2020 Q4 EdgePoint commentary
This quarter, portfolio manager Andrew Pastor explores a deceptively simple (but effective) idea that’s difficult to do in practice – investing differently from everyone else.
This quarter, Derek Skomorowski talks about the risks of buying long-term government bonds in the current environment and why we focus on buying mispriced bonds of businesses that can withstand an economic shutdown no matter how long it lasts.
30+ year peak in duration of the bond market.
U.S. high-grade corporate bond investors have never been paid so little for taking so much risk
The “Sherman Ratio,” named after DoubleLine Capital Deputy Chief Investment Officer Jeffrey Sherman, shows the amount of yield investors earn for each unit of duration. It tumbled to as little as 0.1968 on Dec. 31 for the Bloomberg Barclays U.S. Corporate Bond Index, a record low in data going back more than three decades.
This is happening because the numerator (yield) has continued to tumble while the denominator (duration) increases. The average investment-grade corporate bond yield was a record-low 1.74% as of Dec. 31, compared with 2.84% a year earlier, while the modified duration on the index increased to 8.84 years at the end of 2020, just about a record high, from 7.96 years at the start.
The first week of 2021 demonstrated how potentially perilous this dynamic can be for credit investors. Investment-grade corporate bonds suffered their worst loss on a total return basis since August, and second-biggest decline since March, even though spreads narrowed and there’s no sign of broad stress in high-grade markets.
The blame for that weakness lies almost entirely with Treasuries. The benchmark 10-year yield increased by 20 basis points in the first five trading days of the new year, as investors expect a greater debt-funded stimulus with a Democratic sweep. It really doesn’t take much of a move higher in interest rates to wipe out the income return on the index or a fund tracking it.
Canada is vaccinating 0.12% of the population daily. Total vaccination as of yesterday (January 14th 2020) is 1.15% of the population. Israel is vaccinating 0.76% of its population daily and is at 22.4% of total population vaccinated.
Some global comparison below:
Interesting observation: Prince Edward Island has already administered 5102 vaccines or 3.2% of its population. They are running 283% better than the national average.
FOMO is real
Last week, Elon Musk recommended folks use Signal, an encrypted-messaging platform which isn't a publicly traded company. Investors and fans of Elon misinterpreted this tweet and quickly bought shares of Signal Advance (unrelated company). Signal Advance shares surged over 6000% in 3 trading sessions, pushing its market value to $3.164 billion from a mundane $55 million. This week the stock is down 80% as it was made apparent that Musk was tweeting about a different Signal.
Daily trading activity by individual investors in South Korea