Donald G.M. Coxe brings some 40 years of institutional investment skill to portfolio management. He possesses a deep knowledge of historical, as well as socioeconomic and geopolitical forces that shape investment and economic issues. And he communicates trends in his investment research, notably his bimonthly “Basic Points” report, with a command of language and engaging writing style as eloquent as that of William F. Buckley Jr. In fact, Mr. Coxe developed a longtime friendship with Mr. Buckley dating from Mr. Coxe's college days at the University of Toronto, becoming first a full-time associate editor of National Review and then a contributor, listed on the magazine's masthead for 23 years.
But investing wasn't his first ambition. As a teen, he had his sights set on becoming a jazz pianist. But seeing the American jazz virtuoso Arthur “Art” Tatum play made him realize he couldn't perform at the same level, though Mr. Coxe still enjoys playing the piano. Before moving to investing, he was general manager of the Ontario Federation of Agriculture and general counsel to the Canadian Federation of Agriculture, where he nurtured a professional interest in pension issues and world hunger.
Mr. Coxe was global portfolio strategist with the BMO Financial Group and a leader of its units, CEO of Harris Investment Management Inc., now Harris Investments, and chairman of Jones Heward Investment Counsel Inc., now BMO Asset Management Inc. In 2008, he formed Coxe Advisors LLC to create a commodity-stock investment strategy.
How has the market crisis challenged the capital asset pricing model? The CAPM in my view has been a huge factor in creating two global financial crises (the financial market crisis and the European debt crisis). The model got in the way of ordinary common sense. There is more endogenous risk out there precisely because the risk was so mispriced on such a grand scale by the failure of the model. The slavish dependence on the model has hurt us so much. And, therefore, I argue that the model is dead.
How has that affected pension funds? I'm worried that until we address the model itself, I don't know how we are going to be able to appraise financial assets to each other. Companies should start immediately putting extra money into their pension funds because they've got to assume the next valuation is going to be tougher.
Are Treasury securities risk free since the credit downgrading? Treasuries are acting as if they really are the best asset in world because since they have been downgraded they have been on a roaring bull market. So that's a paradox in itself. (But) when you talk about the fact that a Treasury bill with a zero yield is supposedly the risk-free asset class, well, how can you call that a risk-free asset class when it has zero yield, or 0.01% yield? If it's risk free, it should be giving you some kind of return.
What should be done? We've got trillions of dollars of private pension funds built on the efficient frontier, which is now the deficient frontier. The whole model starts with the risk-free asset class and now we find the risk-free assets are subject to challenge. So what do you substitute for it? There are lots of bright people who can come up with answers for that. I want them to start thinking about it.
Why did you create your commodities strategy fund? Because investors were basically being told that the way to invest in this asset class called commodities was in the commodities themselves, and the vehicles were not acceptable. The typical rolled fund for investing in commodities only worked during the period of time when commodities were in backwardation. Once we move into contangos, which you do in a sustained bull market, they don't work. Why pension funds put money in it is beyond me. It's shear lunacy. It does not work.
So you don't like commodities? It's better to invest in the companies that produce the stuff than the raw stuff. I believe the advantage of investing in stocks (is) you not only get the commodities but you get managerial talent. That's the added value. (For example) in food, we want to be upstream where the protein is produced. We want to contribute to producing more of that and owning the companies that do. We don't own bakers or the people who process meats. We are interested in the food itself.
What about other commodities? We are about 35% (allocation) in precious metals, mostly gold, and that's split between the (exchange-traded fund), which is gold itself, and the gold miners (companies) and the gold streaming companies. (The latter) are royalty companies.
What is gold's place in a pension fund, endowment or foundation portfolio? Gold has done as well as the S&P 500, dividends reinvested, since 1971 (when it began trading freely). That would be a reason for having it in there as a hedge against things going wrong. Even those people who despise it will have to admit that gold will move up in a time of inflation. What they don't see is why gold is doing so well when we have low inflation. The reason for that is frankly the euro (debt issues).
What kind of allocation should a pension fund have to gold? If you're a pension fund (with) a large retired-lives liability, then I think you should have at least 10% of your assets in gold and gold-mining stocks. Because history shows you (that) on a long-term liability like that, inflation is going to come in there. If you do not have a big retired-lives liability, then a lesser weight.
What's your take on pension funds investing in farmland and timberland? I won't comment on timberland. I don't know enough about it. But farmland prices have soared far more than the price of corn or the price of the stocks of companies that produce the technologies for it. So therefore, I think farmland in some places is in a bubble. Farmland is worth what you can earn on it. To justify these prices, you'd have to see corn go up more than $11 or $12 a bushel.
What is it now? Corn is $6.44 a bushel. It wouldn't be even $6.44 a bushel, if it weren't for ethanol, which is using up 40% of our crop. If it weren't for ethanol, corn would be $5 a bushel.
You're a historian by training and look for big things. What are the big themes in investment management now? The biggest theme is collapsing demography in the industrial world. It's very simple: GDP is output per worker multiplied by the number of workers. (The fertility rate) in Europe (is) 1.3 babies per woman. What that means is each generation is 60% the size of the previous generation.
How does one apply this data to investment management? What it tells you is that economic growth cannot be as fast in the future in the industrial world as it was in the past.
That means an assumed rate of return would have to be lower? Yes. You can't have as much GDP growth. Using technology you will get slightly more GDP growth per worker. But if you've got fewer workers, it doesn't make up for it.
