Clearing Up the Holiday Back-Up: Podcast Housekeeping and Round Up (EP.29)

Episode Summary

Executive Summary: Cameron and Ben discuss Canadian ETF market developments, rejecting market-timing and cash hoarding for long-term investors, revisiting global diversification and home-country bias, and critiquing winner-take-all narratives in tech. They also highlight antitrust implications of data dominance, criticize CPP Investments’ shift to active management and rising costs, and close with practical Canadian tax updates for CCPC owners.

Main Topics: Canadian ETF market update and industry consolidation: They review growth in Canadian ETFs, noting the RBC-iShares alliance, Vanguard’s rapid asset gathering, BMO’s strong inflows, and the expansion of thematic products. The discussion frames ETF competition as a scale-driven fee war. Why long-term investors should not move to cash: In response to a listener question and a Barron’s article, they argue that going to cash for market-timing purposes is not supported by evidence, even when valuations are high or sentiment is negative. Home-country bias and true global diversification: They address whether owning the S&P 500 is sufficient because of multinational revenue exposure, arguing that country-specific risks and imperfect correlations still make global diversification essential. Active management persistence and the luck-vs-skill problem: Using S&P’s persistence scorecard, they show that very few top-quartile funds remain there over time, reinforcing skepticism toward claims that managers can consistently beat the market. Winner-take-all tech narratives and market concentration: They challenge the idea that a few mega-cap tech firms will inevitably dominate future returns, pointing to historical precedent where many companies once represented huge shares of the market before later falling back. Data, antitrust, and the changing nature of economic power: They discuss how Google, Facebook, Amazon, and other firms derive power from data, and why antitrust regulation may need to focus on data assets, transparency, and ownership rather than just firm size. CPP Investments, active management, and rising costs: They criticize CPPIB’s move from passive to active management and the resulting growth in staff and costs, while acknowledging CPP itself remains a sound public pension plan. Canadian tax updates for CCPC owner-managers: They cover the federal passive income rules affecting the small business deduction, Ontario’s reported non-adoption of the federal limit, and a tax-planning point about income splitting from a holding company after an active business is removed.

Key Arguments: ETFs are a commodity business, so scale and distribution matter more than product novelty; alliances like RBC-iShares are logical responses to fee pressure. Long-term investors who do not need near-term liquidity should not move to cash based on valuation or market fears; market timing lacks reliable predictive power. Even if S&P 500 companies earn significant foreign revenue, one-country investing is not the same as global diversification because country-level risks and currency exposure still matter. The persistence of top-performing active funds is only marginally better than chance, which undermines claims of repeatable skill. “Winner-take-all” fears are overstated because history shows many different firms have temporarily dominated markets, and today’s leaders can still underperform expectations. Antitrust analysis should adapt to the data economy by considering data scale, access, transparency, and ownership, not just market capitalization. CPP Investments’ move to active management has coincided with a dramatic expansion in headcount and expenses, which the hosts view skeptically. Recent tax changes make RRSP planning more attractive for CCPC owners because passive investment income can reduce small business deduction room. If an owner-manager winds down an active business and leaves only a holding company, income splitting with a spouse may still be possible under certain conditions. People often justify active or tactical decisions by assuming they or their clients are exceptions to the data, but the hosts argue the burden of proof is on those making the deviation.

Data Points: RBC-iShares arrangement: Alliance - Described as a major Canadian ETF industry partnership to combine scale and distribution resources. Vanguard one-ticket fund assets: About $500 million - VGro gathered roughly half a billion dollars in new assets in less than a year. VGro fee: 25 bps - Fee charged by Vanguard’s one-ticket solution. BMO ETF asset growth: $5 billion - BMO was cited as the biggest Canadian ETF asset gatherer in the prior year. New ETF launches in Canada: 140 - Number of new ETF products launched in 2018. HMMJ assets: $1 billion - Horizons’ marijuana ETF crossed the billion-dollar mark. ETF vs mutual fund flows: ETFs gathered more assets than mutual funds - For the first time, ETF inflows exceeded mutual fund inflows in Canada that year. Barron’s advisor survey: 45% - Share of advisors reportedly planning to increase cash allocations based on recent performance and economic conditions. S&P 500 foreign revenue exposure: 43% - Referenced by a listener asking whether S&P 500 ownership already provides global diversification. SPIVA persistence scorecard: 7.09% - Share of U.S. domestic equity funds in the top quartile in Sept. 2016 that stayed in the top quartile by Sept. 2018. Expected by chance: 6.3% - Baseline chance expectation for funds staying in the top quartile over the period. Largest U.S. stock market share, AT&T: 13% - AT&T’s peak share of total U.S. stock market value in 1932. Largest U.S. stock market share, GM: 8% - General Motors’ peak share of the U.S. market in 1928. Largest U.S. stock market share, IBM: 7% - IBM’s peak share of the U.S. market in 1970. Current mega-cap share mentioned: ~3% - Amazon’s share of total U.S. stock market value at the time discussed. CPPIB staff size in 2000: 5 - Employee count referenced in criticism of CPPIB’s growth. CPPIB CEO pay in 2000: $310,000 - Annual CEO compensation referenced for CPPIB in 2000. CPPIB total costs in 2000: $3.7 million - Total costs cited for CPPIB in 2000. CPPIB staff size by 2006: 150 - Employee count after the shift toward active management. CPPIB average compensation for five executives: $4.5 million each - As cited in the discussion of current CPPIB executive compensation. CPPIB total costs: $3.2 billion - Current annual total costs referenced in the critique. Passive income threshold: $50,000 - Amount of passive income that starts to reduce the small business deduction for CCPCs.

Pivotal Quotes: "that's historical hogwash" — Jason Zweig (quoted by hosts): Used to dismiss the idea that today’s tech concentration is unprecedented. "Google can see what people search for: Facebook, what they share, Amazon, what they buy. They own app stores and operating systems and rent out computing power to startups. They have a God's eye view of activities in their own markets and beyond." — The Economist (quoted by hosts): Illustrates how data-rich platforms create new antitrust concerns. "we are hiring for a position here in our team in Ottawa" — Ben/Cameron: Operational update at the start of the episode.

Implications: Listeners should resist market-timing, diversify globally, and be skeptical of narratives that justify concentration or active management. For the industry, data-driven competition, ETF scale battles, and regulation of platform power are likely to intensify.