Evidence: What To Follow And What Not To Follow (EP.24)

Episode Summary

Executive Summary: The episode covers three major investing and policy themes: CPP expansion in Canada, criticism of industry lobbying around financial advice regulation, and a deep dive into why factor investing differs from active stock-picking and liquid alternatives. The hosts argue for long-only factor tilts as a measured, evidence-based way to seek higher expected returns, while warning that more aggressive long-short strategies like AQR’s push evidence too far for most investors.

Main Topics: CPP expansion and retirement security (Priority: 5/5): The hosts discuss Canada Pension Plan expansion starting in 2019, emphasizing higher contributions now in exchange for materially larger lifetime retirement benefits later, with strong value in mortality pooling and forced long-term saving. Industry lobbying and advisor regulation (Priority: 5/5): They criticize Advocis and a Franklin Templeton executive for framing commission-based product business concerns as consumer protection, arguing that reducing embedded commissions and high-fee mutual fund sales is beneficial for investors. Vanguard advisor services entering Canada (Priority: 4/5): They discuss the rumored arrival of Vanguard’s personal advisor service in Canada as a major competitive threat to robo-advisors and a signal that low-cost advice and portfolio management will keep getting cheaper and more scalable. Institutional belief in active management (Priority: 4/5): The hosts dismiss a Natixis survey claiming institutions are losing faith in indexing, arguing the results are clickbait and inconsistent with decades of evidence showing active managers rarely outperform after costs. Why rich people are not necessarily happier (Priority: 3/5): They reflect on how people compare themselves to others, why rising wealth doesn’t guarantee greater happiness, and how adaptation and social comparison reset expectations at every income level. Factor investing versus AQR-style liquid alternatives (Priority: 5/5): The largest segment explains how factor tilts work, why they may raise expected returns through risk premia, and why the hosts prefer simple long-only factor tilts over AQR’s more aggressive long-short, tactical, and stock-selection-heavy strategies.

Key Arguments: CPP expansion is positive because it increases forced retirement saving, improves lifetime income security, and benefits from mortality pooling that private investors rarely obtain on their own. Embedded commissions and advisor lobbying often protect product manufacturers and sales channels more than end clients; more competition from low-cost providers should help consumers, not hurt them. Vanguard’s advisor offering could materially pressure Canadian robo-advisors and other advice platforms because it combines scale, recognizable branding, and lower fees. Institutional surveys claiming active management will outperform are not strong evidence; they often reflect agency bias, career incentives, and a bias for action rather than sound investing beliefs. Factor investing is not a claim that investors can beat the market through skill; it is a deliberate tilt toward higher-expected-return risks like size and value, which can improve portfolio expected returns when combined thoughtfully. Factor returns are best understood as risk premia or behavioral premia, but the hosts strongly favor the risk-based explanation and view factor tilts as priced exposures rather than free lunches. Long-only factor portfolios are preferable to long-short liquid alternatives for most clients because they are simpler, cheaper, lower turnover, and stay grounded in broad market participation and capitalism. AQR’s approach is evidence-based but more extreme: long-short stock selection, tactical beta timing, and high fees make it a different proposition than Dimensional-style indexing with factor tilts. When evaluating managers, apparent alpha can disappear once proper factor benchmarking is used; many outperformers are simply taking hidden small-cap or value exposure.

Data Points: CPP contribution rate: 4.95% rising to 5.95% by 2023 - Employee contribution on pensionable earnings under the CPP expansion Additional CPP contribution on higher earnings: 4% - New second-tier contribution on income above the existing maximum pensionable earnings CPP replacement target: 33% of yearly maximum pensionable earnings - Government goal for expanded CPP benefits Current CPP earnings ceiling: around $57,000 - Approximate yearly maximum pensionable earnings discussed in the episode Maximum CPP benefit: around $1,300 per month - Approximate maximum monthly benefit under the old CPP structure Expanded CPP benefit target: about $20,000 per year in today's dollars - Hosts describe the long-run intended retirement benefit under CPP expansion Current average savings rate: lowest in years - Referenced as background for why forced savings via CPP may help Canadians Vanguard U.S. Personal Advisor Service fee: 30 bps - Fee for Vanguard’s U.S. advice service used as a benchmark against Canadian offerings Vanguard U.S. advisor service minimum: $50,000 - Minimum account size for Vanguard Personal Advisor Service in the U.S. Wealthsimple advice fee: 40 bps - Canadian robo-advisor fee cited when comparing Vanguard’s potential entry into Canada Wealthsimple advice minimum for human advice: $100K - Minimum asset level mentioned for accessing advisor service Natixis survey belief in active outperformance: 61% - Institutional respondents who said active management outperforms passive in the long run Natixis survey belief in active advantage in 2019: 4 out of 5 - Majority of surveyed institutional investors expected active managers to have an advantage AQR long-short equity fund YTD return: down 15.71% - Performance cited as evidence of stress in AQR’s strategy set AQR managed futures fund YTD return: down 14.44% - Another AQR strategy under pressure during the period discussed Broad global equity reference performance: down 7% - Used to compare AQR alternative strategies against standard equity exposure AQR net outflows: $3.5 billion - AQR outflows through end of October, split between institutions and retail advice channels Dimensional U.S. inflows: $20 billion - Contrasted with AQR’s outflows to show investor preference for Dimensional’s approach Dimensional Canada inflows: $5 billion - Illustrates strong adoption of Dimensional in Canada during the year discussed AQR fund expenses: over 2% - High fees cited as one reason the hosts avoid AQR-style products AQR year-end distribution estimate: 3.6% - Estimated distribution for the long-short equity fund, reflecting turnover-related tax drag

Pivotal Quotes: "You do not want a liquid alt because you're bearish on stocks or traditional assets. That kind of timing is difficult to do well." — Cliff Asness (quoted by hosts): Explaining that liquid alternatives should be held for diversification and positive expected return, not market timing "As a blunt example, in general, we believe in choosing individual stocks with good value, good momentum, both price and fundamental, low risk, high cost, quality, example profitability and margins, and positive views from those we think are informed investors." — Cliff Asness (quoted by hosts): Describing AQR’s stock-selection framework and showing how far it goes beyond simple indexing "It's not a free lunch, they're taking more risk." — Hosts: Summarizing the core logic behind factor investing and higher expected returns

Implications: Listeners should view CPP expansion as a meaningful forced-savings upgrade, be skeptical of lobbying that defends high-fee product sales, and distinguish simple factor tilts from far more aggressive long-short strategies. The episode reinforces evidence-based investing, but with caution about complexity, costs, and behavior.