B8 OTHEGLOBEANDMAIL | FRIDAY,SEPTEMBER13,2019
GLOBE INVESTOR
T
he past five years have seen
the momentum invest-
ment style – buying stocks
with the strongest recent price ap-
preciation – outperform valua-
tion-conscious investing strate-
gies by such a large margin that
“The death of value” columns had
become ubiquitous in financial
media.
That all changed at the end of
August. September has seen such
an abrupt change in trend that
Steen Jakobsen, chief economist
for Denmark-based Saxo Bank,
described it as an “equity earth-
quake.” From seemingly out of
nowhere, value stocks are surg-
ing, while the much more popular
momentum stocks, which in-
clude the vaunted FAANG (Face-
book Inc., Amazon.com Inc., Ap-
ple Inc., Netflix Inc., and Alphabet
Inc.’s Google) and domestic fa-
vourite Shopify Inc., are falling
back.
The relative performance of
different investing strategies is
best illustrated with factor-based
exchange-traded funds. In this
case, we’ll use the iShares Edge
MSCI USA Value Factor ETF
(VLUE) to measure value stock re-
turns and the iShares Edge MSCI
USA Momentum Factor ETF
(MTUM) to gauge momentum
stock returns.
Momentum stock investors
have been clear winners over the
past five years. An investment of
US$1,000 in the momentum ETF
in 2014 would have generated a
profit of US$851, well above the
value ETF’s US$320 appreciation.
So far in September, however,
the value ETF has climbed 7.3 per
cent while momentum stocks are
marginally lower. George Pearkes,
macro strategist for Bespoke In-
vestment Group, was among the
first to recognize the surge in val-
ue stocks. Mr. Pearkes noted that
the Sept. 9 trading session
marked the biggest one-day out-
performance of value over mo-
mentum in the history of the ETFs
mentioned above.
The Bespoke strategist also rec-
ognized that this change in per-
formance trend is associated with
September’s other big market
surprise – rising bond yields.
The accompanying chart com-
pares the relative returns of mo-
mentum and value stocks with
the U.S. 10-year bond yield. (Note
that the bond yield is plotted in-
versely to better show the trend).
The purple line represents the
price of the momentum ETF di-
vided by the price of the value
ETF. A rising line indicates mo-
mentum is outperforming value –
the actual number on the left y-
axis doesn’t matter, we’re just
looking at the directional trend.
The outperformance of mo-
mentum stocks is closely associat-
ed with falling bond yields, which
is the case for the majority of the
chart until Aug. 27. The violence
of the change in trend is apparent
in the rapidly falling purple line
after that point. Value stocks be-
gan outperforming as bond yields
began rising.
Rising bond yields indicate
higher economic growth expecta-
tions and this is good news for val-
ue stocks. For much of 2019, global
economic data were deteriorating
and this made companies with
strong profit growth scarce. Inves-
tors increasingly shifted assets to
the few companies that were able
to generate profits – many in the
technology sector – and this proc-
ess spurted the rally in momen-
tum stocks.
The higher growth expecta-
tions implied by rising bond
yields suggest that the number of
companies able to increase prof-
its is expected to increase. In this
“rising tide lifts most boats” situa-
tion, investors can outperform by
owning the most attractively val-
ued stocks where earnings
growth is improving. In otherwords, value stocks.
The trend toward value stocks
is a recent phenomenon, but
Goldman Sachs strategist Ben
Snider believes it represents an
important watershed event. In a
Thursday research report, Mr.
Snider wrote: “Sharp momentum
drawdowns similar to the one
that has taken place in the last
two weeks usually mark the end
of the momentum rallies rather
than tactical buying opportuni-
ties.”
Although Shopify was men-
tioned above, applying this analy-
sis to Canadian equity markets is
not straightforward because of
the dominance of bank and com-
modity stocks in the S&P/TSX
Composite Index. The new trend
toward value is likely constructive
for domestic bank stocks, which
are trading at attractive valua-
tions relative to history, but the
banks are so widely held in Cana-
da that they are almost always in
the “growth at a reasonable price”
category rather than pure value.
The commodity stocks, which
are also attractively valued in
many cases, are often driven by
resource prices, which can sup-
port or conflict with a value-ver-
sus-growth market trend.
I don’t want to suggest inves-
tors make wholesale changes to
their portfolios based on a trend
that’s been in place for less than
three weeks – even if Goldman
Sachs is leaning that way. On the
other hand, I’m a bit over-
whelmed by the amount of atten-
tion the market’s switch to a value
focus is getting among strategists,
portfolio managers and financial
media, and I’m inclined to take it
seriously.Whattodowiththe
recent‘equityearthquake’
SCOTT
BARLOW
OPINIONVALUEVS.MOMENTUM:ASHARPCHANGEINTREND1 .01. 52 .02 .53 .0iSharesEdge MSCIUSAValue
Factor ETF/iSharesEdge MSCI
USAMomentumFactor ETFU.S. 10 - yearbond yield
(inverted)1. 25
S
2018
JOHN SOPINSKI/THEGLOBE ANDMAIL, SOURCE:SCOTTBARLOW;BLOOMBERG2019OND JFM A MJJA S1. 301. 351 .401 .451 .501 .55- 60
INSIDETHEMARKET
I
love the game Monopoly. From time to time I’ll play the
game with my kids, excited to be teaching them the art of
negotiation and basically accumulating wealth at the ex-
pense of all those around me. Having said this, I agree
with joke blogger Kent Graham that Monopoly game pieces
should be reflective of how long it takes to play the game: A
doctor’s waiting-room chair, or a road-construction pylon
would be appropriate.
My favourite card in the deck of Community Chest cards in
the game of Monopoly is the one that says: “Bank error in
your favour, collect $200.” Except that it rarely happens in
real life. Today, I want to share the true story of a man, Mr. G,
whose financial institution made an error related to his tax-
free savings account – but not in his favour, because it led to a
court challenge with the Canada Revenue Agency. We can
learn a few things from his plight.THESTORYIn 2014, Mr. G wanted to open a TFSA account at a new fi-
nancial institution, so he withdrew $5,500 from an existing
TFSA account and immediately contributed those funds to
the TFSA at the new institution. The Canada Revenue Agency
(CRA) recognized this as an overcontribution because Mr. G
was not entitled to recontribute the withdrawn amount to a
TFSA until 2015. That’s how the recontribution rules work. So,
the CRA assessed an overcontribution penalty of $440. Mr. G
objected and requested a waiver of the penalty and interest,
which CRA granted to him in 2014.
But the story isn’t over yet. In 2016, Mr. G had TFSA contri-
bution room of just over $10,000 available. So, on Jan. 8, 2016,
he called his financial institution to instruct them to transfer
$10,000 into his TFSA. Then, 10 days later, he made a second
call to ask whether his contribution had been processed. The
clerk on the phone failed to see that a colleague had already
processed the contribution, and proceeded to redo the con-
tribution, resulting in total contributions to his TFSA of
$20,000 for 2016, and an overcontribution to his TFSA of
about $10,000.
After a few months, in June 2016, Mr. G decided that he
wanted to split his TFSA at the new financial institution into
two separate TFSA accounts. So, he called his financial in-
stitution and gave directions over the phone to split the ac-
counts, but these directions were mistaken for an order to
contribute $10,000 to a new TFSA account. So, Mr. G ended
up with $30,000 of contributions to his TFSA for 2016, and
excess contributions of about $20,000.
Mr. G didn’t notice the excess contributions until he re-
ceived an assessment from CRA in July, 2017. When he discov-
ered the problem, he withdrew the excess $20,000 from his
TFSA. The CRA assessed a penalty of $1,785 under our tax law.
Mr. G requested relief from this penalty, but was denied that
relief in a letter from the CRA in September, 2017. He request-
ed a second review. In May, 2018, he was again denied relief
because he was a “repeat over-contributor,” according to the
CRA.
In the end, Judge Keith Boswell of the Federal Court (2019
FC 1031) sided with Mr. G. The overcontributions arose owing
to a miscommunication between Mr. G and his financial in-
stitution, and were outside of his control.
The fact that he had caused overcontributions to his TFSA
in 2014 was not connected to the question of whether relief
should be granted regarding the overcontributions in 2016.
So, the judge viewed the CRA’s categorization of Mr. G as a
“repeat over-contributor” to be unjustified.
The judge ordered the decision of the CRA in May, 2018, to
be set aside and for the matter to be returned to the CRA for
redetermination by a different CRA employee.THELESSONSWhat takeaways are worth noting from Mr. G’s story? Here
are a few things to consider:
The CRA is tracking contributions to TFSA closely, so if
you happen to make an overcontribution, the taxman will
know about it pretty quickly.
Solving an overcontribution problem can be a tax head-
ache, even if it isn’t your fault, so review your TFSA balances
often and make sure there isn’t more in your plan than there
should be.
Repeat offenders will be treated more harshly. If you’ve
overcontributed to your TFSA before, don’t expect the tax-
man to be lenient when it comes to waiving penalties and
interest.
If you want to move assets from one TFSA to another,
make sure you initiate a direct transfer from one TFSA to the
other, as opposed to making a withdrawal from one TFSA
and then recontributing the amount to another plan. This
would have solved Mr. G’s 2014 problem.LessonsfromaTFSA
storygonewrong
TIM
CESTNICKOPINIONTAXMATTERSFCPA,FCA,CPA(IL),CFP, TEP, author and co-founder and
CEO of OurFamily OfficeInc.| REPORTONBUSINESSThe S&P/TSX Composite Index
touched a record high during
trading on Thursday, before
ending the day slightly below its
highest close on April 23 – re-
warding many Canadian in-
vestors but also reinforcing a
confounding pattern.
The benchmark index
climbed to 16,696.40 midday
before finishing the session at
16,643.28. Today’s close was
about 26 points shy of the re-
cord.
But through a number of
peaks and valleys over the past
five years, the benchmark index
of Canadian companies has
delivered a lacklustre overall
performance that pales next to
major U.S. indexes such as the
S&P 500.
Since September, 2014, the
S&P/TSX has risen just 7.1 per
cent (not including dividends),
compared with a gain of 51.6 per
cent for the S&P 500 (in U.S.
dollar terms).
This is the problem that the
Canadian index has faced for
years: It is woefully undiversi-
fied, with a heavy emphasis on
financials and commodity pro-
ducers. When one of these big
engines sputters – the energy
sector has slumped more than
40 per cent over the past five
years, which is in line with the
decline in the price of crude oil –
the index’s overall performance
is dragged down.
The good news? The S&P/TSX
is enjoying a banner year, with
gains of 16.2 per cent in 2019,
putting it in line with the year-
to-date performance of the S&P500 (also nearing a record high).
Even once-sleepy gold mining
companies are adding to the
rally.
The index is also benefiting
from new heavy hitters, adding
a touch of diversification. Shop-
ify Inc., a technology company
that provides an e-commerce
platform to online merchants,
has seen its share price soar
149.5 per cent in 2019, making it
the 13th most valuable public
company in Canada.
And lastly, the index’s under-
whelming longer-term perform-
ance reinforces the importance
of dividends. Over the past five
years, the total return for the
S&P/TSX is 24.4 per cent –
meaning that quarterly payouts
are the biggest rewards for long-
term investors.DAVIDBERMANONEREASONTOSHRUG,THREETOCELEBRATE
NEWYORKMutual-fund manag-
ers are making the most of the
shaky stock market, which has
provided them an opportunity
to prove themselves and lure
back investors who dumped
them in recent years.
Nearly half of all actively
managed U.S. stock funds turn-
ed in better returns than their
average index-fund peer for the
12 months through June, ac-
cording to fund tracker Mor-
ningstar. Their success rate of
48 per cent may not sound very
impressive, but it’s much better
than the 37 per cent of a year
earlier.
That supports the contention
that stock-picking fund manag-
ers do their best work when
markets are shaky because
they’re free to avoid risky stocks
dragging down the S&P 500 and
other broad indexes. Index
funds, on the other hand, mim-
ic those indexes’ falls. These
extra returns above index funds- what the industry calls “al-
pha” – are what managers hope
will keep investors from panick-
ing and selling their stock funds
when prices fall.
“The unfortunate reality is
that active managers tend to
add alpha when the market is
heading lower,” said Steven
DeSanctis, equity strategist at
Jefferies. And the market has
been heading lower more often
in the last year, often to only
quickly jerk higher again, as
investor fears about a possible
recession wax and wane. The
S&P 500 tumbled nearly 20 per
cent in late 2018, only to start
2019 with its best opening quar-
ter in decades.
Some of the strongest gains
in relative performance recently
have come from managers of
funds that focus on smaller and
mid-sized stocks.
They likely benefited by
steering away from the smallest
stocks, which have struggled
much more than big stocks over
the past year.
But experts caution that
short-term performance figures
can be erratic, and last year’s
pickup in performance wasn’t
enough to shift the long-term
trend, which still shows most
stock-picking managers failing
to keep up with index funds.
Consider funds that invest in
a mix of large-cap stocks, which
are among the most popular
investments and often bench-
mark themselves against the
S&P 500. Just 8 per cent of such
actively managed funds beat
their index-fund peers over the
past decade.ASSOCIATEDPRESSSTOCK-PICKINGFUNDMANAGERSSHINEWHENMARKETISSHAKY