Reflections on the two weeks ending July 4, 2010

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

In last week’s blog, I noted the symbiotic relationship that exists between “Active” and “Passive” investing.  I subsequently came across a research paper published by FundQuest Incorporated, a BNP Paribas company in April 2009 and authored by Jane Li, CFA, CAIA.  The report is based on a study of 30,435 U.S. domiciled non-index mutual funds in 60 categories representing almost $4 trillion of assets as of the end of 2008.  The time period was January 1, 1994 to December 31, 2008 using 13 rolling 3-year periods. 

Their main conclusion was “that we should not paint either active or passive investments with a broad stroke.  Both types of investments have their strengths and weakness.  It depends on the market segments they are in:  less efficient, more active.” 

Not surprisingly, out of 60 Morningstar Categories, the following categories were included in the list in which Active management experienced relative outperformance: Foreign Large Value, Foreign Small/Mid Growth, Foreign Small/Mid Value, Japan Stock, Pacific/Asia ex-Japan Stock and World Stock.  This is consistent with the “less efficient, more active” conclusion. 

My version of the study’s conclusion is that active management is most likely to outperform when the manager actively invests in inefficient categories and sub-categories.  Conversely, active management is most likely to underperform when the manager is a closet index hugger of an efficient index.

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• The Reserve Bank of India increased its Repo and Reverse Repo rates by 25 bps as part of the process of unwinding stimulus policies and managing inflation pressures in the context of growth.

• Wealth Managers generating healthy free cash flows. 
• On June 30, 2010, IGM Financial Inc. reported that it had purchased for cancellation 850,000 (0.32%) of its currently outstanding common shares.  This share buyback is in addition to IGM’s dividend yield, which currently exceeds 5%.