The Globe and Mail, Report on Business
Published December 26, 2009

We'll be turning the calendar to a new decade in a few days and I've been asking people for their take on it. The response has been underwhelming.

Seems nobody has thought about it and a few were even caught off-guard, saying only, “Has it really been 10 years since we partied in the new millennium?”

There is no reason why our thinking should be bound by the calendar but, as investors, it's instructive in this case to do a comparison between the starting points of the last and next decades.

A lot has happened since Y2K. I went from being a new president of an old firm to being an old president of a new firm. The United States went from being an irresistible economic force to a basket case. Britney Spears started the decade at the top of the charts and finished it making a comeback at age 28. And the Leafs, well, they were good in 1999-2000.

Ten years ago, Canadians were generally happy with their portfolios and enjoyed being investors. Today, individuals and pension plans are behind where they need to be and are shell-shocked. They've been through two bear markets in 10 years and the mattress is now looking like a good option.

In 1999, asset allocation was all about the United States. Markets south of the border smoked our TSX composite index in the 1990s and investors were questioning how much money, if any, they should invest in Canada. In 2009, the roles are reversed. Canada is the golden girl, having beaten the United States in eight of the last 10 years. Investors see little reason to place money outside of Canada.

As for stocks, it was all about TMT a decade ago (technology, media, telecom). Nortel accounted for a third of the TSX's value and investors were certain the “new economy” was the future. Today investors also have a strong view, but it's directed at commodities. With increasing demand from China, India and the developing world, and a secure supply harder to come by, stuff that comes out of the ground is where it's at.

Interestingly, technology lived up to its promise, maybe even exceeded it, but the TMT stocks did miserably. In hindsight, investors placed too high a premium on potential growth and anything to do with the Internet. The high-quality ‘global' brands like Coke, Home Depot and General Electric also failed to live up to their lofty price-to-earnings multiples.

Today, the resource stocks don't have the same valuation issue. They may prove to be cheap or expensive depending on what commodity prices do, but the multiples are not in silly territory. As for the global brands, they are generally trading at historically low valuations.

As we started the new millennium, growth managers were the stars of the day while value managers were hanging on by their fingernails (should I buy Nortel?). Of course, their fortunes reversed shortly after the TMT bubble burst.

There have been other profound changes in the asset management business. Over the 10 years, the industry moved to what I'd describe as the “Shaq and Nash” structure. Most of the assets are now concentrated in the hands of a few mega firms – the banks, the insurance-based conglomerates such as Power Financial and Manulife, and a small number of independents such as CI Funds and Fidelity. The banks went from being middling players in 1999 to dominant asset managers today.

Part of Shaq's growth came from acquisition, which served to hollow out the industry's middle tier. Important independent firms disappeared from the wealth management landscape including AIC, Altamira, Bissett, Clarington, MacKenzie, PH&N, Saxon, TAL and many others. Today there is an army of nimble, skilled Nashes looking to become the new middle.

On the product front, mutual funds were still pre-eminent in 1999. There was a wave of new offerings in the late nineties, including specialty funds that tapped into the new economy and “clone” funds that allowed investors to get more foreign content into their registered accounts. Meanwhile, discount brokers couldn't hire staff fast enough to handle all the trading activity and new account openings.

Today, we're also experiencing a surge of specialty products in the form of new exchange-traded funds (ETFs), structured products and closed-end funds. Commodities are a focus for sure, but so is yield and downside protection. The discounters are growing rapidly again after a slow period, but the reasons are different this time. Rather than speculation on tech stocks, investors are looking to save on costs and take control of their portfolio.

As for cost, there definitely is a growing number of clients who are concerned about fees and are doing something about it. Unfortunately, the fee bill for Canadians as a whole has not come down due to the proliferation of complex new products. For every investor who is pro-actively reducing their costs, there are many more who are buying packaged investments.

As we head into the new decade, we can learn some lessons from the old one.

Even when we're right about our view of the world, returns will be disappointing if we pay too much.

No matter how confident we are about something, we still need to be diversified. To have a bias toward a sector or country to the exclusion of other possible outcomes is bad risk management.

And when we look back with 2020 hindsight in 10 years, the decade past will have been led by different forces and industries than the previous one. It's a pattern that repeats itself every time and we need to be ready for it