Canadian PP Performance?

[bluedog]

Has anyone calculated how the CA PP performed in 2012?

Mine definitely has not performed as well as USA one.

The TSX has not made the gains the S & P 500 has over 2012.

I started  in Jan - Feb 2012 when the assets were relatively high.

My simple CA PP is up 1.89% which though not a loss, is not keeping up with inflation (most seem to agree around 2.5%).

Simple being:
    XIC (22.55%)
    XWD (2.45%)
    IGT  (17.92%)
    CGL.C (8.48%)
    ZFL ( 24.2%)
    ZFS  + cash (24.4%)

I have not hit any re-balance points.

Just wondering how other Canadians are feeling about their permanent portfolios going forward into 2013?

Thoughts? I know HB felt strongly that we should only include assets of our own country.

Should we be including some US stock exposure for a smoother ride as the TSX is not as diversified and more commodity-based than the S & P 500?

[Gosso]

I track the monthly performance of the Canadian PP in Excel using the XIRR function.

My overall 2012 returns for the Canadian PP (including dividends, interest, fees, spreads, buy/sell, but not taxes) was 5.6%.

Cash = 1.0%
Bonds = 5.4%
Stocks = 10.5%
Gold = 5.8%

The majority of the returns occurred in January, which was +3.5%.  So if you missed that month then that would explain the lower 2012 returns.  Also, before Dec 1, 2012 the CA PP was hovering around 7.0% for the year, but was hurt by the late December sell off.

The Canadian PP has moved sideways since August 2011, but my guess is we start to see a move higher quite soon.

Hang in there, we're all in this together.

[Stunt]

Agreed, I was under the impression that the Canadian PP was up for the year. However I am in the same boat in that I started deploying the strategy after most of the gains so I am down since inception; albeit less than 1%.

For the most part the 4 asset classes track similar to the US PP and I agree that most of your investments should be in home currency - the reason I think HB originally wanted investments to stay domestic (correct me if I am wrong). However similar to Australia and their lack of 25-30year government bonds, I think Canada has a structural impediment that I have accommodated with my own twist on the PP strategy. Coming from the couch potato strategy, I used my 1/3 Canadian equity, 1/3 US equity and 1/3 International equity stock allocation for my 25% PP stock component.

I understand I take currency risk in having 66% stocks outside the country but I think the US market has more diversification including tech, healthcare, consumer durables and cyclicals that the Canadian market really lacks. The Canadian stock market is way too resource heavy making it almost like a commodity basket as opposed to a representation of the economy or the real marketplace.  I also think we are in a long term trend of growth in emerging markets where most growth will come from in my lifetime (I'm only 29). I can always move back into Canadian equities down the road when I will need the funds in retirement.

So I have a normal Canadian PP with 25/25/25/25 where the stock component has its own little rebalancing strategy of 33/33/33.

[Gosso]

Hi Stunt, and welcome to the forum!

I have also diversified my stocks to international and emerging markets.  I like the idea of diversifying the stocks, especially for small to mid sized countries. 

I have the following allocation:

40% 1-5 year GIC ladder
10% Long term bonds (bought directly from bond desk...although ZFL is fine)
15% Canadian Stocks
10% International Stocks
5% Emerging
20% Gold

This gives me 65% exposure to the Canadian dollar, and 35% exposure to gold and a basket of currencies.  Seems about right to me, and the backtesting supports it.

[bluedog]

Thanks for your replies.

Stunt -

Stunt - Interesting concept...

I also feel that the TSX (XIC) has its own limitations in diversity and may not truly reflect the CND economy.
It is heavily weighted in financials (32.25%) and the resource sectors (energy 25.41% and materials 18.25%), for a  total of 76% which has always niggled me.

I have always had a had a "pure" CDN PP with a bit of XWD (2.45%), but have still felt that the stock component was lacking.

XIC is up 5.72% according to IShares vs. VTI at 16.45%.

Stunt and Gosso -
What are your assets for US, International Stock and Emerging Stocks?

[Gosso]

I use XWD for the US and International stocks.  I then use VEE for emerging markets.

I believe Vanguard Canada is thinking of introducing an unhedged EAFE fund in 2013.  Since they already have the unhedged S&P 500 (VFV), I may consider switching out of XWD into the vanguard funds since they have a lower MER.  But I'll have to see where my capital gains are with XWD.

Regarding XIU:  I agree it is difficult for the TSX 60 to completely and accurately reflect the Canadian economy.  Just look at all the Walmart's, McDonald's, iPhone's, Coke, etc that people use/consume in Canada.  It does seem best to go with a more globally balanced stock portfolio.  Also, I get the feeling that our bond market is for better or worse tied to the US bond market...if this is true then it makes sense to hold some US stocks to help offset this condition.

[Stunt]

Stunt and Gosso -
What are your assets for US, International Stock and Emerging Stocks?

Since I'm adding to the portfolio relatively frequently and not dealing with hundreds of thousands of dollars (yet), I use indexed mutual funds for my PP to keep transaction/trade fees down.

For US market I have TD US Index Fund (TDB661) - 0.5% mer
For Canadian market I have TD Canadian Index Fund (TDB216) - 0.8% mer
For International I have CIBC Emerging Markets Index Fund (CIB519) - 1.2% mer

The CIBC fund is large cap value 1.2% yield and has country diversification:
South Korea  16.29%
Brazil  11.75%
China  11.48%
Taiwan  11.19%
South Africa  7.34%
India  6.69%
Russia  5.82%
Hong Kong  5.63%
Mexico  5.33%
Other 18.48%

By sector:
Financials 20.64%
Industrials 14.90%
Information Technology 13.67%
Materials 11.47%
Energy 10.55%
Consumer Discretionary 9.17%
Consumer Staples 6.34%
Telecommunication Services 5.34%
Other sectors 2.95%
Utilities 1.73%
Other 3.24%

[Stunt]

Thanks for the welcome Gosso, I agree with your assessment on the Canadian economy and like your asset breakdown. Wondering how you get 35% exposure to gold with your mix.

[Gosso]

Thanks for the welcome Gosso

Glad to have a fellow canuck aboard.

Wondering how you get 35% exposure to gold with your mix.

I was including the international/emerging stocks, since they offer the added currency diversification.

20% Gold and 15% International/Emerging = 35%

[frugal]

Gosso,

like that is not BALANCED as HB advocated.

You are predicting, no?

[Gosso]

Gosso,

like that is not BALANCED as HB advocated.

You are predicting, no?

Looks balanced enough to me.  50% in bonds (average duration around 5 years), 30% in stocks, 20% in gold.  I suppose I could balance the stocks and gold to 25/25, but the extra currency diversification of the international and emerging markets gives them a minor "gold-like" property, ie increase in value when the Canadian dollar falls, or vise versa.

[christina]

Hey -
I started my Canadian PP in October 2011. From then until October 2012, it returned 5.4% for me (with a rebalance from cash into all four other assets sometime in the summer).

Since then, my PP has lost a percentage or so.

[Gosso]

Here's a rough graph of how the Canadian PP has performed over the past 10 years:



I had to use intermediate bonds and a mix of corporate, provincial, and federal (XBB), since that is all we have going back to 2003.  So I used:

25% XIU
25% GTU.UN
50% XBB

I rebalanced in 2007 and 2010.

As you can see it is not a completely smooth and steady ride, but overall it slowly grinds upwards.  It seems to have periodic growth spurts followed by a plateau.  It has averaged a CAGR of 9%.  I'd say it is doing its job.

I also don't like using annual returns, since it is easy to pick a peak or trough, which can make the portfolio look a lot better or worse then it is

[christina]

Agreed, I was under the impression that the Canadian PP was up for the year. However I am in the same boat in that I started deploying the strategy after most of the gains so I am down since inception; albeit less than 1%.

For the most part the 4 asset classes track similar to the US PP and I agree that most of your investments should be in home currency - the reason I think HB originally wanted investments to stay domestic (correct me if I am wrong). However similar to Australia and their lack of 25-30year government bonds, I think Canada has a structural impediment that I have accommodated with my own twist on the PP strategy. Coming from the couch potato strategy, I used my 1/3 Canadian equity, 1/3 US equity and 1/3 International equity stock allocation for my 25% PP stock component.

I understand I take currency risk in having 66% stocks outside the country but I think the US market has more diversification including tech, healthcare, consumer durables and cyclicals that the Canadian market really lacks. The Canadian stock market is way too resource heavy making it almost like a commodity basket as opposed to a representation of the economy or the real marketplace.  I also think we are in a long term trend of growth in emerging markets where most growth will come from in my lifetime (I'm only 29). I can always move back into Canadian equities down the road when I will need the funds in retirement.

So I have a normal Canadian PP with 25/25/25/25 where the stock component has its own little rebalancing strategy of 33/33/33.

My impression is that you need Canadian stocks so that you can take full advantage of a boom in the Canadian economy (Canadian prosperity). Since Canada is a resource country, there would have to be a resource boom for our economy to boom in order for our stock market to boom. You just have to accept this, as a Canadian, and not be jealous when the US stock market goes up and yours doesn't. Won't there be other times where the TSX will do way better than the S&P500? (Yes, I think so.)

Unfortunately, I don't understand the need to diversify the stock portion of the Canadian PP, if the logic above is sound.

It seems to me like you are already diversified with your gold, bond, and cash holdings, and that diversifying your stocks is kind of like watering down the 'prosperity' portion of the portfolio, and adding currency risk and whatnot.

[Gosso]

christina,

I think either way can work.  I used to encourage predominately Canadian stocks, but have decided to go with a more global approach.

It doesn't make sense to have almost no info tech stocks (except for RIMM ), health care, or consumer staples/discretionary.  Our stock market is dominated by banks and global miners, which is a large part of our economy, but not 75% of it.

We should still be overweight Canadian stocks (relative to a global weighting), especially since their dividends get preferential tax treatment, but we also need exposure to the US and international markets.  At a bare minimum we should have some US stocks, since that is where most of the multi-national companies are located.

I don't think there is a perfect solution to stocks.  The best I can think of is 50% domestic, 50% international/emerging.

The backtesting also shows that including international stocks has helped to reduce volaitlity:

CA PP with 25% in Canadian stocks (from 1970-2012):
CAGR = 10.0%
ST DEV = 8.6%

CA PP with 12% in Canadian stocks, 7% US, 6% EAFE (from 1970-2012):
CAGR = 10.1%
ST DEV = 8.1%

Source: http://www.ndir.com/cgi-bin/downside_adv.cgi

[bluedog]

Gosso,

Is there a specific reason that you chose XIU (TSX 60) vs XIC (TSX 245) for your CDN stock asset?

Is is performance or the fact that the XIU MER is .18% vs XIC at .27%?

By looking at their respective holdings, they are both heavily weighted in financials and resource sectors.

Just curious...

[Gosso]

bluedog,

I see them as roughly equivalent.  Their returns are almost identical.  XIC is a little better because you get the mid-caps, and also caps individual companies at 10% of index (to avoid the "Nortel effect"), but it has the higher MER.

I hold both, in different accounts...I cannot remember why I decided to select one over the other.

Although Vanguard Canada probably now has the best, with a MER of 0.09% (VCE).  https://www.vanguardcanada.ca/individua ... ortId=9554

I did a little tax loss harvesting at the end of 2012, and converted XIC into VCE.

[bluedog]

Thx again, Gosso.

The holdings/weightings are fairly similar, but you gotta love Vanguard's lower MER

What's the best way to switch out of XIC (in RRSP/TFSA accts) and pick up VCE?

I understand most are against market timing, but there has to be a more favourable way to make the switch.

[Gosso]

Thx again, Gosso.

The holdings/weightings are fairly similar, but you gotta love Vanguard's lower MER

What's the best way to switch out of XIC (in RRSP/TFSA accts) and pick up VCE?

I understand most are against market timing, but there has to be a more favourable way to make the switch.

If you're in tax free accounts then it doesn't matter too much.  Just wait for a calm day, then sell XIC and buy VCE.  You'll pay two trading commissions and the spread.

[christina]

It doesn't make sense to have almost no info tech stocks (except for RIMM ), health care, or consumer staples/discretionary.  Our stock market is dominated by banks and global miners, which is a large part of our economy, but not 75% of it.

I guess I always assumed that owning the Canadian stock market = owning the Canadian economy, but I guess what you're saying is that this is not true, is that correct? .I guess  Canada provides resources that support the consumer staples and tech cos, so indirectly, our economy is tied to those companies. Is this about right? If so, it does make sense to own some US stock (and maybe world stock).

[Gosso]

It doesn't make sense to have almost no info tech stocks (except for RIMM ), health care, or consumer staples/discretionary.  Our stock market is dominated by banks and global miners, which is a large part of our economy, but not 75% of it.

I guess I always assumed that owning the Canadian stock market = owning the Canadian economy, but I guess what you're saying is that this is not true, is that correct? .I guess  Canada provides resources that support the consumer staples and tech cos, so indirectly, our economy is tied to those companies. Is this about right? If so, it does make sense to own some US stock (and maybe world stock).

Sounds like you got it.  Although, if you want to keep things simple then I still think you'd be fine with only Canadian equities, plus you get the preferential tax treatment on dividends (if in a taxable account).

However, I like the idea of adding US/International/Emerging stocks, since it provides exposure to major currencies, and other markets/companies which will impact the Canadian economy.

Didn't Harper just give the auto industry $250 million dollars.  These companies are based in the US and on the US stock exchange, yet they provide jobs for Canadians, and our government is giving them money.

[kepaRos]

Gosso,

like that is not BALANCED as HB advocated.

You are predicting, no?

Looks balanced enough to me.  50% in bonds (average duration around 5 years), 30% in stocks, 20% in gold.  I suppose I could balance the stocks and gold to 25/25, but the extra currency diversification of the international and emerging markets gives them a minor "gold-like" property, ie increase in value when the Canadian dollar falls, or vise versa.

Gosso
I'm new here to the forum. It seems Canucks are in short supply. I first started a PP about 5 weeks ago. I have started scaling in... right now I have about 10% of TOTAL available funds in. The whole concept is new to me so I didn't want to buy at the top so to speak. I suppose the PP doesn't have a "top" as by definition at any time one or more of the assets are going up or down. Nevertheless I knew that gold is in a consolidation period and that the long bond is very vulnerable. Of course bonds and gold went south immediately.
I found the PP through someone I have a paid subscription with. I noticed in his "model" portfolio that he had something called the permanent portfolio... PRPFX. I was amazed to find it was based on Harry Browns work. I bought his book "You Can Profit From A Monetary Crisis" in 1974 or 75. I then bought gold, a lot of gold... and made the typical young no-nothing mistake of riding it up and then back down.  .
So after Googling around I found the crawlingroad.com site and sent for the book which I am in the process of reading.
Anyway to point... a question for you.
On Dec 19 you advocated 25% domestic LTT and 25% STT. But you say your allocation is...
"40% 1-5 year GIC ladder
10% Long term bonds"
Can you elaborate on the reasoning for the GIC ladder... I get gold... stocks/funds/etfs and cash but I am having difficulty with how to approach the bond part of the portfolio. I get the 10% long term bond but how does a GIC ladder fulfill the rest of the "bond/cash" allocation in terms of the HB balance?
I noticed the BMO bond etfs are very thin on volume... is that not a worry? (I have a BMO account as well as TD). Is that why you go with the gov bond as opossed to the etf?
thanks
K

[Gosso]

Hi kepaRos and welcome to the forum!

I'm new here to the forum. It seems Canucks are in short supply. I first started a PP about 5 weeks ago. I have started scaling in... right now I have about 10% of TOTAL available funds in. The whole concept is new to me so I didn't want to buy at the top so to speak. I suppose the PP doesn't have a "top" as by definition at any time one or more of the assets are going up or down. Nevertheless I knew that gold is in a consolidation period and that the long bond is very vulnerable. Of course bonds and gold went south immediately.

The PP does have peaks and troughs, yet they are typically minor compared to other investment strategies.  It would be best to start a PP after it has had a bad month, since it usually reverts to the mean.  I try to add new funds when the PP is at or below its trend line.

Anyway to point... a question for you.
On Dec 19 you advocated 25% domestic LTT and 25% STT. But you say your allocation is...
"40% 1-5 year GIC ladder
10% Long term bonds"
Can you elaborate on the reasoning for the GIC ladder... I get gold... stocks/funds/etfs and cash but I am having difficulty with how to approach the bond part of the portfolio. I get the 10% long term bond but how does a GIC ladder fulfill the rest of the "bond/cash" allocation in terms of the HB balance?
I noticed the BMO bond etfs are very thin on volume... is that not a worry? (I have a BMO account as well as TD). Is that why you go with the gov bond as opossed to the etf?
thanks
K

I'm not being orthodox here.  I see the STT/LTT barbell as a single unit, which has an average bond duration of around 9 years.  Backtesting with the Simba spreadsheet has shown that using intermediate bonds with an average duration of 5 years, worked just as well.  melveyr thinks it has to do with the leverage of the 30 year bonds, see HERE.  Although he still advocates using a bond ETF with a duration of around 10 years, which seems a little high to me.

I like GICs because they are free to buy (no commission, MER, or spreads), pay a higher interest rate, and still have a government guarantee backed by the printing press or nationalization of the banks (as long as you stay under 5 years).  GICs are designed for the little guy, so I'm going to take advantage of it.  The GIC 1-5 year ladder has an average duration of around 2.3 years, and then when I add the LTTs in, it results in an overall bond duration of around 5 years.  I suppose one could do 25% GICs and 25% LTTs to get an average duration of 9 years...I don't see anything wrong with that.  I just don't like LTTs and would rather increase GICs...it still provides deflation protection, yet I sacrifice the benefits from long term rates falling, which could happen if investors believe the Canadian dollar is going to significantly strengthen (just look at the Swiss 30 year bonds for an example).  Maybe I'm wrong about this, but I'm okay with some underperformance from this decision.

As for volume on BMO ETFs, don't worry about it.  BMO (and Vanguard, iShares, etc) always ensures there are bid/ask orders roughly around the NAV value of the ETF...this is accomplished by (evil ) trading bots.  You still pay a spread, but it's not a lot, maybe 0.1%.  But make sure you check the bid/ask before you order, especially if the markets are in crisis mode...although you shouldn't be selling then anyway.

I'm probably the only one advocating an average bond duration of around 5 years, although Clive was the first with his 1-10 year bond ladder, but he has gone MIA...I think he was frustrated by how popular the PP was becoming.

The most important part is 50% in bonds with at least an average bond duration of 5 years.  If you want to push it up to 8-10 year duration then that is probably best, if you want to stick with the basic plan that HB laid out.

[kepaRos]

Gosso
Thanks for your very elaborate reply... it is very helpful. 
K

[frugal]

Gosso Gosso Gosso

1- how you add funds to PP ? Multiples of 40k ? 4x10k$?

2 -  Who is Clive, what he did  and what is MIA ?


Thank you