MARKET WRAP -4 / Weekend Investing Commentary-Reviews 12/11/98
Holiday Season Unleashes Market Dogs
If every dog has its day, the Dogs of the Dow tend to have theirs around New Year's.
The term "Dogs of the Dow" refers to a long-standing Wall Street tactic aimed at beating the overall performance of the blue chip benchmark Dow Jones industrial average by buying the laggards in the group.
The model, which can vary slightly from portfolio to portfolio, tends to run something like this: select the highest-yielding Dow stocks -- which by definition trade at the lowest multiple of their dividends -- and hold them for a year. Odds are the stocks picked will beat the average.
Cull that list again to choose the lowest priced of the high-yield blue chips and you wind up with a group known as the "little dogs."
Either way, some analysts say, the track record for the Dow dogs is a successful one that now draws upwards of $20 billion in funds a year.
Each year on the last trading day of the year a number of money managers purchase a portfolio of the select group of stocks, reshuffling billions of dollars.
Over the last 25 years, the cumulative annual total return for the Dow Dogs Theory produced an 18.2 percent annual compounded return, vs. a 12.6 percent annual compounded return for the Dow-30 stocks.
But recent history has been unkind to the dogs. The Dow Jones industrial average was up 16.9 percent as of November 30 but the five lowest priced stocks in the group were only up 13.6 percent. And the Dow outpaced the dogs in 1997 as well.
Believers in the model are not dissuaded.
"An investor should be aware that this is a long-term investment strategy and no one should expect the Dogs to outperform the Dow each and every year," said Pete Grosz, editor of the Dogs of Dow website.
"This (underperformance) has happened during other periods but in each case the Dogs of the Dow came back," Grosz added.
There are other variations on the theme. Neil Hennessy, president of the Hennessy group of mutual funds, said the firm balances dog investments with one-year Treasury bills.
"If you stay the course which we believe, dogs coupled with 1-year Treasury bills, over time you should come out with 13 percent annual return," Hennessy said.
As of November 30, Dogs of the Dow picks for 1999 would include International Paper Co (IP.N), Caterpillar Inc. (CAT.N), Philip Morris (MO.N), DuPont Co (DD.N) and General Motors (GM.N).
To get a full 10 stocks, you'd add Eastman Kodak (EK.N), Exxon Corp (XON.N), Minnesota Mining & Manufacturing Co (MMM.N), Chevron Corp (CHV.N> and J.P. Morgan & Co Inc (JPM.N).
One popular way to cash in on the strategy is through unit investment trusts, which do the buying and holding in a basket for you.
Robert Burke, vice president and manager of Nuveen Defined Portfolios says the advantage of buying the stocks through a unit investment trust is exposure to more stocks for a lower minimum investment.
But other proponents of the theory recommend buying the Dow Dogs directly through deep discount brokers. "Why pay for a full service broker if you already know which stocks you are going to buy?" says
Grosz.
So Whare Do I Put My Money Now
John Daily - The Globe & Mail
Scared of the stock market? Most investors don't have many other choices
For most of the 1990s, Canadian investors haven't had to do much more than roll out of bed in the morning to make money.
Until August, that is. The meltdown of the Dow Jones industrial average and the subsequent global turmoil rattled even the most bullish market professionals. The $3.6-billion (U.S.) bailout of the Long-Term Capital Management LP hedge fund engineered by the Federal Reserve Bank of New York in September was sobering as well. After all, if Wall Street wonder John Meriwether and his posse of more than 100 number-crunching whizzes – including two Nobel Prize winners – couldn't predict what would happen next, what hope is there for the rest of us?
Brokers and financial planners repeat the mantras of "buy and hold" and "hang on for the long term." That sounds sensible. But it's also predictable advice from people who sell stocks, bonds and mutual funds for a living. On the other hand, there don't appear to be any compelling alternatives.
So I asked managers of three top-performing Canadian mutual funds for some help: Phil Fortuna of Scudder Canada, Len Racioppo of Jarislowsky Fraser Ltd., and Kim Shannon of AMI Partners Inc.
They repeated the mantras.
But they also offered several other suggestions for positioning your portfolio defensively in case of a recession – or worse. However, there's no guarantee that you won't lose money in any given month, or year or in a more prolonged downturn. "Investment management is about winning the game most of the time, not all of the time," says Shannon, who is manager of the Spectrum United Canadian Investment Fund.
Their reasoning goes like this: Even if your portfolio or mutual fund declines during a slump, if it posts better returns than its rivals or the relevant market index, that gives it a cushion or a head start when the bull returns.
So, what will the market do next? "I really don't know if it's going to go up or down," said Racioppo, who manages the Atlas Canadian Balanced and Atlas American Large Cap Growth funds. The other two, like many of their Bay Street and Wall Street peers, won't make predictions either.
But simply saying "Don't worry" about temporary ups and downs is a tad trite. They hurt, but they're also instructive. The August meltdown was an overdue opportunity for young or new investors to check their panic meters. "A pretty good rule of thumb is: If they got really nervous and said, ‘I didn't know anything like this could happen,' it's a pretty good guess that they've got too much stock in their portfolio," says Fortuna, who is a lead manager of the Scudder Canadian Equity Fund.
Of course, your asset allocation between stocks, bonds and cash (or mutual funds that own those instruments) has to be based on more than how you feel. Conventional personal investment wisdom says that you should reduce the percentage of stocks in your portfolio – especially volatile technology or resource stocks – as you get closer to retirement age, and increase your holdings of bonds or other income-producing instruments.
But, in the real world, that's not an option for thousands of Canadians in their late 40s or 50s. They simply haven't saved enough to reach their retirement goals. They will either have to scale back their expectations, or hang on for the ride at the risky end of the risk-reward spectrum – even if the stock market turmoil gets worse. "There's no way they're going to make it parking their money on the sidelines or in bonds or GICs," says Dan Richards, president of Toronto-based Marketing Solutions Corp., which studies investor attitudes and behaviour.
After the August meltdown, however, that's exactly where many of them headed. New mutual fund sales plunged by 95% in September compared with the same month in 1997 – a clear sign that investors are both nervous and trying to time the stock market. But market timing is something that no person or computer has ever been able to do consistently.
So what about the safer-sounding hybrid products introduced over the past couple of years, such as index-linked GICs and segregated funds? The GICs have restrictive rules and conditions about cashing out. Segregated funds, which are now offered by mutual fund companies as well as insurance companies, come with a guarantee of principal if held for 10 years. But, historically, it's been pretty hard to lose money in the North American stock market if you hang on for a decade. In a study that looked at 10-year periods rolling by month from January, 1926, to Aug. 31, 1998, Boston-based Pioneer Investment Management Inc. found the total return on the Standard & Poor's 500 index of large cap U.S. stocks had been positive 96% of the time.
Then there are the enthusiasts who suggest investing in high-tech companies because they're "the wave of the future." Scudder's Fortuna says that is a prescription for unbridled speculation. "Remember, back in the seventies, the 'tronics phase? Anything with the word 'tronics at the end was an automatic buy." Now, Amazon.com Inc., Yahoo Inc. and other Internet stocks shoot up and down by 20% or more in one day.
On the other side of the fence are advisers who urge you to stick with the biggest, bluest chips for safety. "There's only one problem with that argument," says Fortuna. "They were saying that in 1880. They were saying that in 1905, 1915, 1925." He says that an investor who took that advice in the early 1920s might have loaded up on railroad stocks but missed out on Computing-Tabulating-Recording Co. (Hint: It's now known as IBM.)
Which isn't to say that size doesn't matter. Fortuna, Racioppo and Shannon argue that the best way to position a portfolio defensively is to buy a diverse selection of large cap companies – particularly those with a solid history of earnings growth. An international presence can help as well.
In theory, this limits downside risk in several ways. Revenues aren't squeezed as hard by a recession or currency crisis in any one country or region. And if the company is a large pharmaceutical or consumer-products company, so much the better. Racioppo uses Philip Morris Cos. Inc. as an example. "It's half a tobacco company and half a food company, neither one of which is greatly affected by any recession or slowdown." Ditto for drug companies. "How many less blood-pressure pills is Merck going to sell in a recession?"
On the other hand, safety-conscious investors should be careful with shares of financial institutions and resource companies – even big ones. They tend to fluctuate widely during the economic cycle because their earnings are so closely tied to interest rates and commodity prices. But with the 20% RRSP foreign-content limit, the choices in Canada are limited. "You put finance and natural resources together, and you've got about 40% of the Canadian economy," says Fortuna. "I'm really worried about that."
Big swings in the prices of cyclical stocks can also create other headaches. "If you buy Inco at $20 and it goes to $40, well, you have to sell it," says Racioppo. "Because you can bet for sure that it's going to go back down to $20." And frequent sales mean frequent capital gains taxes if investments are held outside an RRSP.
Still, there are risks with big, blue-chip consumer-products companies as well. In the late 1960s and early 1970s, Wall Street money managers touted the virtues of the so-called Nifty Fifty, including Coca-Cola Co., Procter & Gamble Co. and Walt Disney Co. They drove the prices so high that the Nifty Fifty were clobbered by a bear market that began in 1973.
Today, many of those same stocks are back on top of managers' recommended lists. So you have to be careful not to overpay – even for a company with strong earnings. Among the key indicators that Kim Shannon looks for are low price-earnings, price-to-book-value, price-to-sales and price-to-cash-flow ratios, as well as a solid dividend. She says that leaves a stock with "less collapse room." The dividend itself often acts as a "buffer" to continued price declines.
If that sounds too complicated, particularly for investors who own mostly mutual funds, Phil Fortuna has a much simpler test: See if the fund has outperformed the market in down months in the past. "You don't need higher math," he says. "If it's underperformed in down months and had all of its great returns in up months, start worrying."
Speaking of worrying, what about the most fearsome scenario: Worldwide Great Depression-style financial collapse and deflation? That's in the bailiwick of central bankers and finance ministers. Fortuna and other analysts see the bailout of Long-Term Capital Management as an encouraging sign that Alan Greenspan and company have the power and the inclination to prevent that kind of calamity.
In the meantime, the rest of us can't afford to lose too much sleep over it. We really can't do much about it.
STOCKS FOR TOUGH TIMES
Phil Fortuna - Lead Manager, Scudder Canadian Equity Fund
10 largest holdings as of Sept. 30, 1998:
Canadian Utilities Ltd.
Rio Alto Exploration Ltd.
Loblaw Cos. Ltd.
Imasco Ltd.
IPL Energy Inc.
George Weston Ltd.
Hummingbird Communications Ltd.
Provigo Inc.
CHUM Ltd.
Empire Co. Ltd.
Len Racioppo - Manager, Atlas Canadian Balanced Fund and Atlas
American Large Cap Growth Fund
A selection of 10 Canadian and U.S. issues in different industries from the Balanced Fund:
Imasco Ltd.
Great-West Lifeco Inc.
Northern Telecom Ltd.
Canadian Occidental Petroleum Ltd.
J.P. Morgan & Co. Inc.
Fannie Mae (Federal National Mortgage Association)
Philip Morris Cos. Inc.
Gillette Co.
Merck & Co.
Johnson & Johnson
Kim Shannon - Manager, Spectrum United Canadian Investment Fund
10 largest holdings as of Sept. 30, 1998:
BCE Inc.
Royal Bank of Canada
Bank of Montreal
Imasco Ltd.
Bank of Nova Scotia
Toronto Dominion Bank
National Bank of Canada
Canadian Imperial
Bank of Commerce
Dofasco Inc.
TransCanada PipeLines Ltd
Company Focus
Canada's Ballard Power Wants To Drive Cars Of The Future
moneycentral.msn.com
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Links
North American Market Pulse
financialweb.com
cadvision.com
fool.com
canbus.com
msnbc.com
insidewallstreet.com:80/index.html
site-by-site.com
pathfinder.com
iionline.com
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