Market Analysis: Week of Feb 12, 2023

Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, summarizes recent financial headlines and provides context for Canadian investors.

Canadian Telecoms Dial Up Their Earnings Results

Canada’s major telecommunications companies reported their 2022 results with few surprises: Telus slightly missed expectations, Rogers beat forecasts, and Bell landed roughly where analysts anticipated.

Telus expects stronger revenue and earnings in 2023 as capital spending eases. Despite a slight earnings miss for the quarter, the company emphasized continued wireless growth and its global health segment as drivers for the year ahead.

Bell rewarded income-oriented shareholders by increasing its annual dividend from $3.68 to $3.87 and reported record growth in its fibre network business.

A major corporate story to watch remains Rogers’ proposed acquisition of Shaw. The roughly $20 billion deal was still seeking final approval from the Industry Minister at the time of reporting, and any regulatory decision will shape the competitive landscape for Canadian telecom investors.

Disney Shareholders Welcome Back Bob Iger and a Reinstated Dividend

Disney’s latest earnings call was closely watched following CEO Bob Iger’s return after a three-year absence. Iger, known for guiding Disney through major strategic acquisitions in the past, resumed leadership on November 20, 2023. While much of the quarter’s results predate his reappointment, the company’s performance provided a positive backdrop for his return.

Iger also announced a restructuring that will group operations into three divisions: Disney Entertainment (including streaming and media), ESPN, and Parks, Experiences & Products. The company said it plans to reduce its workforce by approximately 7,000 employees as part of cost-saving efforts.

Importantly for dividend-focused investors, Disney indicated it intends to reinstate a modest dividend in 2023, with plans to grow it over time as cost savings take hold.

Other notable U.S. earnings included PayPal and Chipotle. PayPal missed consensus earnings and revenue expectations for the quarter, while Chipotle reported earnings and revenue slightly below what analysts had forecast.

Watch for Misleading Charts When Evaluating Investment Returns

Volatile markets make it easy to create attention-grabbing headlines by selecting convenient time periods. Observing a steep rebound from a low can make returns look dramatic, but that narrative may obscure how much value investors lost from previous peaks.

For example, media coverage about large short-term gains for names like Tesla often neglects the fact that investors who bought at the peak may still be down significantly. Similarly, companies such as Shopify experienced peak-to-trough declines exceeding 80%, meaning a very large percentage gain is required merely to return to breakeven.

Cryptocurrencies illustrate the same mathematical truth. A drop of roughly 77% from peak to trough requires a multiple-hundred-percent gain to return to prior highs. While short-term rallies can be meaningful, investors should compare the narratives with the underlying math before making decisions.

Why Is CPPIB Paying Billions for Active Management?

Debate around active management and its value for large public funds has heated up. This week’s headlines highlighted comments from the Canada Pension Plan Investment Board (CPPIB) leadership predicting that active, value-added managers will excel in the coming decade.

“Alpha” refers to returns that outperform a market benchmark. CPPIB leaders argue that carefully selected managers, geographies, and asset classes can add value beyond passive exposure. However, long-term academic evidence and practical experience suggest active managers rarely beat simple passive strategies after fees.

Critics point to rising operating costs and high compensation within the CPPIB as reasons to question the emphasis on expensive active management. Comparisons show that the CPPIB’s costs relative to fund size are elevated compared with many other large public funds, and oversight of compensation practices has drawn scrutiny.

CPPIB representatives argue that compensation decisions consider multiple factors and comparators beyond public salary benchmarks, but critics counter that growing fees erode net returns for beneficiaries. Analysis by independent commentators and research groups has highlighted the challenge: paying high fees requires similarly high, consistent outperformance to justify the cost.

Even if the CPPIB reports returns above its chosen passive benchmarks, how those benchmarks are constructed matters. A simple, low-cost portfolio of index funds historically delivers competitive long-term outcomes for many individual investors, without the drag of high management fees.

In short, while CPPIB leaders may see a future where active managers produce excess returns, investors should remain aware of the costs and examine whether higher fees are likely to produce sufficient benefits over time.

Kyle Prevost is a financial educator, author and speaker. When he isn’t on a basketball court or in a boxing ring trying to recapture his youth, he helps Canadians with their finances through Million Dollar Journey and the Canadian Financial Summit.