Making sense of the markets this week: February 12, 2023

Canadian Telecoms dial up their earnings results

No big surprises from Canada’s major telecommunications companies that wrapped up their 2022 earnings statements: Telus slightly underperformed expectations; while Rogers outperformed; and Bell finished exactly where most thought it would.

Telus forecasted sunny skies, predicting big gains in both revenue and earnings for 2023, due to its capital spending needs trending down. The company was quick to point out, despite the lower-than-expected earnings results, that its wireless growth numbers and focus on global health operations should continue to pay off in 2023.

Bell continued to reward dividend-conscious shareholders as it increased its annual dividend from $3.68 to $3.87, and reported record growth in its fibre business.

The big story on the Canadian telecommunications horizon is still the “will they or won’t they?” corporate relationship of Rogers and Shaw. The $20 billion takeover by Rogers is seeking final approval from Industry Minister Francois-Philippe Champagne. You can read more about Canadian telecommunications stocks at MillionDollarJourney.com.

Disney shareholders welcome back return of Bob Iger and a reinstated dividend

Investors were eager to see what Disney (DIS/NYSE) had in store for its first earnings call since CEO Bob Iger returned to the fold after a three-year “retirement.” Iger is legendary in management circles for guiding Disney to key acquisitions (including Marvel, Pixar and Star Wars), and he replaced his successor Bob Chapek. He started his latest tenure on November 20, 2023, so we’re not sure how much credit Iger can take for Q4 earnings, but a big beat of expectations is certainly a great way for him to take the helm again. (All in U.S. dollars in this section.)

Also, Iger announced that Disney is to lay off 7,000 employees and that the company is restructuring into three main divisions:

1. Disney Entertainment, including streaming and media operations
2. ESPN
3. Parks, experiences and products

Finally, dividend-conscious investors will be pleased to hear that, nearly three years after the elimination of Disney’s dividend, the company will look to introduce it again in 2023, with Iger stating, “Our cost-cutting initiatives will make this possible, and while initially it will be a modest dividend, we hope to build upon it over time,” Iger said.

A couple of other notable earnings results south of the border this week included Paypal and Chipotle.

• PayPal (PYPL/NASDAQ): Earnings per share of $1 versus $1.20 predicted, and revenues of $ billion versus $7.39 billion predicted.

• Chipotle Mexican Grill (CMG/NYSE): Earnings per share of $8.29 versus $8.90 predicted, and revenues of $2.18 billion versus $2.23 billion predicted.

Watch out for chart crimes re: investment returns

Given how volatile markets have been the past few years, it’s quite easy to make numbers say what you want them to when you play with the different time periods involved.

Chartered financial analyst Ben Carlson was back this week talking about the Psychology of Market Tops & Bottoms on his blog. Our takeaway is that when looking at tough math for stocks looking to rebound from losing a massive amount of value, it’s relatively easy to generate a headline showing “massive gains” all while ignoring the bigger picture.

For example, there’s been lots of news coming out about the recent massive gains by Tesla—despite the fact you would still be down more than 50% if you had invested in the stock at the top!

To bring home the point, let’s look at the harsh mathematical truth. Shopify was down 84.8% from “peak-to-trough.” And, “it would require a return of more than 550% from the market bottom to get “back to even.”

That’s certainly not impossible for a company that’s proven itself to be a remarkable innovator in the past, but it’s a mathematical reality that shouldn’t be distorted by headlines, such as “Shopify Stock Is Up Over 40% This Year. How Much Higher Can It Go?”

Similarly, with bitcoin down 77% peak to trough (the fifth biggest crash of all time according to Bank of America), that means bitcoin will need to go on a 435% run from its bottom in November in order to get back to previous highs. 

Of course, proponents of the ”gambling contract,” otherwise known as BTC, will quickly point out it’s already up nearly 40% from those November 2022 lows. And if you zoom out even further, the returns still look incredible over the last six-plus years. Just understand the “narrative” you’re being told, and then compare the stark mathematical realities before making investment decisions.

Why does the CCPIB pay billions for active management?

Not much gets the blood boiling more quickly than highly-paid active-management gurus talking about how great they are at beating the market.

It only gets worse when the person doing the talking is handling my money. Oh, and he’s handling your money too, so you might want to pay attention.

This week, the headlines read along the lines of: “Canada Pension Plan Investment Board (CPPIB) CEO John Graham predicts ‘Alpha’ investors will outperform in the next decade.”  

For those Canadians who don’t feel the need to try to sound smarter than you are, the “Alpha” to which Graham is referring to those with the ability to generate market-beating returns. Essentially he’s saying: “Look, the next decade will be great for stock-picking investment funds. Because we’re a stock-picking investment fund, this should be especially good for us.”

Graham was actually quoted as saying:

“We see the next decade as being the decade of value-added, the decade of alpha. Just harvesting market returns has been a very successful strategy over the past 20 years because of these tailwinds. And right now, it is about picking your spots. It’s about picking the right geographies, the right asset classes and the right securities.”

We know, from the past 20-plus decades of investing in Canada, that “picking your spots” and “picking the right geographies” rarely works for choosing investment funds. This was borne out of academic studies, and most notably by the famous Warren Buffett versus the hedge funds bet from 2008. You can clearly see from this Morningstar data that volatility does not allow active investment funds to outperform, and there is no reason those results will change going forward. Here’s an excellent podcast that confirms the long-term evidence.

Look at how well (or poorly, actually) active management strategies have done for other Canadian pensions last year, like with the teachers’ plans. That’s some “Alpha” that the active managers in the Ontario Pension Plan have going for themelves.

Writer Upton Sinclair is credited with saying, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Well, Graham has about five-million reasons not to understand that active managers are going to underperform the market average over the long term, when they are charging close to 1% in fees each year. Those fees get charged whether the investments go up or down.

Journalist Andrew Coyne has consistently pointed out that the CPPIB is moving in the wrong direction. Here’s a look at how costs to manage the fund have ballooned a thousand-fold over the last two decades.

Here’s what Graham and his friends are getting paid to run the show:

Oh, and the folks who hired Graham are doing pretty well, too.

I’m not the only one commenting on the steeply rising salaries and a lack of oversight.  

For comparison sake: the Prime Minister makes under $400,000 per year, and the Governor of the Bank of Canada takes home about $500,000. 

When reached for comment by The Toronto Star, Michel Leduci, CPPIB head of public affairs and communications stated, “We respectfully disagree with your premise on what determines, or ought to determine, compensation at CPP Investments.” He continued: “In fact, there are multiple considerations and principles that we apply, going well beyond any narrow set of comparators as you put forward.”

So, your “multiple considerations and principles” determine that you should all make way more money than you did 15 years ago? Great principles if you can get them.

In 2018, PWL Research director Raymond Kerzérho looked at the eight largest pension funds in Canada and found the CPPIB had by far the highest operating costs relative to the size of the fund. The company also released an interesting study on passive versus active management by large American endowment funds. PWL’s Ben Felix and Cameron Passmore have also taken a turn illustrating the shortcomings of the CPPIB and its self-reporting benchmarks.

While Graham and the rest of the CPPIB often state they outperform their passive benchmarks, just how those baselines are constructed is debatable, considering the unique makeup of the managed assets. The CPPIB is certainly outperforming the benchmarks to which they choose to be compared. On a somewhat-related note, I was a highly above-average basketball player once upon a time, compared to what I believe an average basketball player was. No further stats needed.

Here’s Mr. Coyne’s accounting based on a simple portfolio of index funds consisting of 85% stocks and 15% bonds:

While the CPPIB isn’t alone in its misplaced faith in highly-paid fund managers, that doesn’t mean that I—and Canadians, for that matter—have to accept such a costly and poor long-term strategy.  

I actually agree with Graham’s prediction of a “decade of Alpha.” It’s just that the Alpha he should be referring to is the gap between CPPIB management salaries versus the average Canadian’s paycheque.

Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.

Linkedin Twitter Facebook Website