In February 1995, Adam Bain, investment advisor in the London, Ontario branch of RBC Dominion Securities Inc. (RBC DS), was considering whether or not to implement a price momentum strategy for his clients. Trend and Cycle, DS’s technical research department, had recently circulated a copy of a study which described a simple price momentum model and referred to its “startling results” based on back testing the strategy over a 15 year period. The Trend and Cycle group had long promoted the importance of price momentum and relative strength to potential clients. Bain needs to determine whether the proposed model was “too good to be true” or, if it did not look promising, how he would go about implementing such a strategy for his clients.
RBC Dominion Securities Inc.
RBC DS had its roots in an investment firm established in 1901. In 1987, Dominion Securities was acquired by Canada’s largest financial institution, the Royal Bank of Canada. RBC DS was a fill service international investment bank with headquarters in Toronto, London and New York, with offices in more than 150 locations including Boston, Hong Kong, Paris and Tokyo. RBC DS currently operated in over 80 offices across Canada, employed 900 investment advisors, and serviced over 300,000 individual clients.
A RBC DS brochure described the firm’s objectives as follows:
Our constant objective is developing and maintaining the highest degree of client confidence. The confidence earned by providing clients with: timely, accurate financial information; reasoned appropriate investment strategies; conservative, investment grade financial products; the unfailing, rigid control of our safekeeping and segregation procedures for securities over which we have custody; and our effective, hands-on executive, operations and control management structure.
Trend and Cycle Department
The Trend and Cycle department had provided proprietary quantitative analysis tools for RBC DS investment advisors for over 20 years. Its objective was to assist in the implementation of technically based investment decisions. For example, it provided charting tools to analyze thousands of price series in Canada and the US, including stocks, bonds, currencies, commodities, and mutual funds. It could provided “trend phase lines” that indicated which of four phases (analogous to business cycle peaks, troughs, expansions, and recessions) a particular security appeared to be in. The Trend and Cycle department often distributed newsletters to RBC DS investment advisors highlighting interesting internal research results.
Bain graduated from the University of Windsor with a Bachelor of Science degree in 1985 and a Bachelor of Commerce degree in 1987. In that year, he was employed by RBC DS for a very short period before joining with an associate to form a small publishing company focusing on publications for professionals such as doctors and lawyers. In 1991, he returned to DS as an investment advisor. He was currently enrolled in the Canadian Investment Management (CIM) program. The CIM program involved two years of course work in a variety of areas including investment policy, asset allocation, risk management, security valuation, money markets, bond trading, business cycles, foreign exchange markets, and federal government financing. Bain was also involved in a number of organizations including London Community Foundation (which provided grant money to local non-profit organizations), University Hospital, and the Grand Theatre.
Since August 1993, Bain had written a weekly column for the local newspaper, The London Free Press (see Exhibit 1 – sample of article around January 1995). His column involved two parts. The first part reviewed the recent relative performance of a portfolio of stocks with ties to the London community compared to the overall market (as measured by the Toronto Stock Exchange 300 index). The second part alerted...