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Alex O’Hara – Partner since 2021 (Queens Quay – Toronto, ON)
It's back – The EdgePoint ornament
Like most people, we took down our holiday ornament in the new year, but we’ve brought it back to the EdgePoint store for a limited time. Spread joy this season by lowering our investors' fees with any profit from store sales.
This week in charts
Neither stocks nor bonds have done well this year
Saying no to cryptocurrency was a glorious moment for Canada’s investment advisers
Crypto is still in its infancy and may yet turn out to be a reliable financial asset we commonly invest in or use for making payments. What advisers got right was the idea of staying away during a speculative frenzy that could only end badly. The price of bitcoin, ethereum and other coins is down by half to two-thirds or more this year. FTX, a once-celebrated crypto exchange, has filed for bankruptcy protection with debts in the billions of dollars.
For the most part, though, crypto has mostly been a story of individual investors buying in on their own while advisers and money managers mainly watched from the sidelines. Back in March, 2021, I wrote a piece with the headline Why Your Investment Adviser Hates Bitcoin. I surveyed advisers on LinkedIn and found a stern resistance to incorporating it into client portfolios on the basis that it was hard to value and thus too risky.
Resisting crypto at its peak took some conviction because prices were rising so fast. Bitcoin pretty much quadrupled from November, 2020, to the same month last year, and other cryptocurrencies soared as well. To stand against crypto as an adviser was to risk coming off like an apologist for an outdated and decaying financial system – just the sort of thing crypto investors saw themselves as rebelling against.
The pressure on advisers to accept crypto must have been intense, given how much faith individual Canadians put in the sector. “Polls seem to indicate that Canadians are more likely to be invested in crypto than American, Australian, or British households,” says a recent report from the independent analysis company Morningstar.
Big traders flock to US equity options with fleeting lifespans
While options trading has risen broadly since the start of the coronavirus pandemic, Goldman Sachs strategist Rocky Fishman said ultra-short-dated options have been “the strongest area of volume growth”. He estimated that roughly 44 per cent of S&P 500 index options that have been traded in the third and fourth quarter of this year had less than one day to expiry.
The vast majority of the volumes appear to be flowing from professional traders such as asset managers, hedge funds and banks and not retail investors, research shows.
Some have pointed to the surge in options trading as one propellant of the wild intraday market swings registered this year. Market makers that sell options contracts will hedge their positions to avoid making a bet on the market’s direction.
That hedging can, at times, accelerate broader shifts. If market makers sold a large number of call options that would pay out if the S&P 500 were to rise, for example, they could hedge their position by purchasing S&P 500 futures. Some believe that index futures trading can in turn affect the prices of underlying stocks.
Starlight Investments, one of Canada’s largest owners of apartment buildings and multifamily properties, is halting monthly payouts on two of its funds, another sign that higher interest rates are causing trouble across the real estate sector – even for the most sophisticated managers and investors.
Starlight, which owns $25-billion worth of properties and real estate securities in Canada and the United States, paused distributions on two funds that specialize in U.S. properties: the U.S. Residential Fund and the U.S. Multi-Family (No. 2) Core Plus Fund. Combined, the two funds have $840-million in assets under.
The Starlight portfolios benefitted from this strength, with average rents on properties in the larger U.S. Residential Fund jumping 17 per cent year-over-year in the third quarter. Yet rising interest rates are now biting because both funds rely on short-term, variable-rate mortgages to finance their purchases.
“The size and pace of interest rate increases has been unprecedented and has resulted in interest rates that are significantly higher than projected at the time the fund financed its properties,” Starlight wrote to investors Friday. In response, the company is halting distributions that paid a 4-per-cent annual yield.
Investor Howard Marks: ‘The short run is by far the least important thing
I arrive 10 minutes early for our lunch at Il Gattopardo, near the Museum of Modern Art in Midtown Manhattan, to find that my guest is already sitting at his usual corner table. He’s dressed in a smart grey suit and tie, and his customary clear-framed glasses. As befits a man whose entire world view is predicated on anticipating what could go wrong, he is, in his own words, “pathologically prompt. I can’t be late if I want to.”
As we enjoy our simple main course, Marks expounds one of his core philosophies: that economic cycles are driven by the pendulum of human emotion. “In real life, things fluctuate between pretty good and not so hot, but in the market, things go from flawless to hopeless,” he says. “Nothing’s ever flawless and nothing is ever hopeless, but when people reach those extremes, it’s a good opportunity for the contrarian.”
We’re lunching in late September. The US Federal Reserve has quickly raised interest rates to curb inflation and there has been a correction in equity markets. For Marks, “we’re in what I call the zone of reasonableness . . . And when it’s in fair territory, there’s nothing brilliant to do.”
This week’s fun finds
Here are the ages you peak at everything throughout life
‘Zombie’ virus revived after 50,000 years trapped in Siberian permafrost
Scientists are thawing out these ancient viruses in order to assess their impacts on public health. As the permafrost, or permanently frozen ground, melts in the Northern Hemisphere, the thawing ice releases tons of trapped chemicals and microbes.
“Due to climate warming, irreversibly thawing permafrost is releasing organic matter frozen for up to a million years, most of which decomposes into carbon dioxide and methane, further enhancing the greenhouse effect,” the study’s authors wrote. “Part of this organic matter also consists of revived cellular microbes (prokaryotes, unicellular eukaryotes) as well as viruses that remained dormant since prehistorical times.”
Just because wine experts can judge the characteristics of wine doesn’t mean we should care about their assessments of quality. Most of the research I found showed no blind preference for more expensive wines over cheaper ones.
Here my favorite study is Goldstein et al., “Do More Expensive Wines Taste Better? Evidence From a Large Sample of Blind Tastings.” They look at 6,175 tastings from 17 wine tasting events and find that, among ordinary people (nonexperts), “the correlation between price and overall rating is small and negative, suggesting that individuals on average enjoy more expensive wines slightly less.” But experts might prefer more expensive wine; the study found that if wine A cost 10 times more than wine B, experts on average ranked it seven points higher on a 100-point scale. However, this effect was not quite statistically significant, and all that the authors can say with certainty is that experts don’t dislike more expensive wine the same way normal people do.
