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Chapter 1: What is the main topic discussed in this episode?
This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from free Canadians. We are hosted by me, Benjamin Felix, Chief Investment Officer, Dan Bortolotti, Portfolio Manager, and Ben Wilson, Head of M&A at PWL Capital.
Good to be back.
Chapter 2: What are mega IPOs and why are they significant for index investors?
Yeah, good to be back. It's episode 406. Exciting to get into the main topic later on this episode. But before we get to that, exciting news that many people have probably already heard by the time this episode is coming out, but PWL made a pretty cool acquisition in Vancouver, BC, partnered up with the McDonald's, Shimco and company team out in Vancouver.
So we now have a great team out there and officially a PWL office space. As we continue to grow and find like-minded advisors that are implementing a similar philosophy and financial planning-driven approach to their clients, we are expanding our presence across the country.
Chapter 3: Why do newly public stocks tend to underperform?
And this is a great team to be partnered with.
pretty well-known financial planning firms, been around for a long time and pioneers in that industry, specifically fee-only planning, I think originally, submitting to have them on board.
Chapter 4: How do index inclusion rules differ across various indices?
A fee-only planning pedigree and they went into portfolio management and on that side of the business, they're super, super aligned with the way that PWA operates. You said pioneers, Dan, I was going to say OGs, but you know. Yeah.
Chapter 5: What is the impact of fast-track IPO inclusion on stock prices?
They're one of the oldest financial planning firms around and have been in business for a very, very long time. And they've been super involved with moving the financial planning profession in Canada forward. Very cool to have them part of our team.
Some of their early founders were part of creating the RFP designation, which is the Registered Financial Planning designation, which has now become known as almost a step above the CFP. The CFP is a prerequisite, and it's kind of elevating the profession to a higher advanced planning level.
Yeah, the RFP is a more advanced kind of version of the CFP, I guess. IAFP, who issues the RFP designation, is a very cool organization that, as you said, McDonnell or Shimko has been heavily involved with, as was one of PWL's founders, Tony Layton, back in the day. Very cool to partner with these guys.
Chapter 6: What role does free float play in index construction?
Makes a ton of sense, I think, for both firms.
Absolutely. In the spirit of PWL's growth and what we're doing on the M&A inorganic growth side, we're trying to build up what we're calling an integrated wealth management firm, which is a bit unique in the independent space in Canada in particular.
But we're trying to focus on the idea that markets work and planning matters and trying to find like-minded partners that are looking to be part of something bigger. We have started a monthly webinar series that's primarily directed at advisors. By the time this episode comes out, the next one is slated for May 26th. Keep an eye out for news on that episode.
But those webinars are kind of centered around what's your next chapter, exploring what might be possible, how PWL's model might be different, and looking at... what you might want to consider through your succession options and be curious. It's always important to think ahead to your succession plan, even if you're not ready to make that move in your career.
It seems like a pretty good opportunity for advisors to talk to a group of people that have spent a lot of time thinking about practice management and succession.
They've always been great discussions so far. We've already done a few of those and lots of engagement, lots of great questions and people are just curious to learn more. And that's all it's about, making connections and learning from each other.
Awesome. All right, should we jump into the main topic? Let's do it.
Yeah, let's do it.
I did a video on this topic and the title was kind of aggressive. I don't know. Very out of character, probably. I don't know if we'll call this episode the same thing, but that one we called the mega IPO grift. Anyway, that's roughly what the topic is. It's just about some of the big IPOs that are coming down the pipe here potentially.
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Chapter 7: How might index rebalancing affect investor returns?
And a lot of it is similar content, but I do have some new information to add to this episode discussion. On a few points, I had some emails with Professor Jay Ritter and got some interesting new data points. I also talked to the folks at Avantis about how They handle IPO inclusion, which is actually different from how Dimensional does it.
I mentioned Dimensional in the video, so that's interesting, but we'll get to that in a minute. The main issue here, and I saw this coming up a lot online, which is why I thought it made sense to make a video about it. The main issue is that some massive private companies are set to go public soon. SpaceX, OpenAI, Anthropic, there are a few other ones, Databricks, a couple others as well.
Chapter 8: Are investors missing out on opportunities in private markets?
And these are private companies that would rank among the largest public companies if they were public. The interesting thing is, and the relevant thing is for people who think like us and invest like us, buying the market basically, at least as a simplification,
The implication here is that if those companies go public and get included in an index, if you are an index fund investor, you're going to end up potentially buying some of these companies when they go public, whether you like it or not. I think there are lots of other issues around this too, like separate from the investment thesis.
Some people don't like the idea of investing in certain companies for other reasons. We won't get too much into that, but the issue is that index funds buy these stocks if they get included in the index.
One of the issues with IPO inclusion, and we've done episodes at least tangentially related to this, although in some cases directly related to this in the past, is that IPOs tend to be pretty terrible investments. And these ones in particular, these big SpaceX and OpenAI, raise some, I think, pretty interesting questions.
We'll talk through in this episode how stock indices and the index funds tracking them include IPOs, which is a whole interesting thing in itself. How do the different indices include them? How that might affect index fund returns and what investors can do about it.
We'll also cover whether index fund investors are missing out on private market returns, which I think is a really interesting topic and a common perception based on companies like the ones we're talking about staying private longer and getting bigger in private markets. That's the setup. Do you guys have any comments before I keep going?
We got into that question about whether index fund investors were missing out on private markets in a previous episode. fairly controversial topic. Some smart people disagree on it, but yeah, I guess now we're kind of looking at the opposite is that, is there a portion of the market that index fund investors might want to recuse themselves from? And we'll see where that goes. Right.
I think this is also a fascinating example of how different changes in the markets can impact investor behavior, which we'll be commenting on throughout the episode as well.
sure. People want to find the problem with index funds. There are problems with index funds. We've talked about them on this podcast in the past. In general though, they're great investments because they just deliver the returns that the stock market has to offer.
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