This week's interesting finds

EdgePoint Q4 2022 commentaries are now live on the website. This quarter: 

• New growth? (equity) – Andrew Pastor discusses why we believe investor biases help us buy growing companies without having to pay for that growth.

• A rose by any other name (fixed income) – Derek Skomorowski takes the opportunity to tell us why labels matter less than content.

Alexandria DiBellonia, partner since 2014 (Ottawa, Ontario)   

How Americans spent their money in 2021 by age   

Robots are spreading to other industries… 

…and are integrating more into them   

The middle class is growing in emerging markets 

MBA Mortgage Market Index shows U.S. mortgage volumes are the lowest in over 20 years

The cost of a new vehicle is almost a year’s worth of income 

Lack of trust in the media

Investors Seek to Pull $20 Billion From Core Real Estate Funds

A group of property funds for institutional investors ended last year with $20 billion in withdrawal requests, the biggest waiting line since the Great Recession, according to IDR Investment Management, which tracks an index of the open-end diversified core equity [ODCE] funds. 

“It’s like the nightclub where everybody lines up to get in and then lines up to leave when it closes,” John Murray, head of global private commercial real estate at Pacific Investment Management Co., said in an interview. 

The capital outflows are ratcheting up the pressure on institutional fund managers as higher interest rates batter the commercial real estate market. At the same time, managers such as Blackstone Inc. are seeing retail investors — wealthy individuals in particular — pulling money from real estate bets amid volatile markets. 

Redemptions are “prompting many core funds to attempt to sell their most liquid assets, like industrial and multifamily assets, which implies a headwind for even the most relatively resilient sectors” of commercial real estate, Murray wrote in a December note. 

For institutional investors, the exit queue is at least partly a response to what’s known as the denominator effect. Investment managers often have certain targets for how much they want to have invested in stocks, bonds, real estate and other assets. As markets slumped last year, their stock and bond holdings shrunk in size while real estate held up better, meaning it often constituted a bigger slice of their portfolios than they initially intended.

This week’s fun finds 

Lunar New Year celebration

We celebrated the upcoming Year of the Rabbit in both the Toronto and Montreal offices with our second moai of the year.

The Best Routine, According to Science

The research on routines is clear. They are indeed effective. They help you activate when you’re feeling low, automate decisions so you don’t burn willpower, and prime your mind-body system to more easily groove into the task at hand. If you work out every morning, you don’t have to think about working out, you just do it. And, if you’re like most people, you feel much better afterward, regardless of how you were feeling before. 

But here’s the catch: Although routines can be magical, there is no magic routine. What works for one person might not work for others. This is problematic for those in the cult of routines, especially those looking to make a buck selling their own.

The bottom line is that the only way to an optimal routine is through astute self-awareness—not mimicking what other people do—and experimentation. The more you can match your activities to your energy levels, the better. The more you can figure out which types of environments stimulate your best work, the better. 

There is also a danger in becoming overly attached to your routine. If for whatever reason you can’t stick to it—you’re traveling, your special coffee shop closes, whatever elixir you order from your favorite podcast’s advertising goes out of business—you won’t know what to do. It’s like a Zen koan: The first rule of routines is to develop one and stick with it. The second rule is to cultivate the capacity to easily release from it. 

Boston Dynamics’ latest Atlas video demos a robot that can run, jump and now grab and throw

Boston Dynamics just released the latest demo of its humanoid robot, Atlas. The robot could already run and jump over complex terrain thanks to its feet. Now, the robot has hands, per se. These rudimentary grippers give the robot new life. Suddenly, instead of being an agile pack mule, the Atlas becomes something closer to a human, with the ability to pick up and drop off anything it can grab independently.

The claw-like gripper consists of one fixed finger and one moving finger. Boston Dynamics says the grippers were designed for heavy lifting tasks and were first demonstrated in a Super Bowl commercial where Atlas held a keg over its head. 

NASA's Webb telescope has discovered its first exoplanet

NASA's Webb telescope has discovered an exoplanet, which is any planet that is outside of our solar system, for the first time, the agency announced Wednesday. 

Researchers were scanning the skies using NASA's Transiting Exoplanet Survey Satellite (TESS) when they came across the exoplanet, and used the Webb's spectrograph technology to further investigate. Spectrographs transmit light from an object to a spectrum, which can give information about the object's temperature, mass and chemical composition. 

"These first observational results from an Earth-size, rocky planet open the door to many future possibilities for studying rocky planet atmospheres with Webb," said Mark Clampin, astrophysics division director at NASA headquarters in D.C. "Webb is bringing us closer and closer to a new understanding of Earth-like worlds outside our solar system, and the mission is only just getting started."

This week's interesting finds

 

Craig Advice – Partner since 2008 (Canmore, Alberta)

This week in charts

Who owns U.S. equity? 

Share buybacks by U.S. companies   

Projected top-6 countries by population in 2100 

CLO Managers Face Trading Crunch in Downturn 

By the end of 2023, more than 40% of collateralized loan obligations will be subject to restrictions on their ability to easily manage their portfolio by investing in new loans, according to Bank of America Corp. 

That means CLO managers will have less flexibility to keep their loan collateral safe just when they need it most. The share of CCC rated loans in CLO portfolios hit 5.6% by mid-December, according to the bank, not far from the carefully watched 7.5% level where individual CLOs may need to begin looking to divert cash flows from equity holders. 

“CLO managers are likely working hard to sort out the B- loans that will eventually be downgraded from those that won’t be downgraded,” said Steven Abrahams of Amherst Pierpont Securities, a broker-dealer owned by Santander. 

One way they’ll be able to tell the good from the bad is by looking at prices. The universe of loans rated B- is trading at a wide range, from roughly 70 to 90 cents on the dollar. The main difficulty lies in what to do about loans at the bottom end of that range. It’s too late now to sell those loans without locking in steep losses. 

“The ability to pick through loans to separate the ones that can be salvaged from the ones that can’t is what will distinguish managers this year,” said Abrahams.   

This week’s fun finds 

EdgePointers continue (and adapt) an annual tradition 

We delayed our annual holiday gathering into the new year, but it was worth the wait as (partner-shucked) oysters made their way to the festivities. 

Tea if by sea, cha if by land: Why the world only has two words for tea 

With a few minor exceptions, there are really only two ways to say “tea” in the world. One is like the English term—té in Spanish and tee in Afrikaans are two examples. The other is some variation of cha, like chay in Hindi. 

Both versions come from China. How they spread around the world offers a clear picture of how globalization worked before “globalization” was a term anybody used. The words that sound like “cha” spread across land, along the Silk Road. The “tea”-like phrasings spread over water, by Dutch traders bringing the novel leaves back to Europe. 

A few languages have their own way of talking about tea. These languages are generally in places where tea grows naturally, which led locals to develop their own way to refer to it. In Burmese, for example, tea leaves are lakphak.

This week's interesting finds

Sandro Panella and Cesare Rizzuto – Partners since 2008 and 2011 (Little Italy – Toronto, Ontario)

 

This week in charts 

Tesla’s market-cap drop in perspective 

Bloomberg negative-yielding debt index loses its last member 

Canadian housing affordability 

Inflation category weights 

How private markets became an escape from reality 

The rage for private investing began in the early 2000s, after the success of the Yale University endowment fund led by David Swensen, who embraced private investments to diversify away from stock and bond markets and stabilise returns in the long run. Swensen’s definition of “long” was decades — not a mere ten years, much less the next turn from bear to bull market. He looked for private managers who were building companies rather than stripping and flipping for a quick profit. Swensen defined his job as generating multigenerational wealth to support Yale, which he assumed to be “immortal”. But his approach also had the potential to free money managers from daily pressure in the markets, and transcend the short-term thinking that was infecting modern capitalism. 

What started as a sound idea has become an escape from something else entirely: reality. In return for the promise of superior returns, private funds typically “lock in” client money for up to 10 years, then report to clients much less frequently than public funds do — quarterly at most, not daily. In the new tight money era, with losses spreading across asset classes, private channels have become a way for money managers to conceal losses from clients — typically capital allocators at pension funds or other big savings institutions — who are often content in the dark. They don’t want to face the agonies of daily volatility either.   

Alberta sees largest population increase ever: StatsCan data 

"I think it would be fair to say that the Alberta economy has been doing reasonably well for the last couple of years, and that's made it more attractive," said Janet Lane of the Canada West Foundation. 

Lane, the director of the foundation's Human Capital Centre, says the job market is the first driver of population changes. 

"A very close second recently has been the cost of living in Vancouver and Toronto, the cost of housing for young people. It has absolutely been out of reach to be able to buy a home." 

British Columbia and Ontario were the two largest sources of migrants within Canada, with about 11,000 and 12,000 people arriving, respectively, from each. 

While Alberta led the country in proportional population increases, Ontario by far had the largest increase in sheer numbers. 

That province added more than 153,000 net new residents, largely due to international migration, but it lost more people to other provinces than it gained, many of them to Alberta.

This week’s fun finds   

Are Mushrooms the Future of Alternative Leather? 

MycoWorks eventually focused on creating a material that had the look and feel of leather but was free of animal parts. Called Reishi, after the Japanese name for the genus of mushrooms Mr. Ross first used, it can currently be produced in sheets of six square feet. (MycoWorks declined to disclose pricing except to say that it is currently comparable with exotic hides. As the company continues to grow, they added, MycoWorks will be able to offer some at lower prices.) 

The company, whose headquarters are in Emeryville, Calif., has obtained more than 75 patents and now has over 160 employees in the United States, France and Spain. It has also secured collaborations with high-end companies like Hermès and, most recently, the furniture maker Ligne Roset and GM Ventures, the investment arm of General Motors. 

In contrast, MycoWorks “can achieve the same quality and performance as animal leathers without the need for any sort of plastics,” Matthew Scullin, MycoWorks’ chief executive, said at a temporary exhibition showroom in New York in the spring. Now too large to rely solely on local farmers for its supply of mycelium, the company has its own strains which “we basically keep in cold storage,” Mr. Scullin said. 

The process starts by combining the mycelium with waste from sawmills in trays; as the sawdust decomposes, the mixture begins to develop into a thin sheet. The material can then be customized to meet clients’ specifications, including specific textures, and can include the addition of other fibers, like cotton. The Fine Mycelium, the trademarked name for its patented technology, is then finished by outside tanneries. (The tanning process does not use chromium, historically one of the most polluting parts of leather manufacturing.) 

Because the process for creating Reishi has only a few steps, Mr. Scullin said, it has a “low impact” on the environment. In addition, he said, while animal hides vary in size and texture, Reishi is more consistent and predictable for clients. 

The Surprisingly Profound Power of Thank-You Notes 

Near the end of December, I open my email or pick up a pen, and I begin composing thank-you notes. The messages are usually just a few sentences long: I recap my interactions with the recipient that year, put my finger on what I appreciated, and say I’m grateful. But when I consider whom to thank, I realize the list could go on and on. I try to think of everyone who made my year better: the established journalist who referred me to a radio program, the HR staff who processed my paperwork, the friend who dropped off groceries when I was recovering from COVID. Almost always, I get a note back expressing similar gratitude. 

Typically, we’re told to write thank-you notes at specific junctures—after finishing a job interview, receiving a gift, hosting a wedding or another significant function. These notes can be lovely, but they also run the risk of being rote and transactional. We send them because we’re expected to. End-of-year thank-you notes, though, aren’t written out of obligation. Those who get them are reminded unexpectedly that someone is thinking of them—and that their actions haven’t gone unnoticed. 

I’d argue that end-of-year thank-you notes are good for the sender too. Looking back on the year, I don’t stop reflecting after thinking about what I’ve accomplished. When I make a mental list of everyone who supported me, I remember that no achievement is the result of my efforts alone. That realization is humbling; it grounds me in gratitude for all I was able to do rather than resentment for what I didn’t or couldn’t do. 

Making a New Year’s Resolution? Don’t Go to War With Yourself 

“It’s helpful for resolutions to be resilient—ones that you’re going to be able to stick with even when life doesn’t run as perfectly as you planned. I like the idea that Dan Harris, the meditation writer and podcaster, talks about, which is resolving to do things “day-ish”—the notion that you can make your plan for change a lot more sustainable if it’s not so rigid that one missed day spells failure. 

“The other thing is just to remember that the difference between not doing anything at all and doing 10 minutes a few times a week is absolute. It’s the same idea as “the best kind of workout to do is the one you’re actually going to do.” If it happens to not be the ideal physical regimen according to science right now, that couldn’t matter less. 

“I don’t think there’s anything helpful about resolutions that put you at war with yourself. Often, it’s basically just a resolution to, like, shout even louder at yourself this year until you finally do the things that you think you ought to be doing. That kind of internal combat never works in the end, because you start to resent the person who’s yelling at you to do all these things—even if that person is yourself.”

Season's greetings from the EdgePoint team!

Happy Holidays!

From our EdgePoint family to yours, wishing you all the joys of the season, health, and happiness throughout the coming year! 

Plaid Day at our Toronto and Montreal offices

This week's interesting finds

Zack Chetrat – Partner since 2017 (Cambie & West Broadway – Vancouver, British Columbia)

This week in charts

More Americans are joining the ‘cashless’ economy

Young adults are staying with their parents

 

More Canadian renters than ever before

Sea Change (Howard Marks memo)

“The overall period from 2009 through 2021 (with the exception of a few months in 2020) was one in which optimism prevailed among investors and worry was minimal. Low inflation allowed central bankers to maintain generous monetary policies.  These were golden times for corporations and asset owners thanks to good economic growth, cheap and easily accessible capital, and freedom from distress. This was an asset owner’s market and a borrower’s market.  With the risk-free rate at zero, fear of loss absent, and people eager to make risky investments, it was a frustrating period for lenders and bargain hunters.

“Inflation began to rear its head in early 2021, when our emergence from isolation permitted too much money (savings amassed by people shut in at home, including distributions from massive Covid-19 relief programs) to chase too few goods and services (with supply hampered by the uneven restart of manufacturing and transportation). Because the Fed deemed the inflation “transitory,” it continued its policies of low interest rates and quantitative easing, keeping money loose.  These policies further stimulated demand (especially for homes) at a time when it didn’t need stimulating.

“Inflation worsened as 2021 wore on, and late in the year, the Fed acknowledged that it wasn’t likely to be short-lived. Thus, the Fed started reducing its purchases of bonds in November and began raising interest rates in March 2022, kicking off one of the quickest rate-hiking cycles on record.  The stock market, which had ignored inflation and rising interest rates for most of 2021, began to fall around year-end.

“How has this change manifested itself in investment options? Here’s one example: In the low-return world of just one year ago, high yield bonds offered yields of 4-5%. A lot of issuance was at yields in the 3s, and at least one new bond came to the market with a “handle” of 2. The usefulness of these bonds for institutions needing returns of 6 or 7% was quite limited.  Today these securities yield roughly 8%, meaning even after allowing for some defaults, they’re likely to deliver equity-like returns, sourced from contractual cash flows on public securities.  Credit instruments of all kinds are potentially poised to deliver performance that can help investors accomplish their goals.”

Quebec Shuns Bitcoin Mining in Bid to Conserve Power

The government-owned utility Hydro-Quebec asked a provincial regulator last month to reallocate the 270 megawatts of energy, equivalent to the energy consumed by roughly 97,000 households, that it had set aside for crypto mining.

It is also a sharp reversal from 2018, when the then-CEO of Hydro-Quebec said bitcoin business was necessary to boost provincial consumption to offset what he feared was declining demand that would put the utility into a “death spiral.”

At the end of the last year, Canada was the fourth-largest producer of bitcoin, behind the U.S., China—where illicit bitcoin mining continues despite a 2018 government ban—and Kazakhstan, according to the University of Cambridge Judge Business School.

Hydro-Quebec charges the lowest rates for industrial power in North America, with average prices as of April 1 of 3.93 cents per kilowatt-hour in Montreal, its largest city, according to the utility’s data. Industrial customers in Houston paid an average of 10.33 cents. The average cost in North America is 8.22 cents, according to Hydro-Quebec.

Now, the utility says that demand for electricity in the province will grow 14% over the next 10 years and it needs to direct energy to higher priority areas, such as exports.

Quebec has signed agreements to provide power to New York City and Massachusetts. The provincial utility is trying to build transmission lines through Maine to supply power to New England, a project that could bring the province more than $7 billion in revenue over the next 20 years.

This week’s fun finds

Becoming Athletic In My 50s

This was a new feeling — and one that was, for me, incredibly weird and foreign. What had changed? Why was I suddenly digging the feeling of exercise?

Part of it was that really vigorous cycling crept into my life as a functional activity. I wasn’t having to “set time aside to exercise”, or fit it into my calendar. I was just, well, moving around town and doing errands. I was Getting Stuff Done. I didn’t classify it as an athletic activity or a sport: It was “mobility”, autonomy. Since I’m also a big ol’ treehugger focused on climate-change mitigation, it also felt rad and empowering to suddenly schlep all over town — and carry heavy loads — without using a car.

But along the way, I also realized I was vibing with many of the thrills of athletics. I enjoyed pushing the limits of my endurance. In the fall of 2020, for example, my son and I decided to try cycling a full “century”, 100 miles in a single day. We hit the road one morning in early September, and holy moses by dinner we’d made our way to Philadelphia. When I arrived at Philly’s city hall, it felt astounding to have hauled such ass entirely under my own steam. It was a wild, giddy boost to one’s self-esteem. “After you’ve traveled a serious distance on a bike,” as I later wrote, “it’s hard to feel down on yourself.”

But most obviously, long-distance cycling finally helped me figure out what motivated all these sporty folks, who I’d regarded for decades with such dank suspicion. I now understood them, a little. Specifically, I felt the pleasure of figuring out what my body — and what my willpower — was capable of.

YouTube Stars Cash In Video Rights for Millions of Dollars

Spotter Inc. and Keli Network Inc., which does business as Jellysmack, are flooding the personalities behind top YouTube channels with offers to license their old videos, pitching the deals as timely infusions that can help them expand their businesses.

The startups offer cash sums in exchange for the future advertising sales generated by a YouTube creator’s old videos, striking deals that can stretch for as long as five years.

Spotter said it had spent $740 million on content licensing agreements since 2019 after announcing earlier this year that it planned to invest $1 billion by the middle of 2023. Jellysmack has put aside $500 million for similar deals.

SoftBank Group Corp.’s Vision Fund invested in both companies, betting the videos would increase in value as YouTube stars attract larger audiences. Other smaller firms are also pitching deals to creators.

The Murky Path To Becoming a New York Times Best Seller

No one outside The New York Times knows exactly how its best sellers are calculated—and the list of theories is longer than the actual list of best sellers. In The New York Times’ own words, “The weekly book lists are determined by sales numbers.” It adds that this data "reflects the previous week’s Sunday-to-Saturday sales period" and takes into account "numbers on millions of titles each week from tens of thousands of storefronts and online retailers as well as specialty and independent bookstores." The paper keeps its sources confidential, it argues, "to circumvent potential pressure on the booksellers and prevent people from trying to game their way onto the lists." Its expressed goal is for “the lists to reflect what individual consumers are buying across the country instead of what is being bought in bulk by individuals or associated groups.” But beyond these disclosures, the Times is not exactly forthcoming about how the sausage gets made.

Laura B. McGrath, an assistant professor of English at Temple University who teaches a course on the history of the best seller, compares The New York Times’ list to the original recipe for Coca-Cola: “We have a pretty good idea of what goes into it, but not the exact amount of each ingredient.”

Although the list claims to be a numerical ranking with full autonomy from The New York Times Book Review, some of the sources I spoke with believe that an element of editorial curation must be at play. “To my knowledge, The New York Times tracks sales of books, and the sales are what is ‘supposed to’ decide where those books sit on the list. However, the truth is, it's much more editorialized,” Sarah*, a book publicist who has worked at two Big Five houses, suggested to me. “There is quite a bit taken into consideration—i.e., are the book sales mostly bulk buys? Are they mostly indie bookstore sales? Are they mostly Amazon sales? Even which list the book would be considered for has a huge effect.” For example, whether a book is considered for the Hardcover Nonfiction weekly list or the Advice, How-To, & Miscellaneous weekly list might affect whether it becomes a best seller at all.

Times spokesperson Melissa Torres denied in an email that any editorial judgments are involved in constructing the best seller list.

This week's interesting finds

Alex Gramegna – Partner since 2019 (100 St. – Edmonton, AB) 

This week in charts 

Pandemic saving habits have ended 

Vanguard quits net zero climate effort, citing need for independence 

Vanguard Group Inc is pulling out of a major investment-industry initiative on tackling climate change, the world's biggest mutual fund manager said on Wednesday, explaining it wants to demonstrate independence and clarify its views for investors. 

One focus of criticism has been the effort known as the Net Zero Asset Managers (NZAM) initiative, launched in late 2020 to encourage fund firms to reach net zero emission targets by 2050 and limit the rise in global temperatures. As of Nov. 9, NZAM counted 291 signatories representing some $66 trillion in assets under management. 

As recently as May Vanguard was touting commitments it had made in line with NZAM's goals. On Wednesday Vanguard posted a statement on its website saying industry initiatives like NZAM can create confusion. 

"We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks—and to make clear that Vanguard speaks independently on matters of importance to our investors," Vanguard said in the statement. 

Vanguard rivals including BlackRock Inc (BLK.N) have taken the opposite stand and said their NZAM participation does not conflict with their independence. A BlackRock spokesman said on Wednesday the company remains part of NZAM. 

Daniel Wiener, chairman of Adviser Investments in Newton, Massachusetts and a longtime Vanguard observer, said the firm's withdrawal showed it lacked a strong leader on ESG issues that BlackRock has in its CEO Laurence Fink. 

"Backing out of this thing is simply Vanguard blowing with the winds of constant change. They don’t have a strong personality like Fink to champion a cause," Wiener said. 

German strategy paper targets China trade dependence 

Germany's Economy Ministry recommends excluding using components from providers from authoritarian states in critical infrastructure and imposing stricter requirements for firms dealing with China, a strategy paper seen by Reuters shows. 

Those German firms particularly exposed to China should share details on that business with the government and undergo regular stress tests, according to the ministry's "Internal Guidelines on China", marked confidential. 

Deep trade ties bind Asia and Europe's biggest economy, with rapid Chinese expansion and demand for Germany's cars and machinery fuelling German growth over the past two decades. China became Germany's single biggest trade partner in 2016. 

Germany did not aim to decouple from its top trade partner, China, said the paper, first reported on by online portal The Pioneer. But Russia's invasion of Ukraine had shown the high risks of close economic relations with autocratic states seeking alternative world orders. 

KLM chief encourages passengers to take the train to cut emissions 

KLM’s chief executive has encouraged passengers to take the train rather than fly on some short-haul journeys to help cut carbon emissions, saying the airline sector should stop viewing rail as a competitor. 

“If [you] have a good alternative you should really use it,” Marjan Rintel told the Financial Times in an interview. “If you’re serious on reaching your sustainability goals, the train is not a competitor. We need to work together.” 

Rintel said KLM had already block-booked seats on the train service linking Amsterdam to Brussels and Paris in response, and she had urged the business “to develop the relationships with the Dutch railways, to see what we can do at short notice to motivate our customers to go by train to Brussels or Paris”. 

KLM was also looking at making it easier to buy flight and train tickets in a single booking and was in discussions with rail companies in the Netherlands and France about making transfers easier, Rintel said. 

However, she expressed no interest in becoming directly involved in running train services and said the airline would work with NS and the Eurostar Group, owner of the cross-Channel Eurostar service and of the Thalys service linking France, Belgium, Germany and the Netherlands.   

Music Deal Maker With Rights to Tens of Thousands of Songs Faces Chorus of Investor Unease

Investors are demanding a change of tune at Hipgnosis Songs Fund Ltd., the London-listed investment vehicle that owns the rights to tens of thousands of songs written by artists such as Shakira, Lindsey Buckingham and the Red Hot Chili Peppers. 

A spokesman for the investment adviser to the fund said it adds value through active song management. It is benefiting from growth in premium streaming services and other new sources of revenue that are boosting the global music industry, he said. 

When times were good, Hipgnosis tapped investors repeatedly for new equity funding to buy more songs, acquiring catalogs at what some music executives viewed as high prices. 

The rush of deals fed into higher sales, boosting the stock price and its ability to raise more money. From its 2018 listing onward, Hipgnosis has raised about 1.3 billion pounds in equity, equivalent to about $1.58 billion, and borrowed hundreds of millions of dollars more. 

[Founder] Mr. Mercuriadis has struck separate deals with Blackstone, which agreed in late 2021 to take a majority stake in Hipgnosis Song Management Ltd., which advises the listed fund. The investment adviser also manages a second private fund for Blackstone, known as Hipgnosis Songs Capital. 

This year, however, Hipgnosis stock has fallen roughly 35% and now languishes below its listing price.

This week’s fun finds 

Santa came early to the EdgePoint office 

Our littlest partners came into the office to see Santa and his elves. There was mad science, presents and a lot of laughter. 

Changing the wrap game 

Several EdgePoint partners and volunteered their time with Holiday Helpers to wrap presents for families in need. 

Fortunately, there were no reported paper cuts.   

EdgePointers go back to school 

Internal partners and alumni of Michael Power – Saint Joseph High School, Anna, Stefania and Daniela, along with Chief Camp Counsellor Montana, presented our Edge-ucation Camp on financial literacy at their old high school.

This week's interesting finds

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 

Options provide the right to buy or sell assets at a fixed price by a given date. Zero-day options provide this right for the shortest possible period, expiring the same day they are purchased. 

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. 

Rental housing investor Starlight halts distributions on two funds, citing variable-rate mortgage woes

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.” 

Is Wine Fake?

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.