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July 2020
  • What Do You Value?
  • Model Portfolio
  • Final Thoughts
What Do You Value?
It has been a summer for backyard pools. I made a strategic error in knocking down my 24 foot above ground pool last summer, thinking that I could rely on the steep discount offered by Hamilton public pools to their senior citizens reaching the advanced age of 55. Who knew that a worldwide pandemic would effectively close city pools for a good chunk of the summer? Enter Amazon. Seeing the lockdown unfolding back in March, I hastily ordered a free standing 10-foot inflatable pool, now sitting on the large crater that was once our adult-sized pool.  I failed to factor in my need for a pool skimmer to keep the pool clean. So back to Amazon, using my Prime membership, I secured the $10 item and had it shipped free and fast. It arrived yesterday, not a moment too soon. 

As I reflect on the popularity of Amazon and other internet-based companies so fashionable right now, I can’t help wondering if investors aren’t letting their customer enthusiasm cloud their investor judgement.  After all, how much money can Amazon make offering free delivery for $10 items? Any accountant will point out the foolishness of this statement:  “We lose money on every sale but we’ll make it up on volume”. 
Taken as a whole, FANMAG (Facebook, Amazon, Netflix, Microsoft, Apple and Google) now make up over 22% of the S&P 500 Index 1. And they are up 33%/year in the five years ended July 6th. The rest of the index is up only 5% over this same time-period 2If the past is any guide, this could spell trouble.  In my first decade advising clients, tech stocks went on a similar run, pushing the NASDAQ index up 541% from 1995 to 1999, before plummeting 67%. 3

How many of you remember the nerdy Palm Pilot that 3Com spun off in 1999?  For a brief, time investors valued a portion of the new company more highly than its parent, who still owned most of it! 4 I owned one of those Palm Pilots and considered it indispensable at the time. Not knowing, of course, that it would become a relic, just like the BlackBerry that came after it. Who knows what the world has in store for the iPhone?

That is to say that value investing - owning companies that are “unsexy” and out of favour but not in chronic decline, has lost much of it’s following these past 10 years. And for good reason.  The Russell 3000 Value Index is trailing its growth counterpart for the 10 years ended June 30th by over 7%/year.  Historically, value has outperformed growth by about 3% annually. 5 Could a reversal be in the works? Value went on a tear after the Tech Bubble, outperforming growth by 82% in the period 2000-2005. 6 

Why bet on FANMAG stocks continuing to outperform the market? In many ways they are competing with each other. Why not, instead, bet on the earning power of the other 494 companies in the index to deliver superior returns? Dimensional Funds, with their emphasis on smaller value stocks and owning the entire market, could once again be poised to deliver superior returns.  
Mark Orr

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please contact the appropriate professional. Aldershot Financial Group is a trade name of Aligned Capital Partners Inc. (ACPI). ACPI is a Member of the Canadian Investor Protection Fund ( www.CIPF.ca ) and the Investment Industry Regulatory Organization of Canada ( www.IIROC.ca ). Mark Orr is registered to provide investment advice and transact in securities/mutual funds in the provinces of Ontario, Manitoba, and B.C. The opinions expressed are those of the author and not necessarily those of Aligned Capital Partners Inc. Investment products are provided by Aligned Capital Partners Inc. (“ACPI”). Any advice which may be given in respect of non-securities services (including insurance) is given by your advisor solely, and no such advice is given in their capacity as an agent of ACPI. Accordingly, ACPI is not liable and/or responsible for any non-investment related business conducted by Mark Orr. The Canadian Investor Protection Fund (CIPF) does not cover any non-securities related business conducted by Mark Orr.
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This graph represents a hypothetical portfolio allocated to 45% DFA Five-Year Global Fixed Income Fund Class A, 15% DFA Canadian Core Equity Fund Class A, 15% DFA US Core Equity Fund Class A (from January 31, 2008 to January 31, 2009) / DFA US Core Equity Fund Class A (H) (from January 31, 2009 to June 30, 2020), 15% DFA International Core Equity Fund Class A and 10% DFA Global Real Estate Securities Fund Class A, initially invested on January 31, 2008 with pricing up to June 30, 2020 using monthly data and rebalanced on a month-end basis. The data series has been smoothed. This information is for informational purposes and not meant to be construed as investment advice. Actual client portfolio allocations and returns will vary depending on the client’s investment profile. 

Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. The indicated rates of return are the historical annual compounded total returns including changes in unit/share value and reinvestment of all distributions/dividends. They do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the fund facts and consult your Advisor before investing.
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John Booth, Senior Financial Advisor, CPA, CA, CFDS, CFP
Mark Orr, Senior Financial Advisor, CPA, CA, CFP, CIM