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Even though the past week was a slow one due to the holiday season, there is quite a lot of meaty stuff that you’ll find it interesting to dig into. Happy New Year to all of you!
Jonathan Clements in WSJ’s “Bring fresh eyes to your portfolio in 2008” suggests that in the New Year you should perhaps look at your portfolio in a new way. Among the suggestions are: (1) factor in Human Capital (your earning capacity) that behaves like a bond into your asset allocation and so you can increase the proportion of equity in your portfolio, (2) include in liabilities cost of retirement, the potential needs of your family (helping parents and children), (3) factor in any social security and pension income into the fixed income portion of your asset allocation, and (4) focus on risk (not just returns), i.e. set the stock/bond mix appropriate for you and then add new funds only to increase your diversification.
Barron’s Marc Chandler doesn’t mince words in “Get ready for a loonie landing” He believes that those who think the loonie can continue flying high and stay decoupled of the U.S. dollar and U.S. economy are dreaming in Technicolor. He points out that on a PPP (Purchasing Power Parity or in-country buying power) basis the Canadian dollar should be about U.S. $0.81. And while U.S. assets may look cheap to foreigners, the Canadian assets don’t. So be prepared for the loonie to head for US$0.88-0.90.
In Globe and Mail’s “Keep a proper perspective on global weightings” Rob Carrick has an excellent column reminding readers to maintain proper foreign diversification, even though the past year hasn’t been kind to those who invested outside of Canada without hedging their foreign currency exposure. He explains how one needs the foreign assets not just for geographical diversification, but also because the Canadian market is so concentrated in energy, financials and mining sectors, with relatively low exposure to consumer driven, information technology and healthcare sectors. He then concludes with the asset allocation recommendation by Steadyhand Investment Funds, which suggests bonds/Canadian-stocks/US-stocks/International-stocks allocations of 15/37/24/24 for a growth portfolio, 50/30/10/10 for a balanced portfolio and 73/20/3/4/ for an income portfolio. Not a bad mix, though considering that much, if not all, of one’s bond portfolio may be in Canadian assets and inside an RRSP, one may want to lighten up on the Canadian stock content in favour of international stocks, especially for the balanced and income portfolios.
In CFA Institute’s Financial Analysts Journal, Andre Perold does a frontal attack on the relatively new so-called ‘fundamental indexing’ introduced by the respected Robert Arnott, in “Fundamentally flawed indexing” . Perold attacks the fundamental indexers’ primary thesis, that a capitalization weighted index must be suboptimal as by its very nature will require over-investing/under-investing in over-valued/under-valued assets. The author argues (and claims to prove) that fundamental indexing is just a form of (active rather than passive) value oriented investing; He further argues that capitalization weighted indexing based investing is the only one that can be universally followed by those with or without security selection skills. The author does not have an argument with the fact that historically value funds may have had a better performance than index funds. “At issue is whether value stocks have had high returns because they are riskier or because they are mispriced. If the effect is about risk, then fundamental indexers (and quantitative value investors generally) cannot expect to obtain high returns after adjusting for risk. If the effect is about mispricing, fundamental indexers will need to rely on a continuation of that pattern of mispricing in order to obtain high future returns…”
In Seeking Alpha’s “My ideal ETF Christmas gifts” Matthew Hougan lists a number of new ETFs already in the works and already expected in the New Year like: Barclays Global TIPS (government inflation indexed bonds), ProShares 130/30 (active long/short fund) and Market Vectors Coal ETFs. He then proceeds to list some ETFs that he would like to have in 2008, such as: cheaper commodity funds (less that current 0.75%), VIX fund (volatility index fund), and more strategy ETFs (e.g. absolute return, principal protected, hedge funds).

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