Reflections on the two weeks ending June 20, 2010

During the past two weeks, I’ve read a number of articles debating the merits of “Active” versus “Passive” investing.  Upon reflection, I concluded that the irony of these debates was that, rather than any single position being right, the strategies were actually dependent on each other for their success. 

Consider the Active versus Passive debate.  The debate is essentially premised on the hypothesis that an “efficient market” comprised of:

• Lots of unemotional, knowledgeable investors
• With abundant capital
• And timely and complete information

will ensure that security prices reflect their true value and, accordingly, “Active” investors are unable to earn a premium return.  Put another way, the argument in support of “Passive” investing relies on “Active” investors to keep the market efficient.  Conversely, as the market gets more efficient, and the premium earned by “Active” investors diminishes, it would be reasonable to expect a decrease in “Active” investors relative to “Passive” investors which, in turn, would be expected to result in a less efficient market and the potential for higher returns for “Active” investors.

So, as a practitioner of fundamental analysis driven investing, I am glad for the growth trend of passive index investing – it provides another source of premium returns for an investor focused on investing in a few quality businesses at attractive prices.

During the week, the following news items were of relevance to some of the companies we follow:

• While industry growth is one key element in the investment thesis for Wealth Managers, operating and financial leverage is another.
• On June 23, 2010, AGF Management Ltd reported fully diluted Earnings Per Share of $0.30 for its second quarter ended May 31, 2010.  This compares against $0.19 in the prior year for a 58% increase.  Operating leverage was evident as May 31, 2010 Assets Under Management were 14.6% higher than the prior year.
• At the end of the week, the Indian government made a major announcement towards removing subsidization of fuel prices.

1. This is consistent with the general direction of policy reform towards being “market driven”.
2. The cost savings to the government along with the revenues earned by the government from auctioning mobile communication spectrum is reducing the size of the Indian fiscal deficit to well below its GDP growth rate.

• During the week, Suncor announced another sale of non-core natural gas properties as it continues to monetize non-core assets and focus on oil-sands development.