A Comment -- General Comments From an Expert (A Commentary)

XLV-T is a Pharma/healthcare ETF from Spider. QRH-T is from Questrade and based on US health care. ZUH-T has a number of US healthcare holdings, hedged to US$.

Total Market ETFs vs. Large Cap-only ETFs? He prefers fully hedged. He prefers the S&P and then he moves into specific sectors if appropriate.

Long term suggestion on an ETF that would be relatively safe. He suggests multiple ETFs and some cash. He suggests one Canadian and one US index fund for small amounts of money. There is no commission for regular contributions. You have to be firm with your bank manager. 1/3^rd / 1/3^rd / 1/3^rd Canadian / US / Cash.

Market. We are still in a corrective mode, but expects to have a nice little run in May, followed by a pause, and then a pretty decent run for the rest of the year, possibly your typical stuff in October. This next run is going to surprise a lot of people. The US$ probably doesn’t get as strong as people expect.

Inflation? Expectations have been reasonably low over the last bunch of years. Today they are starting to creep up a little. Moving up to a year from now, he doesn’t think inflation is going to be that material. There are 2 sources of inflation that matter, one is wages and one is housing. In Canada, we could be at a tipping point where things cool down a bit. He wouldn’t worry about this too much.

Market. There has been a sleepy feeling in US equities, a lack of volatility. Volatility is at a low point, not seen since 1993. Stocks haven’t made a move since February. There are markets that are moving, but they are overseas, particularly in Europe, as well as in emerging markets where they’ve had gains year-to-date of 13% and 15% respectively. The US economy is doing fine and the rest of the world is struggling, but that is changing. The electoral mood in Europe is now focusing on the economy, and there are strong signs the economy is picking up. If you want to play in emerging markets, European companies have a larger exposure of sales to them, then US companies. European stocks have underperformed for 9 straight years, which leaves them undervalued.

A safe pharmaceutical company? He has a philosophy that the analysts don’t really understand large pharmaceutical companies. They are typically very complex. He prefers looking at the cheaper names, and by just buying cheap, that will bail him out. Right now the cheaper names are in Europe. He is looking at things like Roche Pharmaceuticals or Norval Nordisk.

Healthcare. There are 2 things in healthcare that are really driving the market. One is the shorter-term dynamics, and then there are the longer-term dynamics. A key driver is the aging population, which is a global phenomenon. As a person gets older and moves through the age differentials, the amount of money spent on healthcare increases exponentially. In developing markets, as your wealth increases, it is a disproportionate amount of money that is actually spent on healthcare. We are seeing some changes in the US health care act, but that has a long way to go before it actually becomes enacted.

Medical device or Pharma stocks?Med-Tech is more expensive right now. Valuations are definitely up at the upper band of their historical forward price multiples. He is okay with that, because they are delivering on their bottom line and there is growth. However, based on valuation, he brought his exposure down to 20% from 25% in January. He does see value on the pharmaceutical side, particularly in the biotech space.

Market. This market doesn’t want to give up. It is an interesting market from a lot of perspectives. He is Long equities, more so than normal, but still has a lot of cash. Doesn’t believe in the bond market. A lot of things have gone right; the volatility index VIX, is at an all-time low and markets are at an all-time high. Interest rates continue to creep up, which is typically is a headwind. Corporate earnings have been good, but are in the areas that nobody is buying. Canada, after having been the best performing market last year, has really lagged, not just in energy and materials, but financials as well. Today he is 80% in equities. Of that 80%, 16%-18% would be in the US.

Market. One of the most pressing issues for Canadian investors is closet index products. There was a report looking at all the global markets, and found that 37% of mutual funds in Canada are closet indexing. If you do the math on the amount of assets in Canada, this is a $275 billion problem, just on the Canadian equity category alone. Closet indexing is when a manager takes a very small bet, differentiating from the market Index relative to what they are charging and claiming to be as a product. For example, say there is a new market opening up on Mars, and a manager is investing in this new market. There is a company that is the largest in the market. The manager does due diligence, and ultimately decides the stock is not going to do well because of many issues. However, they decided to put a 3% weighting in the portfolios. The only reason they own it is because it is the largest stock on the market. If it is a 5% weighting, you own 3% in your portfolio, you are technically underweight the market, and that is your active call. There are a lot of Canadian managers that are hugging underlying index, and not making an active bet, to be different from the market. She only tries to invest in what she thinks will do well. Whether it is a big or small part of the index, whether it is the main sector or not, she is just looking for the best opportunities.

Markets. There was a little bit of sell the news in France, but it was the lowest turnout (40%) and 10% did not mark either party on the ballot. He is pessimistic about it. Political risk has passed a hurtle but has not turned the corner on risk because of the Italian election coming up. Italy is far bigger a risk than France in terms of their debt. Markets have anticipated the victory and the currency has been up over the last couple of weeks. It is the last part of S&P earnings. The last leg is the retailers. News coming out of department stores shouldn’t be that rosy and will put a damper on this earnings season. A lot of good news is priced in. Chasing performance this late in the cycle is a fool’s game. He is in the sell-the-news mode.

Educational Segment. When you invest globally, currency is the most important consideration. It makes a huge difference to your return. He showed a chart of long term returns of international ETFs with and without currency hedges. Currency explains about 70% of the difference in returns. It is the biggest factor over the years. This is not the best time to get into Europe except with a currency hedged, covered call ETF.

Markets. The one stop investing Fad: This time it is ETFs that mimic indexes. Since the bottom of 2009 the ETFs have beaten the value investment managers overall. Increasingly it has become the ‘thing’ to invest in ETFs and forget the value people. Money is ‘gushing’ into index ETFs and they tend to chase the very highly and very low valued stocks. Then what you get is a lopsided structure. The problem is when you get into a bear market and money gushes out. The high valued stocks crash worse. He has been here before. In 1971 he remembers the ‘nifty 50’ stocks that had outperformed all the way up to 1971. But this was the top of the market and these 50 stocks were off 80% by 1974. Many of them never came back after that. Now they are doing it again with ETFs. When the media grasps it and hypes it, then you know you are close to the end.

Canadian Banks. They are reasonably priced. They are not cheap, but not terribly expensive. RY-T is the most expensive, but may deliver more upside. He likes them for their dividend and defensive quality. There is nothing wrong with them and should be a core part of a portfolio. He does not see a collapse in housing prices going back more than a year.