Archive for December, 2012

Sleepy Mini Portfolio Q4-2012 Update

December 12, 2012


Since my previous update, the Sleepy Mini Portfolio has gained 3.75 percent due to a rally in the stock markets over the fall months. It is now just over five years since the Sleepy Mini Portfolio was launched in August 2007 with an initial investment of $1,000 with a target allocation of 20% bonds, 20% Canadian stocks, 30% US stocks and 30% International stocks. Another $1,000 was added to the portfolio every quarter since then for a total investment of $21,000. Here’s how the portfolio looks as of December 11, 2012:

TDB909 – Canadian Bonds – $4,629 (19.4%)
TDB900 – Canadian Equities – $4,738 (19.9%)
TDB902 – US Equities – $7,011 (29.4%)
TDB911 – International Equities – $7,457 (31.3%)
Total – $23,835
Total Invested – $21,000

The idea behind the Sleepy Mini Portfolio is to follow a mechanical investment strategy of committing savings to a long-term portfolio on a regular basis. Therefore, we will add another $1,000 to the portfolio and rebalance it to the original target allocation using this rebalancing spreadsheet. Here are the results:


TDB909 – TD Canadian Bond Index (e-Series) – Buy units for $337.63.
TDB900 – TD Canadian Index (e-Series) – Buy units for $228.79.
TDB902 – TD US Index (e-Series) – Buy units for $433.58.

Inspite of the economic troubles in Europe, International markets have outperformed other markets over the past quarter. Therefore, we will skip making a contribution to the International stock portion of the portfolio.

Sleepy Mutual Fund Portfolio as of Dec. 11, 2012

Readers are often curious about the annualized returns of the Sleepy Mini Portfolio. It is easy to calculate using the XIRR function in Microsoft Excel. Plugging in the dates, contributions and the current portfolio value tells us that the Sleepy Mini Portfolio returned an annualized 5.3 percent over the past five years.

[NB: An earlier version reported the rate of return of this portfolio incorrectly as 7.2 percent.]

Q&A with Vanguard Canada

December 10, 2012


It is now more than one year since Vanguard came to Canada by launching its first set of Exchange-Traded Funds (ETFs). Last week, I had a chance to chat with Atul Tiwari Chief of Vanguard Canada. I asked him a few of my questions and those of Canadian Money Forum members (here) about Vanguard’s plans for the future, ownership structure and securities lending policies.

It is now over an year since Vanguard launched its first suite of ETFs. The flagship Vanguard MSCI Canada Index ETF (VCE) has just $91 million in AUM. Can long-term investors assume that Vanguard is committed to doing business in Canada?

We are very pleased with where Vanguard Canada is today, exactly one year (Dec. 6th) after our launch. We have $430 million in assets and accounted for 12.5 percent of inflow into ETFs in the categories of our 6 core products to date in 2012. Investors can be confident that Vanguard plans to be in Canada for a long, long time. That’s because Vanguard has expanded into new markets in a careful, deliberate fashion.

Any comment on upcoming ETFs?

We will be launching our third tranche of ETFs in 2013. We are looking into launching unhedged versions of Vanguard EAFE Index ETF (CAD-Hedged) (TSX: VEF) and Vanguard MSCI US Broad Market Index ETF (TSX: VUS) but our plans are not final.

Vanguard in the US offers extras to investors with $50,000 or more in assets such as commission-free ETF trading, financial plans etc. Are there any plans to launch similar services in Canada in the future?

Vanguard in the US operates a brokerage that allows it to offer clients commission-free ETF trading. We don’t have plans to offer such services in the near future. Canadian investors wishing to purchase Vanguard ETFs can currently do so through brokerages such as iTrade and others that offer them.

ETFs such as VEF and VEE which are wraps around US-listed ETFs. Will these ETFs hold component securities directly at some point in the future?

The issue is cost. It is very expensive to buy and take custody of foreign shares in Canada compared to the United States, which has the deepest capital markets in the world. Vanguard is aware that holding wrap ETFs in registered accounts incurs a cost and investors should weigh that against the benefits of not having to convert currencies and US estate tax implications. Withholding taxes should be only one of the factors you consider when you invest.

Can you comment on the ownership structure of Vanguard Canada? Is it similar to that of the US, where Vanguard is set up as a mutual company in which the company is owned by the funds and the interests of Vanguard’s are aligned with that of investors in its funds?

Vanguard Canada is set up as a subsidiary of Vanguard US. Since Vanguard in the US is set up as a mutual company in which the mutual funds own the fund company, and it operates on an “at cost” basis, it translates into lower costs for investors over time. Vanguard Canada will operate on the same principle. At present, we are in start-up mode, so essentially Vanguard US fund holders are subsidizing investors in Vanguard’s Canadian ETFs. As the ETFs gather more assets and the operations become profitable, the profits will, in effect, flow back to investors in the form of lower fees.

Can you comment on your securities lending policies? What about collateral? Is there a chance, however remote, that the collateral can turn illiquid or experience losses? (Interested readers may want to check out this paper on how Vanguard practises securities lending).

Vanguard does securities lending differently from other ETF vendors. First, there is no securities lending in fixed-income products. In equity ETFs, only a small percentage of a fund’s assets — between 1 to 5 percent, typically around 3 percent — are lent out. Vanguard lends out only scarce securities to earn better fees. For example, Vanguard ETFs will not generally lend a stock such as IBM that is easily available for borrowing. It should be noted that unlike other firms that allocate a significant portion of lending revenues to their management companies, Vanguard returns all lending revenues, net of broker rebates, program costs, and agent fees, to the funds for the benefit of investors. Vanguard invests the collateral in high quality short term instruments, such as Government securities or cash deposits and marks to market daily at 102-105%.

A Compilation of Warren Buffett’s Online Articles

December 5, 2012


I recently ordered Tap Dancing to Work, a collection of articles on (and sometimes by) Warren Buffett that had appeared in Fortune magazine over the years. Unfortunately, I found the book somewhat disappointing because I had already read the better bits over the years (most of it is already available online) and the bits that I had missed (usually the older articles) were hardly interesting. A further quibble is that some of Mr. Buffett’s work that were published elsewhere are not included in the book.

If you have an hour or so and are interested in reading some of Mr. Buffett’s works check out the following articles available online. And prepare to be amazed by a guy who has made some astonishingly prescient market calls despite claiming to have no idea where the markets are headed short-term.

Buffett: How inflation swindles the equity investor

By Warren Buffett, Published May 1977 in Fortune Magazine

For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms, let the politicians print money as they might.

And why didn’t it turn out that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds.

The Superinvestors of Graham-and-Doddsville

By Warren Buffett, Published 1984 in Hermes, Columbia Business School Magazine

I’m convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.

Mr. Buffett on the Stock Market

By Warren Buffett, Carol Loomis, Published November 1999 in Fortune Magazine.

I think it’s very hard to come up with a persuasive case that equities will over the next 17 years perform anything like–anything like–they’ve performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate–repeat, aggregate–would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that’s 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more.

Warren Buffett On The Stock Market

By Warren Buffett, Carol Loomis, Published December 2001 in Fortune Magazine.

Even so, that is a good-sized drop from when I was talking about the market in 1999. I ventured then that the American public should expect equity returns over the next decade or two (with dividends included and 2% inflation assumed) of perhaps 7%. That was a gross figure, not counting frictional costs, such as commissions and fees. Net, I thought returns might be 6%.

Today stock market “hamburgers,” so to speak, are cheaper. The country’s economy has grown and stocks are lower, which means that investors are getting more for their money. I would expect now to see long-term returns run somewhat higher, in the neighborhood of 7% after costs. Not bad at all–that is, unless you’re still deriving your expectations from the 1990s.

Buy American. I Am.

By Warren Buffett, Published October 2008 in The New York Times

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Buffett’s Big Bet

By Carol Loomis, Published November 2009 in Fortune Magazine.

Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500?

That question is now the subject of a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protégé Partners LLC, a New York City money management firm that runs funds of hedge funds – in other words, a firm whose existence rests on its ability to put its clients’ money into the best hedge funds and keep it out of the underperformers.

Why stocks beat gold and bonds

By Warren Buffett, Published February 2012 in Fortune Magazine.

My own preference — and you knew this was coming — is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See’s Candy meet that double-barreled test. Certain other companies — think of our regulated utilities, for example — fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

And last but not least, Buffett’s Letters to Shareholders usually contains a nugget or two of investment wisdom.

Buffett Partnership Ltd. Letters, 1959 to 1975.

Berkshire Hathaway Inc. Shareholder Letters, 1977 to 2011.