA graduates who have never experienced the realities of a true bear market. Its an old Wall Street adage: don't confuse brains and a bull market. I'm not talking about 1994 (which was really bad only for bond managers), but a grinding bear market. 1990 was pretty bad, but that assumes a track record of at least 7-8 years.

The consequence of these considerations is that you have to take a LONG-TERM view of performance, so that you're not judging the manager on the basis of the time frame during which he/she shines brightest. That's why I think short-term performance doesn't matter much.

So, when we apply these sorts of considerations to Trimark, and to your (valid) comparisons, what do we get? Well, we know that Krembil has been around since the mid 1970s. Before he started Trimark, he ran the famous Taurus Fund at Bolton Tremblay, and his ability in a variety of market conditions is well recognized. We know that he is a good defensive manager in a real bear market - he beat the MSCI Index by more than 4% in 1990 (although he certainly lost money). We know he's disciplined - otherwise he'd have rushed to be fully invested during this latest bull run. (The fact that he doesn't just throw money into the market, but insists on finding investments that satisfy his critieria is a plus rather than a weakness IMHO). We know his 'value+growth' approach is not likely to be the strongest performer in a market with high valuations, so why are we surprised when performance is less than stellar in the current climate.

(I suppose you might argue that it is exactly the apparently persistent high valuations that suggest the 'paradigm shift' you mentioned, and that Krembil's apparent refusal to get on the bandwagon suggests he's out of touch with the new reality. Mebbe so, and mebbe not. I think my response would be that the long-term returns of the market are remarkably stable (at around 10%) and that this data series incorporates technology changes going back almost 200 years. That being the case, I think the jury is still out on whether the current 'shift' to the 'knowledge-based economy' will change the long-term pattern. And, since current returns have been dramatically higher than the long-term trend, more modest valuations are not unlikely in the future.)

Fidelity? Well, it certainly hasn't got a long-term track record under the current manager. Fidelity has a reputation for grooming managers well, but there isn't necessarily any continuity in the approach from one manager to the next. Just look at the gyrations that the Magellan Fund went through following Lynch's departure in 1991. Haberman has been responsible for the fund since 1993 (hardly a long-term record) And even assuming you're prepared to accept that he's entitled to count the prevous manager's track record in his own record, the ten year numbers (to 31 Dec'97) are Trimark Fund (17.4%); Fidelity Intern'l Portfolio (13.1%).

Since we can't know the future, the best we can do is attempt to maximize the probability that the fund we choose will perform in the way we expect it will. Based on the factors I think are important, my assessment is that while Fidelity is a good fund, the likelihood is greater that Trimark will do in the future what its done in the past.

Now I'm going to get MY helmut on, and wait for the counter-offensive. :-)

Date: 26-Apr-98 - 12:21 PM
From: PK

I just thought I'd put my two cents in about the so-called new paradigm. This term is usually tossed around re the business cycle -- the central banks, with their emphasis on inflation control, have found a way to mitigate cyclical effects and we are in for prolonged, relatively stable conditions (I know there's alot more to the concept, but I thought I'd touch on its basics).

Is there a new paradigm -- Who knows? If you look at what paradigm really means (ie pattern), all people are saying is that there is a new pattern. To my way of thinking, the "old pattern" was pretty tough to determine, so I don't know how you can say with confidence we are in a "new pattern".

Date: 26-Apr-98 - 1:57 PM
From: George


Your posting last night [ the 9:50 pm one] has me thinking on a topic that probably has been kicked around since mutual funds started and discussed at this site before I came along.

You say: "My own view is that when people invest in a mutual fund, what they're really doing is choosing a manager for their money." - I presume you believe that the manager is the key to superior fund performance.

You may already guess that I am not sure that active management makes any overall long term difference. My own views have turned 180 degrees from where I started in the early 60's and now I am wondering whether you are 180 degrees behind me or 180 degrees ahead of me with your views.

I can remember when in 1965 [I was 25 then] the rage in the mutual fund business in the US was somebody by the name of Gerald Tsai. He had just started his own fund, Manhatten Fund, after a truly astounding record with some other company. I bet all my savings - that must have been less than $500, as I was a graduate student at the time, making all of $2,500 a year - on this "financial genius" who the press said played the stock market like a virtuoso. I was taken in. Well my investment did zip. But that did not deter me. I chased other similar spectacular performance records for another 20 years sometimes succeeding and sometimes not until it slowly dawned on me that it was not clear that past performance was any guarantee at all of future performance. [I am a slow learner.]

More recently I read "Bogle on Mutual Funds" and Malkiel's "A Random Walk Down Wall Street" and these books crystallized what I had slowly learned.

In Malkiel's book he writes - "No scientific evidence has yet been assembled to indicate that the investment performance of professionally managed portfolios as a group has been any better than that of randomly selected portfolios." [Page 184]

If there are exceptions to this rule I would put Templeton , Buffett, and Lynch at the top of the list. Yet a few pages after the above quote I read "Peter Lynch, just after he retired from managing the Magellan Fund, admitted that most investors would be better off in an index fund rather than investing in an actively managed equity fund.

I'm hoping you may care to comment. Please understand that I am not trying to be provocative but rather I want to hear views that may not necessarily coincide with mine.

Even now I still do find it tempting to look at past performance as some indication of future performance. Allan Jacobs did some great things for my assets in Sceptre Equity recently. Yet over the years that Fund is only slightly better that the TSE index. I'm not convinced that it has any statistical significance or that it enhances the probability of its future performance being superior.

Date: 26-Apr-98 - 2:17 PM
From: thbox

quick notes and then I've got to attend to "she who must be obeyed"

Gerry Tsai was a previous manager of Lynch's Magellan Fund. I think he got convinced of his own invincibility, and did things that are now not permitted. (Some examples are canvassed in Christensen's book "Surviving the coming Mutual Funds Crisis.)

Burton Malkiel has (somewhat) repudiated his earlier view. Malkiel and others like Paul Samuelson now acknowledge that the market is not entirely rational (and by implication, if it isn't then it is possible to exploit those inefficiencies.) That said however, both still firmly believe that for the most part the market is rational.

I've read Bogle quite carefully, and its interesting to see how he glosses over the weak points in the argument. I'll come back to this as soon as I can, because I believe its important to understand what Bogle deson't say as well as what he does say.

I agree entirely - most managers cannot beat the market. But there is a difference between saying its hard to do, and saying it can't be done. If you believe the former (as I do), the trick is to identify in advance the managers who are smart enough to do it.

On that note, I'll stop for now...... but like Arnold, "I'll be back" :-)

Date: 26-Apr-98 - 3:40 PM
From: Bison

As a relatively new invester (5 years) and with the bulk of my investments in Trimark funds I have been considering shifting about 15k into some other equity funds in which I am already invested.

These funds include GT Global Canada Growth, Mackenzie Ivy Canada Growth and Ethical Growth. I am also invested in Sceptre and AIC Advantage 2. Foreign content is at the max.

Am I doing the right thing by slowly getting out of Trimark Select Canadiann Growth? Also should I cut down on the number of fund groups I am involved with?

Any advice would be we welcome.

Date: 26-Apr-98 - 5:22 PM
From: Matt

Bison, if I were you, I would do what I did about a year ago, and dump Trimark. Their only fund that seems respectable lately is the Trimark Fund and this one is down considerably from when I sold it. ( I sold at over $29 and now it's around $24) This fund is FE so there was no cost for me to get out. Actually, there was no cost for me to get IN either...:) In all fairness though, Trimark did payout some distributions a few months back so this affected the share prices of their funds.

In reading this thread though, it seems people are sticking with Trimark simply because of their past performance. Of course, this does not guarantee future performance, no one can guarantee that. It seems there are some die hard Bob Krembil fans out there. I guess what ticked me off is the fact that Trimak Sel Cdn Grwth fund did around 3.5% in 1997. I know you have to think long term but a Cdn equity fund that did this poorly last year is inconceivable.

Date: 27-Apr-98 - 8:08 AM
From: JJ

George, you make some interesting points regarding manager performance. Your Sceptre Equity point is well taken, but note that Allan Jacobs has only managed the fund for the past five years and in that period has significantly outperformed.

Jacobs himself is way above average in $$$ earned as well. Did anyone else read the Globe&Mail trivia recently that Jacobs is in the top-20 non-CEO earners in Canada. Makes base $2.2 million + bonus.

Date: 27-Apr-98 - 11:04 AM
From: Lurking Tom

As a Trimark unitholder I too am somewhat disheartened by the poor performance in the last while. It has prompted my new investment money to go to other avenues. I have only held my Trimark for a few years. I reevaluate every spring to see if the investment is meeting my expectations or not. In the short term, I think that to continue to hold Trimark is a good decision. I still like the philosophy that they have. I think that the discipline that the managers have shown by not jumping the gun on investing their (my?) cash/gold is reasonable. There are no shortage of active threads about the overvaluation of some parts of the market. I think that for a conservative investor, who doesn't subscribe to a new paradigm Trimark is still a good place to invest your money. I will, of course, reconsider next year - month by month and quarter by quarter is a bit too often for me. Better approach I think, than the people who worry about "What happened on Friday."

Date: 27-Apr-98 - 11:59 AM
From: jd


Indeed, Trimark Fund paid out $6+ in distributions, so the $29 vs $24 comparison is really $29 vs $30.5. So it is NOT considerably down from when you sold it, but marginally up.

It has been stumbling a bit lately, but nothing to get upset about. It is unrealistic to expect a fund to hover about in the 1st quartile or even second quartile region every calendar year.

Date: 27-Apr-98 - 12:15 PM
From: thbox


We agree more and more often. Couldn't have said it better. :-)

Date: 27-Apr-98 - 1:48 PM
From: Colin White

Congratualtions to George and thbox, good thread guys.

On the philosophical front I would suggest this discussion of perfomance has a missing link making it less relevant than it could be.

If the true issue is where investors get the best return the marketing channel cannot be ignored. A better mouse trap is not really better unless it is used by real people. Although we can criticize Trimark and others for below average returns we cannot ignore their role in saving millions of Canadians from retiring in poverty. They have also been very forthcoming with information regarding the mistakes they made to cause the under performance leading to a better informed investor. The marketing effort put forth by these companies while expensive for the investors, has increased the level of knowledge and acceptance of market investing. Those arguing for the low MER companies to the exclusion of all else ignore the fact that many Canadians would not be putting money in the markets if it were not for these companies.

This may seem a little off topic but I think it is important to recognize that if all players in the market competed strictly on performance numbers then everyone would be worse off.

To summarize, yes they have under performed and they may or may not be able to improve their performance quickly but they have been very forthcoming with information and other investor support to help their unit holders.

Date: 27-Apr-98 - 2:29 PM
From: mac

when I read about the investment style of trimark on real value based company and stock and it is a safe conservative style that is good for all market condition and that the raging bull is not good for this style of investment...I could not help but wonder why is it that a good company would not go up with the other bad companies in a raging bulling and just return 3.5% /yr as compared to 25% in some other funds..If the return is 10%, I would accept that it is reasonable and a safe alternative, may be even 7 - 8%, but 3.5% means a real it is not management is a flop and one had to admit it

Date: 27-Apr-98 - 3:50 PM
From: thbox


I wanted to address your remarks on the active-passive mgmt debate more fully than I could yesterday afternoon.

My sense is that the fundamental justification for the indexing lies in the propositions of efficient market theory. If the market instantaneously factors into security prices all relevant information about them, it is impossible to outperform the market, except by assuming a disproportionate level of risk (and then usually only for relatively short time frames.) Since active management has a cost, it will eat into gross returns. To offset these costs, active management has to assume more risk than the "market" portfolio, and since the higher returns from this strategy are transitory, the long-term returns of active management will be lower than the long-term returns of passive management.

I see three separate shortcomings with this view. The first, which I adverted to yesterday, is that there is increasingly undeniable evidence that the market is NOT completely efficient. Malkiel acknowledges the fact, as does Paul Samuelson. They don't go so far as to concede the superiority of active management, but do admit that the issue is less black-and-white than was imagined 15 years ago. But if the market isn't completely efficient, it is theoretically possible to exploit those inefficiencies. That necessarily implies a place for active management since passive management cannot by definition exploit inefficiencies - it merely takes the "market" as a given.

The second shortcoming relates to the way in which risk is understood in academic economics. Everyone is taught that volatility = risk. The more the price of a security varies, the less certain the probability of an actual return within a manageable range. This is apt for short-term investment horizons, but significantly less so for long-term horizons. The reason is that variability is time-frame dependent. Over periods of one year, stock returns can vary wildly, but over 5, 10 and especially 20+ time frames, the variability of all investment returns declines (although stock returns decline most dramatically.) Academics usualy reject this view, which is sometimes called "time diversification" because logically, the 'total amount' of risk doesn't decline - while the frequency of abberrant returns declines, the magnitude of any aberrant returns grows. The fact is though that over the past 200 years, time diversification has worked in fact, even though there is no theoretical support for it. (Makes you wonder about the merit of the theory, doesn't it. You would, I think, find Jeremy Siegel's "Stocks for the Long Run" very insightful. He is a professor of Finance and Wharton and is the source of the historical data to which I refer.)

To continue, the trouble with the conventional view of risk is that it is short-term risk which is used as the basis for "risk-adjusted" performance. It would be aacceptable to judge the merits of a five year investment by examining the variability of five-year returns, but what happens in fact is that the merit of any investment (1, 5, 10 or more years) is judged on the basis of MONTHLY variations in return. Why do I care how much the security price fluctutates from month to month? I'm not selling it right now, so I can ignore the monthly fluctuations. Indeed, planners and advisers tell their clients to ignore short-term flucuations. But they still rely absolutely on a concept of risk-adjusted returns which is calculated on the basis of monthly volatility statistics.

So, if we break away from the concept of risk-adjusted returns, then the argument about active returns not exceeding "market" returns on a risk-adjusted basis loses much of its force. What we want is superior returns. If active management can deliver them (over the long-term of course) does it matter whether the "risk-adjusted returns" were lower. Don't I still have more money in my pocket than a passive investor?

The third shortcoming is that much of the argument for indexing is based on "average" performance of active vs. passive portfolios. Bogle's argument for indexing can be expressed as a syllogism:

All portfolios are either active or passive.

The aggregate of all portfolio returns equals the market return.

The aggregate of all passive portfolio equals the market return.

Therefore (1) the aggregate of all active portfolios equals the market return.

Active portfolios have higher costs than passive portfolios.

Therefore (2) active portfolios have lower NET returns than passive portfolios.

Elegant, but flawed. Because I don't (intentionally at least) invest in the "average" active portfolio. As obvious as Bogle's argument is the unspoken conclusion that some active managers must outperform, and some must underperform the 'average' active portfolio.

Bogle does address this argument obliquely. He contends that it is very rare for any individual fund to post Q1 returns in consecutive periods. But there's a slide here from "above average" to Q1. Isn't the real issue a manager's ability to sustain "above average" performance from one period to the next?. Indeed, Bogle contends that probability of repeating Q1 performance is "1 in 3 - only marginally better than mere chance. But if this is better than mere chance, what is the probability of sustaining Q1/2 performance? It has to be better (so it has to be better than "mere chance" ) but (not too surprisingly) Bogle does not offer that data.

OK, I don't invest in the 'average' manager. How do I know in advance which manager will be the "best" going forward? Now THAT is a good question.

Bogle's repsonse is - ultimately - you can't know, so you should limit your downside and buy the index. The quotation you cited from Lynch (that was quoted in Bogle) is at page 173. The next sentence (which starts a new paragraph) of the book says this:

Such extraordinary managers [as Lynch, Buffet, Neff] in any event, not only are few in number by are DIFFICULT TO IDENTIFY IN ADVANCE.

Yes that is so. And his argument that it requires at least 25 years of data to distinguish luck from skill at the 95% confidence level is absolutely correct. But the argument that indexing is a way to minimize your downside is MUCH MUCH MUCH less powerful than the one which is hung on the tenets of EMH, or Bogle's syllogism. In effect it says: accept second best, because it will probably be better than the manager you choose.

While too much data is required to isolate skill from luck on purely statistical bases, I believe it is still possible to identify the active managers with the greatest probability of sustaining superior performance. Here's the "coles notes" version of the criteria I think are important (but, he says immodestly, the fuller version is found in The Canadian Mutual Fund Bible (Macmillan, 1997, 1998): :-)

(i) long-term track record for the MANAGER (as a fund manager - not a pension mgr)

(ii) discipline in the investment approach (and preferably that the approach be amenable to articulation - no 'gut' feels)

(iii) bottom-up (fundamental) approach to security selection

(iv) long-term investment horizon

Additional important criteria include:

(v) an institutional link between the fund sponsor/manager and the portfolio manager (in other words, no "hired guns"

(vi) low portfolio turnover

(vii) manageable number of securities in the portfolio (no 200+ position funds)

(viii) no excessive sectoral concentration

I think that's enough for now. (Man, can I be long-winded . . . . . . ) :-)

Date: 27-Apr-98 - 6:25 PM
From: George

Thbox: Great stuff. I too "shall return" to give it a fuller reply later, as I must run in a minute or so. Here are some immediate thoughts.

Market Efficiency. Long time ago I learned "never say Always" and "never say Never". I agree that the notion of the efficient market cannot be proven to be absolute. How could we possibly prove that it Always IS efficient? Any observational "science" [if that is what market analysis is] by definition implies some measurement uncertainty. [For absolutes we got to religion or astrology.] To me the real question then becomes": - "If the market is almost always efficient, does the added cost of active management justify the possibility of outsmareting or beating the market. I'm inclined to say NO.

On Risk. Must re-read your comments more carefully to reply. [This is a complex issue.]

On Averages - Indexing - Superior Performance - again "I shall return".

Methinks this is great fun - and I shall do my best to find fault with your reasoning. Cheers.

Date: 27-Apr-98 - 6:44 PM
From: thbox


Just a small comment on "market efficiency". One of the proxies for efficiency is the relationship between fund returns and MER. (The argument is that if the market is efficient, it will reward low cost producers.)

As it turns out, the market is pretty efficient for bonds. Because interest rates are the single most important determinant of bond fund returns, its hard to "outmanage" the market by finding other sources of 'value' that can offset the impact of interest rates. The exception is corporate bonds, in which security analysis is critical (because you have to evaluate the viability of the security in order to judge its credit worthiness.) So, lower MER = higher returns in bond (and money market) funds, but not in corporate bond funds.

There is less correlation in equities than in bonds. A recent thread discussed this, and in Canada the correlation of MER and 10 year returns is -.02, which is weak, but nonetheless statistically significant. However, if you add in small-caps, the correlation is lower. (You can't do small caps alone - there aren't enough data points to create a statistically significant sample) - at least for a ten year period.) The implication is however that the correlation between MER and small-cap returns isn't very strong. (This by the way is consistent with US data, which found that while lower MER = higher returns in large-cap stock funds, lower MER = lower returns in small-cap funds.) And this is consistent with our intiuitive understanding of the market's efficiency: we would expect the larger, more followed securities to be priced more "efficiently" than the smaller, less followed, stocks.

The point of this (again) long-winded blathering is that the market isn't uniformly efficient or inefficient, but that there is at least some indication that it is possible to identify at least broadly, where the inefficiencies are greatest.


thbox :-)

Date: 27-Apr-98 - 7:26 PM
From: PK

Hi Thbox-

You state your case well. But let's take a look at the three shortcomings you discuss. In each case i'll paraphrase you, so please take me to task if I misintrepret what you have said.

1) "The market is not completely efficient and . . . passive management cannot by definition exploit inefficiencies". Before I argue "why can't they?", lets articulate what the inefficiencies are. For the most part, the anomolies found are about "markets" not "managers". It has been found (historically) that two dimensions seem to provide some degree of excess returns. These are Value vs. Growth (with value coming out ahead) and Large Cap vs Small Cap (with small cap coming out ahead). If you believe that these anomololies will persist, nothing prevents an indexer from overweighting their portfolio along these lines. I can add an extra amount of small cap to my portfolio if I choose (which I have done, BTW). You could also add an extra weighting of Value. In the US, it is very easy to do this type of overweighting with an index strategy, because small cap and value index funds exist (just look at Vangaurd's offerings). In Canada this is more difficult to do -- but this is because the products aren't available. I wouldn't blame the index strategy for that shortcoming.

2) You discussed the concept of "time diversification" and how you really only care about performance and return variability in the long run. Well, so do I. Whether you think risk increases, decreases or statys the same over time the effect (whatever it is) occurs on indexed investments as well as actively managed investments. For the most part, this "shortcoming" is the same as your third point which is,

3) "If active management can deliver higher returns over the long-run, does it matter whether the risk adjusted returns were lower -- don't I still have more money in my pocket then the passive investor?" Well maybe yes, maybe no, but the probabilities are on the side of the indexer. In any given year an index fund is most likely going to be a low 2nd quartile performer. But over 10 years or more, this consistent low 2nd quartile performer moves up the ranks. Just take a look at Vangaurd's 10 year history with their SP500 index fund and you will see it's a solid 1st quartile performer. So, my decision to go the index route is not because I'm satisfied with 2nd best -- to the contary, I think it maximizes my probability of achieving first quartile performance in the long run.

Now, if you believe you can find a manager who's differential skill will allow you to beat an index fund over the long haul, go for it. But you should state that your case is more a matter of faith than fact.

BTW, I wholeheartly agree with the criteria you use to select quality management. If you want to go that route, using your criteria is an excellent why to proceed. For anyone you opts for an active management approach I would recommend using your selection criteria. Additionally, I think if your going to use this approach I agree with your strategy of using only one active manager (you said you have all your money with Trimark). Combining two or more actively managed funds just increases your chances of achieving index performance (in gross terms) but at a much higher cost. An alternative approach worth considering is an index strategy for a portion of your funds with an allocation of the remainder with a manager that meets your selection criteria. For myself, I'm happier with a pure index play, but this second approach has some logic (as opposed to combining multiple, active styles).

One other thing, in you latest post to George you referenced a thread that disusses the 10 year relationship between MER and return. You stated that the correlation was -.02. In fact, the correlation found was -.242. This thread can be found at the following link:

Do Low MERs Matter?

Date: 27-Apr-98 - 8:01 PM
From: thbox


Thanks for the link, and yes, I misstated the correlation.

As to point 1, if your point is that you can buy a "value" index, or a "growth" index, then yes, I agree, although I think that the typology "value outperforms growth" and "small-cap outperforms large-cap" is much too simplistic. Value is typically understood to "outperform" growth only a a "risk-adjsuted" basis (which, for reasons articulated earlier, I think is a crock.) Small caps have outperformed large-caps over the past while, but as Siegel points out in his book, the risk of a small-cap portfolio is greater than that in a large-cap portfolio because (in his words) "diversifiable risk can only be ignored when an asset becomes part of a larger portfolio. If small stocks per se are the portfolio, the risk rises dramatically. In that case the superior returns on small stocks are overwhelmed by the extra risk."

However, if your point is that the index can be tweaked (a la Royal's Strategic Index Funds) then NO. Either you're a passive investor or you're not, but you can's suck and blow at the same time (Hope I'm not trying to do that! :-) )

As to point two, it isn't the same as "three". Three is about the logical "slip" from the 'average' manager to the "actual" manager. I do agree that most managers underperform the index. I do agree that identifying the managers who can outperform is (in Mark Hulbert's phrase) E X T R E M E L Y H A R D to do. I do agree that taken as a whole, investors would do better with the index than with the fund they choose. but none of that says, It can't be done. And while I concede there is an element of faith, you still have to explain Buffet, Neff, Lynch - and even Krembil, who has outperformed the TSE (although recent performance is sorely testing that performance record) and the MSCI Index (with more positive recent performance.)

Thanks again for the link. Your turn.


Date: 27-Apr-98 - 9:18 PM
From: PK

To Thbox-

I don't have time to respond in detail now, I just wanted to say my point 1 was definitely NOT about tweaking an index like Royal's Strategic Index fund does. Actually, I think its unconscionable that Royal Bank uses index in the name of that fund. If I understand stand that fund correctly, it takes the investment philosophy of O'Shaunessay (i think that's his name anyways) and calls the fund an index because its based on stocks he would buy via his selection criteria. This logic escapes me totally. It's like saying if I thought you should buy only stocks of companys run by left-handed CEOs with brown eyes somehow buying the entire subset of stocks based on these criteria would be an index (the PK Strategic Index). Amazing.

Anyways, i'll get back to you on the meaningful stuff when I have more time -- it is interesting.

Date: 27-Apr-98 - 9:51 PM
From: thbox

When will you be offering the PK Sinister CEO Advantage Index Fund??? I'll HAVE to get some. :-)

Date: 27-Apr-98 - 11:55 PM
From: Bylo

thbox and PK,

I haven't had much time to read all of your contributions nor spend much time on Fundlib because I've been travelling on business. I won't be back in the GWN til Friday (I waved to Rob this morning as we crossed Utah.) For now here are a couple of observations to toss into the discussion.

1. The longer the time period the closer most funds' performance tends to cluster around a "mean" annual return. Compare the broad range of 5-year CARs to the more clustered 10-year, 15-year (or longer--if you can find the data) CARs. So in the long run even the best managers have a tough time consistently beating the average manager by more than a couple of percentage points. But that's also the difference in MERs between a low-MER index fund (like Vanguard or TIPs/HIPs/SPYs/DIAs) and the MER of the average actively-managed equity fund. So why take the risk of picking the next Lynch/Krembil/Mersch or whoever, when you can eliminate the risk altogether with a low-MER index fund?

2. Actively-managed funds have two more problems that go hand-in-hand. Both are avoided with index funds.
(a) Turnover and Taxes (outside an RRSP): thbox, as a big fan of Krembil you must be in some pain this week as you write that fat check to Ottawa for their share of Santa Bob's Christmas present. I sure noticed it! So even if a good manager can beat the index by a point or two, we investors must split the proceeds with Revenue Canada.
(b) Management Changes: What happens to Trimark Fund and Trimark Canadian when Bob Krembil retires? Suppose his replacement just doesn't have Bob's talent. After a few years of patience, when we Trimark loyalists finally bail out, again we have to share the proceeds with Ottawa. Remember too that the longer a superior manager's track record, the closer s/he is to retirement. So presumably the greater the "risk" of a manager change in the future.

I don't need to tell you that index funds because of their low turnover and immunity to management style changes (heh, what "management style"?) tend to be very tax efficient. Outside an RRSP that ought to be worth a few percentage points handicap.

Now I've always maintained that index funds aren't a panacea. I believe however that they should comprise a good percentage of a conservative, buy-and-hold investor's portfolio--especially outside an RRSP. Right now I'm slowly moving more of the equity portion of my portfolio to index funds, and also moving the most tax-inefficient funds inside my RRSP.

That said, I nevertheless remain in awe of the Templeton organisation's success in passing the "religion" down the line from Sir John to Hansberger, Holowesko, etc. while consistently maintaining a monotonous (but highly lucrative) 15% CAR since (almost fo me) the beginning of time.

Date: 28-Apr-98 - 12:47 AM
From: George

Thbox: I may need more than one take to sort out my reasoning on this topic. I have never tried to articulate it before - and thus this note represents work [mental work] in progress and I hope you will be patient with me.

Efficient market theory [EMT]. It seems we both may agree that if total EMT was fact, then the only sensible alternative for the best long-term investment returns is indexing. But I am inclined to think that even partial EMT may justify indexing in many if not most cases. [More on this after the following digression.]

As my earlier note argued, I don't think an absolute or total EMT in the stock market is really possible. And I agree with you that the gap between the absolute EMT position and the actual reality is much smaller for the bond market than the stock market. The bond market is of course far less complex [with a lower "risk" and a corresponding lower long-term return] and thus the higher correlation of higher return with lower MER for bonds. I suppose it therefore follows that for bonds, - a low-MER-bond-fund makes the most sense - specifically a Vanguard style bond fund, or something as close as possible to it in Canada, or buying the bonds directly and holding them to maturity.

I have some problems with the notion of an absolute EMT myself. For one thing, real change in the real world never happens instantaneously. Change takes time [even if it is a brief moment] and time allows for intervention and exploitation. The question is how much time is there and how much exploitation [by a clever manager] is possible in that "gap". I cannot imagine that there is a universal answer on that one. I have also wondered to myself: - "What does the EMT mean in the hypothetical and extreme case when absolutely 100% of the market is in indexes? What "drives" the index then? The relative value of stocks would not change and that seems sort of ridiculous." Furthermore my own actions in purchasing individual stocks belies the notion of a total EMT market. I have worked with computers since the early 60's, staring with a brief job with IBM in 1961. Ten years ago I decided I should test my "understanding" of the computer hardware/software industry by investing in it. I have done well. And why would I be investing outside an index if I believed only in the total EMT?

You write: "To offset [added] costs active management has to assume more risk than the market "portfolio". Yes that is true for real "active" managers. But my reading of the trend is that today more and more fund managers are worried about falling behind the market index, worried about looking bad relative to it and so have become "closet indexers" themselves while they promote "active management" and charge active management MERs.

Risk-adjusted returns. I better come back to this topic at a later time. I don't think I understood the "time diversification" business. Is this about the distinction between the standard deviation of a distribution and the variance of the mean of that distribution?

Average performance of active vs. passive portfolios. I would have argued as follows: The aggregate of all active portfolio returns defines one market return average - let us call it AVG1. This aggregate has some distribution about this average, with some standard deviation about the average. The aggregate of all passive portfolio returns defines another market return average AVG2. This aggregate has little or distribution about its average.

Because of the drag of MERs on active funds, AVG1 < AVG2. I think this must be so. How can it be otherwise? Thus it follows that the passive portfolio investor will beat more than 50% of the active investors and do so with little or no risk of under-performing the market. I think the MER drag on the performance record of broadly diversified funds is one heck of a handicap. It does of course follow that some active managers will beat AVG2. That must also follow. But we all wonder, was it luck or was it smarts?

Most funds that beat AVG2 one year will not do so the next year. Then who are the managers who can beat the indexes consistently? We agree, they are "difficult to identify in advance". Your eight point list of criteria on how to increase the odds on finding one seems reasonable. But I still don't like the odds. It may make investing more "fun"

The "one who must be obeyed" is inquiring what I am doing in the attic huddled over this glowing screen so late into the night. Sorry I must break off I will return .

Date: 28-Apr-98 - 7:57 AM
From: PK

Hi Thbox -

I thought I'd begin by taking a step back. For me, the decision to invest in an actively managed fund like Trimark's or use a passive index approach is a secondary decision. More important is my choice of asset mix. I put considerable effort into this activity, because I believe in the long term it is going to have far more influence on my returns than any single security selection (please note that I'm using the term security selection very broadly here). Additionally, no one knows my particular circumstance and risk tolerance better than I know myself (except maybe my wife, but that's another story). So, when I develop my asset mix strategy, I have determined that I want a reasonably elaborate breakdown of asset types and this mix is based on a long term perspective. Over time, my knowledge level, circumstances and convictions regarding investing have evolved and I foresee this continuing.

Given the above, I need to determine how best to implement an investment strategy for each asset category that I want representation. So the decision Trimark vs. Index is in the context of which of these investments best fits my requirement for diversified, large capitalization, Canadian equities. Each and every asset category I choose is subject to the same type of analysis.

It is in this context that I choose passive indexing for this specific asset category. I have come to this conclusion for several reasons. First, in this specific segment, I believe the market is very close to efficient. I say very close because I am skeptical by nature and have trouble believing almost anything with complete certainty. So the question for me becomes can a gifted investor like Bob Krembil achieve excess returns in a nearly efficient market over the long run. For he do so, these excess returns have to come as a result of security selection and/or market timing. On the issue of timing, I am steadfast. I definitely don't believe in trying to time the market (this goes for any attempt I or Bob Krembil or anyone for that matter could make at trying to time). Timing also has the negative consequence of disrupting my carefully crafted asset mix. If I have decided that I want X% invested in diversified, large-cap Canadian Equities, I know that if I invest X% in a passive index I will get this representation. If, on the other hand, I invest with Trimark, I may find that suddenly my desired X% allocation has been reduced by a 24% cash and fixed income holding. It is more important to me to maintain my desired long term strategic mix than to have it compromised by someone else's timing decisions. Since I don't want to time, a decision to go with Krembil would have to be based on his ability to select securities. Here's where the efficiency of this market segment comes in. At the end of 1997, fully 84% of Trimark Select's Canadian holdings were made up companies from either the TSE 35 or TSE 100 (I'm referring to the Canadian part of the fund only). I didn't look specifically at the remaining 16% but I would guess that it was mostly from TSE 300 companies. These are, by definition, the largest capitalization stocks in Canada. While I do not say finding excess returns in this arena is impossible, I believe it will be very difficult. So for this reason I choose indexing.

My second reason for choosing indexing in this specific segment is based on my needs. There is only one reason for choosing Trimark namely, the possibility that the fund will achieve returns in excess of a passive benchmark. By going for this possibility I put underperforming a passive index into play. In my circumstance I believe I can achieve my long term goals with returns based on the index's performance. While I would not sneeze at excess returns (who would?) I do not believe a quest for these returns warrants the risk of underperforming the index. For me, its a little like trying to reach the 18th green of a Par 5 in two when a 230 yard carry over water is needed. If I needed a eagle to win I would try it, but if I had a two stroke lead, I would lay-up for sure.

My third reason for choosing a passive index is based on cost. I can implement this strategy for under a 1% MER. The active strategy costs about 2.3% (I'm not exactly sure what Trimark's MER is, but I think this is close). Perhaps this can be described as knowing the cost of everything but the value of nothing but I don't think so. I've already said that I think this segment is nearly efficient so achieving a gross return of about 1.5% annually in excess of a passive benchmark over the long-haul will be darn tough (not impossible, but very difficult).

So those are my reasons for choosing indexing in the diversified, large-cap Canadian segment of my portfolio. I should point out that I do use active management in some segments and/or circumstances. For Canadian small-cap I use Bissett. This segment is most likely less-efficient and therefore provides more opportunity for quality management. To be honest, I don't know whether I'd choose a passive index in this segment if I had the opportunity. Research in the US says it is tough for a small-cap index fund to overcome the high costs of maintaining this type of index (although Rex Sinquefield says it can be done). Within my RRSP, I use PH&N's Canadian Equity Plus fund. While this is a managed fund, it's costs are low and it is pretty close to being index-like. Additionally, it gives me some extra foreign content, which I want for diversification purposes.

Sorry for the length of the post but I have a bit of a problem with being long-winded.

Date: 28-Apr-98 - 9:03 AM
From: thbox


Re: Closet Indexing

Yes, many managers do this, and yes, they charge the fees associated with active managment for their efforts. The argument in EMT though is that even if they really do try to outperform the market, they can only do so by incurring additional costs, and that they must therefore achieve returns in excess of the market merely to offset the costs of the active strategy. Since there is only one "minimum" level of risk for a given level of return (remember the 'efficient frontier?), then (assuming efficiency) an increase in the level of return can only be had by increasing the level of risk.

RE: time diversification:

This has nothing to do with the distinction between "standard deviation of a distribution and the variance of the mean of that distribution". Standard deviation is about the variance of returns about a mean: its just that to make the math work, you need to use the square of the variance.

Time diversification is the notion that variance decreases with the holding period of an investment. In my edition of Malkiel (the sixth, published in 1995/6) there is a chapter 14 entitled "A Life Cycle Guide to Investing". (I say this because he's revised the book a couple of times) If you flip through thata chapter, you'll find a bar chart/graph with six 'floating' bars, which show the anticipated range of returns for various holding periods. For longer time periods, the anticipated range of returns is smaller than for shorter time periods. THAT is time diversification illustrated. (Once again, sorry I can't do HTML, or I'd put the damn thning up.

RE: active v. passive portfolios

I understand your argument, but Bogle's is tighter. Yours assumes that the relationship between AVG1 and AVG2 is such that the higher MER of the AVG1 portfolios will drag their net performance below AVG2. Bogle's argument establishes the connection, so you don't need to make that assumption.

I agree that almost no manager can consistently beat the market, year after year after year. So what? That's not the point. I don't invest discretely each year: I invest for a LONG period of time. The important question then is: can my manager beat the market consistently over LONG periods of time. S/he doesn't have to beat the market every year to beat it consistently over LONG periods of time: s/he can have a bad year (or even two) and still beat the market over the LONG term.

Your fianl point about disliking the odds is the most important one. That is the compelling reason for indexing: statistically, most investors (including most porfessional managers) can't beat the market, so indexing is a rational resopnse. That is hardly the same though as saying the market CANNOT be beaten. It's hard but there are managers who can do it. (At least I hope so, because my co-author and I spent a lot of time writing about the best way to find them. :-)

Date: 28-Apr-98 - 9:38 AM
From: George

Date: 28-Apr-98 - 9:52 AM
From: George

Ooops - I stll peck the wrong keys at times.

Thbox: Boy, it has finally dawned on me. "The Canadian Mutual Fund Bible" is your book! [As I said earlier I can be slow.] I have not read it but will try to correcty that shortly. I presume that the Worlds Biggest Bookstore in Toronto must carry it.

So far I agree with most of what you say, I need to think some more on the "not sure" stuff, and I appreciate the way you express yourself.

Is is also a bit of a relief to know that you have taken the time to write a book - and thus spent much time on this issue. I was wondering - "Who is this guy?" - that is running rings around me.

Be back.

Date: 28-Apr-98 - 10:05 AM
From: thbox

Hi PK:

If I understand you correctly, your argument is:

(1) using active mgmt involuntarily delegates the asset mix to the portfolio manager, because you have no control over the degree to which s/he will be "fully invested" (or indeed, the degree to which s/he adheres to a particular investment approach (value, growth, large/small cap, etc.)

(2) in large-caps at least, the potential excess returns from active management are insufficiently great to justify the risk of underperformance, particularly given the fact that the "guaranteed" returns of the index are adequate to meet your investment objectives.

I agree. As to (1), my personal view is that I want to leave the investment decision to someone with more brains than me, and if Krembil in his wisdom wants to wait for valuations to improve before investing, that's OK with me - he unquestionably knows more about it than I. I'm not so concerned about my 'asset allocation (since I'm one who believes that over the long-term stocks will work best) My concern with style drift is that it is indicative of a lack of mgmt discipline. If there's no discipline, I have no assurance that what has worked for the manager in the past will continue to be applied (and so I have less confidence in the likelihood of future superior performance.)

As to (2), you are to be commended. The issue is exactly WHAT ARE MY NEEDS rather than WHAT'S THE BEST FUND. The answer to the second presupposes an answer to the first, but few people bother to ask it, let alone answer it.

Thanks for the debate.

Bylo (wherever you are):

Cogent contribution, as always:

As to (1) , yes, but you're talking averages again. There are specific funds that do not 'revert' to a long-term position only 1-2 percentage points above the benchmark. Moreover, the fund returns are NET of expenses, so the GROSS difference is in fact greater. (But I don't want to go down the MER debate road - again - now.)

As to (2) (a) yes, definitely, and tax efficiency is the one consideration I left out of my "how to choose good managers" list (although I adverted to it indirectly in my reference to low portfolio turnover. And as to (2) (b) a VERY good question, which you and I have bounced around before. I have real practical concerns about this, but it doesn't alter the argument that it is possible to outperform through active mgmt.

At the risk of repeating myself, I'm struck by the fact that supporters of indexing quickly abandon Bogle's logical justification for indexing, and instead adopt a very practical view - it may be possible to outperform the market through active mgmt but its too damn much trouble for the (incremental) benefit, so lets take the path of least resistance. There is nothing wrong with this argument, but it certainly lacks the intellectual rigour Bogle would (apparently) like it to embody.

hope you're having a fun trip :-)

Date: 28-Apr-98 - 10:10 AM
From: thbox

Hi George:

No rings, thats for sure. If I was sooo damn good at the fund thing, I'd be on a beach somewhere very warm rather than yipping about how it can (should? might?) be done.


Date: 28-Apr-98 - 1:13 PM
From: Bill Smith

Andrew, The Trimark Fund has had a tough time and is likely to continue in this vain. Despite some comments re/ size not being an issue, it certainly is. Over the last 5 years none of the largest diversified Canadian Equity Funds like Trimark's has outperformed the TSE 300 index. Trimark are restricted to buying only the largest of Canada's companies, eroding their ability to find good quality undervalued stocks which may present strong growth opportunities going forward.

Added to this, Trimark seems to have deviated from style by purchasing gold in late 1997. Trimark esposues buying good companies. Gold is not a good company, it produces no earnings and is less a store of value than once perceived.

The Elliott & Page Value Equity Fund seems like a good option as it espouses the same mandate that Trimark claims, but because of its size ($30 million) and very strong management track record, it presents an obvious replacement, should that be what you're looking for.

Date: 28-Apr-98 - 1:28 PM
From: thbox

Bill Smith:

Could you tell me about Gord Higgins' track record?

thanks in advance

Date: 28-Apr-98 - 1:36 PM
From: Bill Smith


Sure. Gord Higgins has returned 11% for the first 3 months of 1997, placing him in the second quartile.

Prior to that his track record gross of fees, running pension funds is 16.8% in 95, 38.3% in 96 and 20.0% in 97. Each of these years he has outperformed the TSE 300 even after taking 2% off for what would be mutual fund fees.

Date: 28-Apr-98 - 2:45 PM
From: thbox

Thanks for the quick response.

Here's two more questions:

(1) Can you tell me where I might get that kind of info.

(2) What is his long-term record? In particular, how well has he done through the bear market of 1990-1, or the (mini) bear of 1994?

Thanks in advance again! :-)

(Do you have an e-mail address?)

Date: 28-Apr-98 - 3:22 PM
From: Bill Smith


This information is difficult to find as only those investment advisors who have cotact with Elliott & Page are likely to have it.

As far as Gordon Higgins' performance prior to 1995, these munbers are apparently not published as there is a compliance restriction against him doing so seeing he was with a different pension fund dealer. But from what I know he had solid 2nd quartile performance through the 7 years he was with Aetna Invesment Management.

I would prefer not to disclose my email address at this time but I will be reviewing this forum in case I am able to help further.

Date: 28-Apr-98 - 3:32 PM
From: thbox

IF he is a member of AIMR (that is, if he is a CFA) then the standard rule is that the track record belongs to the firm and not to the individual. Those who aren't CFAs aren't bound by the same rule. In any event, why wouldn't that restriction prevent the disclosure of the pension fund track record from '95 to '97, unless he ran institutional money for E&P.


Date: 28-Apr-98 - 4:49 PM
From: Bylo

thbox, PK, et al

This is another one of the threads that makes FundLib the best mutual fund discussion forum on the 'Net. Once the activity on this thread dies down I'll "archive" it for posterity. We've lost too many oldie goldies to let any more die in cyberspace. And yes, the archival will be on the web :-)

BTW, to answer an earlier question, I'm across the street from the western residence of one M. Mouse, Esq. Wonderful weather here -- 25 degrees, sunny and not at all humid -- but alas I gotta work. Sigh :-(

Date: 28-Apr-98 - 4:55 PM
From: George

It seems I may have introduced a thread within the thread in this strea a few days ago.I hope it is not annoying to anybody asm y own comments are not Trimark specific.

In reply to some who have made comments on my comments:

To JJ: While I am most pleased with Allan Jacobs performance with Sceptre over the last 5 years, I think 5 years is too short a time interval to judge if this was "luck" or "market smarts". [My analogy is that if somebody tosses a coin only 5 times and gets 4 heads, you raise your eyebrows but don't rush to buy stock in his abilities yet. If after 20 tosses he has 16 heads - BUY!] Yes I too saw that Jacobs makes $2.2 millions. Well good for him but I think this a sign of how crazy things are. Clearly Jacobs is the "star" at Sceptre and they don't want to lose him. But I sure wish there was a John Bogle on the Canadianinvestment scene as a counterbalance to the extremes that the Jacobs number signifies.

To Colin White: I am all for getting as much information out to the public as possible - and I view Forums like this one as a small step in that direction. But I would not laud the Canadian Mutual Fund industry too much. There is much they could be doing for consumer information that is not being done. Unfortunately - I think the current successes in mutual fund sales numbers results in the status quo being maintained. My fear would be that eventually there may be deep disillusionment by many fund holders against the high fees they paid - and then there may be negative long term consequences.

To PK and Bylo; Thanks for your input. You state what I wished I had said - and what I may repeat tomorrow. It seems that more or less we are in the same "camp" but you both have a better arsenal of facts and words. Perhaps together we can give Thbox a good workout.[I hope we aren't ganging up too much - but he seems a cheerful sort - and it all may be grist for the next edition of his book.]

To PK: I read your 7:57AM posting with much interest and fascination. Can I ask some questions? (1) Can you tell me the details of your strategic asset allocation mix? (2) For "diversified, large capitalization, Canadian equities" do you use some index funds or do you go to TIPS? (3) For broadly based investments I have been inclined to go more with the US S&P 500 than the TSE 100. Do you share this perspective? The 500 is not as resource + bank based as the TSE is and is representative of a much more mature economy. [I feel a bit unpatriotic saying this.]

To Thbox: I agree with PK that "For anyone who opts for an active management approach I would recommend using your selection criteria". But then if I agree with you that there are managers who can beat the market and you have a prescription that makes this more likely - my next question is "Can you be more quantitative? Give me numbers?" I realize that this may be tough to do. But I am reminded of my past dealings with insurance people who try to confuse me with "possibility" of some unfortunate accident when what I want from them is the "probability" of that occurance. And there is a world of difference between the two. The probability number may be non-zero, but if it is small enough, I will ignore it. [To illustrate, every morning when I get out of bed I may die for having done that - but I am inclined to ignore that possibility and its associated probability - and in fact usually do get out of bed.]

Methinks I can go on too long.

Date: 28-Apr-98 - 5:04 PM
From: Bill Smith

He does have a CFA which explains why he can't promote his numbers before 1995. Since then, the institutional money was a Manulife Pension Fund and they own Elliott & Page which explains why he can promote those numbers. I understand they are recorded in SEI which tracks Pension Funds like Bell Charts tracks Mutual Funds. I don't however know the exact name of the Pension Fund to look it up.

Date: 28-Apr-98 - 5:22 PM
From: thbox


I think the next edition will be a tell-all expose on the fundlibrary's virtual personalities! (Oh yeah, now THAT sounds too exciting for words.)

Less facaetiously, these sorts of debates DO help - both to refine what it is that I think (when I think....(I think)), and in articulating it.

You pick up on the crux of an issue quickly. The trouble with too much mutual fund analysis (particularly of the sort found in 'best funds' books) :-) is that it attempts to reduce the analytical process to a mechanical application of ratios, rankings and various other 'numbers'. It would be nice if it could be quantified entirely - because that would at least make it straightforward, if not simple. But it can't. The reality is that so much of what is truly important in mutual fund analysis is not amenable to quantification. I'm currently working on a piece about Ranga Chand's Scotia Leaders Program (Bylo has seen the first draft.) The trouble with Chand's analysis, which he lauds as "wholly quantitiative" is that he misses the point. He insists on a five-year track record, but 3 of the funds in the Cdn equity portfolio had had management (and even mandate) changes in the period of time prior to their inclusion in the portfolio.

Now admittedly, Chand's methodology is about as sophisticated as a concrete block, but the essential point is that "wholly quantitative" analysis is a chimera. Any sensitive analysis requires judgement, and that means (at some point) wisdom has to prevail over knowledge. That is not to say of course that I have wisdom (I wish) but only that any entirely quantitative approach is doomed to mediocrity. In considering the various factors I outlined in an earlier post, it would be impossible to rank them. In Some cases one factor will predominate: in others, the conjunction of two or three factors will outweigh what would ordinarily be a principal concern.

Yadda yadda, sorry I go on too much. That's the trouble with discussions - there's no one there to say "shut up".

regards :-)

BTW, our book is not like the others: there are no explicitly recommended funds, and no lists (except a bald list of funds with five-year track records as of 12/96) The book is much more about what (we think) is important in fund analysis, and HOW investors can do it themselves (so that they choose funds that are suitable for them rather than 'best' in some weird objective sense.)

Date: 28-Apr-98 - 7:25 PM
From: PK

Hi Thbox -

In your last post you said "It would be nice if it could be quantified entirely - because that would at least make it straightforward, if not simple. But it can't."

I agree wholeheartly. I'm not usually a big fan of quotes, but one of my all time favorites is from Einstein and is appropriate here:

Einstein said "Keep things as simple as possible, but not more so". It seems to me alot of investment analysis/advice is firmly in the more so side of his statement.

To George - I promise to answer your questions in a couple of days -- unfortunately I'm really pressed for time right now (lots of work to do and my taxes!)

Date: 29-Apr-98 - 9:19 AM
From: George

Date: 29-Apr-98 - 10:13 AM
From: George

Oooops - another ops above.[I hit the return instead of the tab.]

To Thbox and PK. I agree but disagree. I agree with "Keep it as simple as possible, but not more so [AE]." My less eloquant version is: "keep it simple stupid". It is also true that not everything under the sun can be quantified and also that too much emphasis on numeric details at the expense of judgment can be a mistake.

But I would argue that financial analysis in the end is about numbers - numbers about costs, numbers about returns and numbers about risk - true, this the hardest of the three to quantify. And also about some non-numbers in issues like - "Do I invest in Philip Morris because they sell cigarettes?"

Einstein believed in numbers. And he was a remarkable scientist and human being. I was fortunate in that at age 12 my dad gave me his books, "The World As I See It" and "Science ... (I forgot the rest of the title) as birthday presents and I read and thought about them a long time.

To continue with Eistein - because I think it relates to our issues. His ideas about E=mc**2 and the curvature of space had to be tested with numbers. Until they could be proven to be true they were only "interesting ideas". But that was hard to do. Years later, in 1919 Dyson, Eddington and Davidson did successfully measure the bending of light by the sun. This "confirmed" his ideas and made them useful facts.

They real challange faced by Dyson et al was to convince their colleagues that what they saw [measured] was not simply a statitical fluctuation [a random walk number], but a meaningful and conclusive number with reliasbly estimated uncertainties.

It seems to me that as investors, whether we are evaluating the performance of funds or the performance of managers, in the end we must try to separate the statistical fluctuations from the statistically conclusive numbers. That of course is difficlt - and I have no magical insights. It is a work in progress. [And thus I really appreciate and benefit from dialogues with you out there.]

To Thbox. I empathise with what I interpret as a lament in "Wholly quantitative analysis is a chimera". I agree it is hard, that we cannot YET understand everything in quantitative terms, that the light at the end of the tunnell is not yet in sight. But I would argue that we must believe that "any given idea or prescription" in the end must be tested with numbers - if it cannot be thus, I think the idea is doomed to remain an "interesting possibility", that may or may not be legitimate, - and no more than that.

My apologies if I sound a bit preachy at times. Cheers.

Date: 29-Apr-98 - 10:20 AM
From: Scanner98

To George, et al:

Your posts have nothing to do with the thread name, so could you please either discuss the Trimark Select Growth fund, or start a new thread?

Date: 29-Apr-98 - 10:25 AM
From: Madelyn

Wow, this thread sure is a keeper. I'd just like to make a couple of additional comments.

I found it interesting that George brought up the Manhattan Fund. This fund was THE "performance fund" in the late sixties. I think there are many similarities now to that time. There were lots of young hot managers that had no experience in anything but a bull market, and lots of investors ready to jump on the bandwagon after a 15 year bull market that started in 1948. The fund did 38.6% in 1967, far outpacing the S&P, and then went downhill from there. Some of the "growth" companies it held went bankrupt.

thbox, did you see the article in the Globe (I think), that discussed the Scotia Leaders Program dumping the BPI fund? It was hilarious. The Scotia VP in charge was quoted as saying that a year was long enough to wait for performance. Then later in the article, discussing the poor performance of the Scotia Leaders, he said that the investors should understand that mutual funds are a long-term hold. Huh?

"Chand's methodology is about as sophisticated as a concrete block ..." hehehe, I couldn't agree more. I'd be interested in seeing your piece on this.

Date: 29-Apr-98 - 10:30 AM
From: Scanner98

I agree with your plea - but being new here I was not sure if that was the right thing to do. I was hoping that somebody with more seniority or experience would take the initiative. Sorry.

Date: 29-Apr-98 - 10:34 AM
From: George

Another oops and damn. The above message "from Scanner98" was really "from George". Sorry again. I am a marginal compter keyboard type.]

Date: 29-Apr-98 - 10:56 AM
From: PK

Hi Scanner - I'm sorry you believe the thread has digressed, but I actually think it has been quite to the point. Andrew Buck's original question was "Should I keep Trimark Select or dump it?". Instead of the usual "sell X, Buy Y" type of comments (usually given with little rationale) the discussion has been a reasoned debate between the merits of Trimark (very specifically and well articulated by Thbox) vs. an alternative plausible strategy - namely passive benchmarking. Along the way, there has been digressions, but in the 3 or 4 months since I found this site, I've thought some of the best threads have had an element of serendipity about them. Once again, sorry that you do not seem to agree with this assessment.

Date: 29-Apr-98 - 10:57 PM
From: thbox


I didn't see the article (I couldn't find it in the Globe). Can you be more specific about where it was?

Thanks in advance

Date: 01-May-98 - 3:18 PM
From: Madelyn


Sorry, it wasn't the Globe but The Ottawa Citizen (Southam). April 14, 1998 in the Mutual Fund Report.

The article is called "Leaders was a follower through '97".

Excerpts: "Mr. Pelley [VP of mutual funds for Scotia Securities] said program administratiors are prepared to endure the five and six-month slumps that occasionally befall even the best of funds, but their monitoring system draws the line at 12 months. 'A decent fund manager should be able to turn one around within a year', he said."

Later, from Mr. Pelly, "From our perspective, we're very happy with the program itself [Leaders]. It's doing exactly what we intended for it to do. we haven't promoted it as a short-term program. If you bought long-term, you know sometimes you have to grin and bear it."

From me: I don't think BPI sold that fund as short term either. I really find it ironic. I can't find this article on the Net, so you may have to dig it out.

As you probably know, Scotia Leaders had a 2.84% return for 1997.

Date: 01-May-98 - 3:26 PM
From: thbox


In fact, I didn't know what the 1997 annual return for the program was. Thanks for the info. I'm sure though that investors will be happy with that return because it was -after all- achieved through a "wholly quantitative and objective research methodology." (Just SAYING that improves returns, don't you know. :-)

(Thanks for the up-date on the article. I'll see what I can find.)

Date: 01-May-98 - 4:55 PM
From: Madelyn

Yes indeedy. ;-)

I wrote an article awhile ago that touched on the Leaders Program, and a couple of others. That's Not a WRAP!. At the time you could access the Leader's program returns from their Web site. Now it see it is password protected. Hmmm, wonder why?

Date: 01-May-98 - 5:38 PM
From: Jane

thbox or Madelyn, do you know what other funds the Scotia Leaders program had invested in?

Date: 01-May-98 - 6:30 PM
From: thbox


The Scotia Leaders Program has two portfolios: one Canadian; one global. Eachis composed of five funds, and in each portfolio, the five funds are equally weighted (20%)

For the Canadian portfolio, the funds are;

AGF Growth Equity Fund

Sprectrum United Canadian Investment Fund [formerly BPI Cdn Small Companies Fund]

Industrial Future Fund

Trimark Canadian Fund

Elliott & Page Equity Fund

For the global portfolio, the funds are:

AIC Value Fund

CI PAcific Fund

Fidelity International Portfolio

Templeton International Stock Fund

Trimark Fund

Of the funds in the Cdn portfolio, three hadn't had the same manager for the five years prior to their inclusion in the program (in October/96), and one (the Industrial [now Universal] Future Fund changed its mandate in mid-1993. But, hey!. Never mind those details, we're wholly quantitative......

Hope this helps.

Date: 02-May-98 - 9:46 AM
From: Jane

Thanks. It is quite interesting. And people actually buy this program?

Date: 02-May-98 - 11:31 AM
From: thbox

In (ill-advised) droves.

At the risk of seeming overly cynical, doesn't a "wholly quantitative approach" imply that no human intelligence is at work? (I'm sure Scotia would take umbrage at that view, but if the shoe fits ...... :-) )

Date: 03-May-98 - 4:43 PM
From: Madelyn

thbox, I just re-read an earlier posting that you did about Gerry Tsai and Magellan. My understanding was that Tsai ran a Fidelity fund before departing to run the Manhatten fund, but I thought that Ned Johnson ran the Magellan fund and that Tsai ran another. I'm not clear on this though so can your clarification would be appreciated. Did their funds merge into Magellan?

Thanks in advance.

Date: 03-May-98 - 5:41 PM
From: thbox


My information is that Tsai was the first manager of Magellan (which was a small fund when Lynch took it over in 1977.) Tsai certainly ran Fidelity's Capital Builder Fund (which was an early entrant in the g-go fund field) before he left to start the Manhattan Fund but I can't find the reference now to Tsai's (alleged) mgmt of Magellan. I'll look more tomorrow.

Date: 05-May-98 - 4:35 PM

Date: 06-May-98 - 3:56 PM
From: voyeur

Doesn't it all come down to picking the right stocks? I continue to DCA into Trimark Cdn because I like some of the newer investment choices.

For instance, (Gummy, Bylo take note) Mortice Kern Systems out of Waterloo (stock symbol MKX on the TSE), which had IPO mid last year at $7. Today, just passed the $10 mark. See news at Mortice Kerns Systems chosen by Microsoft

Date: 06-May-98 - 4:28 PM
From: Bylo

Good for Randall (Howard, the President of MKS). That's yet another triumph for him. Several years ago IBM licensed the same MKS technology for use in their flagship OS/390 operating system. Glad to see that Billionaire Bill finally saw the light ;-)

But what's the point here?

They also could have bought such boring low-tech stocks as Yogen Fruz (ice cream and yoghurt.) Alan Jacobs of Sceptre did. YF was around $5 a year ago. It's now over $14 and climbing rapidly.

Or they could have bought Schneider Foods (meat packing -- even lower tech and even more boring!) Irwin Michael of ABC did. SCD's gone from $11 to $29 in the last year.

Instead they also bought into Burns Philps (yeast, spices, et al). Then they watched as their investment (and mine too, dammit!) drop like a stone to 1/10 of its value.

One winner (or loser) doesn't make a fund a success (or a failure.)

Date: 06-May-98 - 5:54 PM
From: Alberta-Jon

Ladies and gentlemen:

Wow! What a fantastic mini-school in some of the fundamentals of fund investment.

Nothing profound to add to this discussion other than a heart felt thanks to all of you for taking the time to write such clear accounts of such complex ideas.

Is it kosher to ask thbox the name of his book.? From what I have read here, I know I would enjoy and learn much from his/her book.

I definitely will be adding this thread to my growing library. Thanks again.

Date: 06-May-98 - 8:30 PM
From: thbox


Its got to be at least as kosher as the shameless huckstering I (occasionally) engage in. It is: The Canadian Mutual Fund Bible (Macmillan Canada)

Thanks for asking: hope you enjoy it.


Date: 06-May-98 - 8:35 PM
From: PK

To Alberta Jon-

His book is "The Mutual Fund Bible" and it is available frugally at many public libraries. Or you could buy it, so thbox can give Trimark more money so they can then allocate it to cash.

Date: 06-May-98 - 9:53 PM
From: thbox

ho ho ho ho ho PK. (Maybe I'll dynamically allocate it) :-)

Date: 07-May-98 - 3:34 PM
From: voyeur

Bylo: I agree with your statement that "One winner (or loser) doesn't make a fund a success (or a failure.)"

But, in order by make a decision on bailing out of this fund, our staying in, I plan to do the following:

1) Review Trimark's portfolio to see if mandate has remained the same and fits in with my own objectives.

2) Get an "unaudited statement of trading activities" for the next quarter (Trimark offers to provide this on request), and see if they are following their own "buy good companies" creed. Examine the trading on the non-performing equities to get an idea of their outlook on each one.

For example, what trading if any, has occurred with INCO. Are they purchasing more INCO shares while they are cheap, meaning they are voting that INCO is still a good company. Or, are they holding their current position, meaning they no longer believe in long term prospects, and will sell off when the resource sector rebounds. Or, are they selling their current position at the worst possible time.

Have they sold off Burns Philps, and written off this company? etc. (based on previous thread, Templeton Growth bought into this company, too)

3) With a portfolio of about 50 stocks, analyzing the non-performers should be too bad an exercise. I will report back if any one is interest.

Being a novice investor, with a long-term investment horizon of 25-30 years, I believe I have set a modest goal of 10% CAR. However, we all want to maximize our returns, especially when the going is good. Evaluating when to dump a fund is not an easy task.

Date: 07-May-98 - 4:00 PM
From: Alberta-Jon


Thanks. I look forward to reading your book. Nothing wrong with discreetly selling your wares, I think.

PK,,,,don't tell thbox but I almost always read a book from the library before buying. Thanks for the frugal tip.

Date: 07-May-98 - 4:17 PM
From: Bylo


According to thbox, Trimark haven't changed the mandate or management style of their funds. Now who am I to argue with him? :-)

That said there seems to be no reason to dump the fund. OTOH, when it's clear that a fund's mandate or management style has changed (hello Frank) or when a manager gets caught doing something naughty (goodbye Frank) that's a different matter. But there's no evidence of this with Trimark.

I think we may disagree here on philosophical grounds. When I buy an actively-managed fund I let the manager do his/her job. Every stock picker has both successes and failures. (I think Peter Lynch said he was happy if on balance just 60% of his picks turned out to be winners.)

BTW Burns-Philps are an Australian company. It's Trimark Fund (not Select Canadian) that holds/held them, as does/did Temp Growth. [FWIW, I own some of both funds. Since I'm confident in their managers' abilities, I don't pay much attention to the minutae of their investments.]

With a 25-35 year horizon, your 10% CAR is by historical measures a realistic objective. Unless of course you believe that we've entered some new economic age and thus "this time it's different."

Date: 07-May-98 - 4:37 PM
From: rupert

If I wanted to dump my Trimark SCG , anybody got any suggestions about funds with supposedly similar philosophy that I might go into? No loads preferred.

Date: 07-May-98 - 5:14 PM
From: fish

I don't know if you people realize or not, but Vito Maida manages this fund NOT Bob Krembil.

And Mortice Kern Systems is not in this fund, but it is in the Trimark Discovery fund.

Date: 07-May-98 - 5:27 PM
From: thbox


what do you figure Krembil does at the office - hook together the paperclips inside the holder so as to fool the others?

Come on. Its Krembil's company, and he's the operating investment mind. I think Maida's a bright guy (and obviously Krembil does) but the funds are run by teams, and he's the "lead" manager for the purposes of public consumption only.


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