tag:blogger.com,1999:blog-8726099595977098922024-02-01T22:03:50.471-05:00TheUnbiasedPortfolioI will be sharing my opinions, and those of some others I respect, on how the investment business works, or fails to work, for the portfolio owner. My focus will be on portfolio construction or destruction depending on the topic of the day! Hopefully we can find a way to laugh at it all!Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.comBlogger66125tag:blogger.com,1999:blog-872609959597709892.post-89099790949335852282012-07-31T14:04:00.000-04:002012-07-31T14:04:02.624-04:00Income Product Risk: Pref Shares<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijf6a0T7iYehs2WDxODI0EyqApSuzzKCTx5-6Fm8Ix1Km8OSv82svlKB5iJG1v1tmYza5enyBXvkEpE23RpyMy2kYKth-Vix1oGznbF_cTCozajab6alTZo8QEl2H3rwFgftXntLCI2Iz_/s1600/blind.bmp" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijf6a0T7iYehs2WDxODI0EyqApSuzzKCTx5-6Fm8Ix1Km8OSv82svlKB5iJG1v1tmYza5enyBXvkEpE23RpyMy2kYKth-Vix1oGznbF_cTCozajab6alTZo8QEl2H3rwFgftXntLCI2Iz_/s200/blind.bmp" width="176" /></a></div>
<span style="font-family: Calibri;">With investors flocking to “income” products it is worth
taking a moment to understand the risks that can be associated with innocuous
sounding investments in the “income” generating asset pool. The current
Canadian regulatory standards apply virtually no meaningful assistance in
assessing product risk. As such, many investors fall into the trap of believing
an “income” security is similar to the risk profile of “fixed income”
securities that provide on-going income. This is not a surprise given that
investment advisors/salespeople generally speak of “income” products as a
replacement for “fixed income” securities such as investment grade bonds. Given
the growth in the number of “income” products, now is a great time to lift the
hood on preferred shares; one of the basic income securities growing in
popularity.</span></div>
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<a href="http://www.investopedia.com/terms/p/preferredstock.asp#axzz20X0Ccg8e"><span style="color: blue; font-family: Calibri;">Preferred
Share</span></a><span style="font-family: Calibri;">s (or prefs) is a hybrid product which has features of both equities
(common shares) and fixed income (bonds). There are several types of preferred
shares and the various types can have very different risk profiles. As a
general rule the type of preferred share issued will vary based upon a
combination of what the issuing company requires and what terms investors will
accept at the time of issue. </span></div>
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<span style="font-family: Calibri;"><i style="mso-bidi-font-style: normal;">Preferred Dividend
Position</i>: The primary benefit of a preferred share is first call on
dividends at a pre-set rate. The pref share dividend is more secure than the
common share dividend and may have assets backing the shares in the event of
corporate default. A 3.5% pref share will be paid 3.5% of the face price annually,
at the discretion of the board of the issuing company. Should the company not
have sufficient cash to pay all dividends, the pref shares have first right to any
dividends paid before the common shareholders receive any dividend declared. As
always the dividends are paid at the direction of the company’s board of
directors. When you hear about a company cutting its dividend that is almost
always the “common share” dividend being reduced and only very rarely would it
include the “preferred share” dividend. </span></div>
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<span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">Features of Pref
Shares</b>:</span><span style="font-family: Calibri;">Pref shares are issued by “charter”. The charter is similar
to the trust deed of a bond issue in that it describes the rights of the pref
share holder as a debtor of the company. It is the preferential access to
dividends stated in the charter that give these shares their name. In return
for this preference the holders of pref shares give up any right to vote as a
shareholder of the company. In general the common share holders are entitled to
a vote for each share owned (I am ignoring the few companies that have
non-voting common share classes as they are the exception not the rule.). The
lack of voting rights does not tend to hamper the average retail investor
although it may discourage some large institutional investors. </span></div>
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<span style="font-family: Calibri;"><i style="mso-bidi-font-style: normal;">Market Value of a Preferred Share</i>:
The preference shares will be sold with a face value such as $25.00 per share
and it is this value that the dividend is based upon. For example a 4% pref
share issued at $25.00 would pay a fixed annual dividend of $1.00 at the
company’s discretion. The pref shares have no claim to any growth in profits
and as such they trade at a value that is based primarily upon the dividend
guarantee. In this sense the pref share value behaves very much like a bond or
debt instrument. The value of the stream of dividends is comparable to the
interest yield on a corporate bond. As such, an increase in the market yields
of either bonds or new pref shares will cause pref shares to drop in value. A
decrease in yields will similarly cause pref shares to rise in value.</span></div>
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<span style="font-family: Calibri;"><i style="mso-bidi-font-style: normal;">Cumulative or
Non-cumulative Dividends</i>: Pref shares can have dividends suspended should a
company need to do so. However, a “cumulative” pref shareholder must receive
all missed dividend payments before any common share dividend can be paid by
the company and before any pref share is redeemed by the company. A
non-cumulative pref share has no right to recover missed dividend payments when
regular dividends are re-started by a company.</span></div>
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<span style="font-family: Calibri;"><i style="mso-bidi-font-style: normal;">Restricted Terms</i>:
A preferred share charter may restrict the company from issuing any future pref
share series with a senior debt position to the specified preferred share
issue. In some situations the restrictions may prevent a company from selling
specified assets prior to redeeming the preferred shares referred to in the charter.</span></div>
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<span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">Risk Profile</b>: Preferred
shares are exposed to a unique set of risks that many retail investors are not
aware of. The hybrid nature of the shares provides both additional security and
additional risk characteristics. The risks of each pref share series must be
determined separately prior to making a purchase. </span></div>
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<span style="font-family: Calibri;"><i style="mso-bidi-font-style: normal;">Debt Risk</i>: An
example may be the best way to showcase the unique issues around evaluating pref
shares within a company:</span></div>
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<span style="font-family: Calibri;">Company ABC currently has several series of preferred shares
outstanding as follows:</span></div>
<div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">One “preference share series A, 4%” and 3 series
of preferred shares B.C, and D at 5%.</span></div>
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<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">The holders of the “preference” shares are
holding a preferred share similar to B, C, and D series holders. The difference
is that the “preference” series has a higher ranking of security should the
firm default on their obligations.</span></div>
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<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">The B, C, and D series are legally defined as
“pari passu”, which means they all have equal rights to the firm’s assets.
These rights however are subordinate to the series A shares.</span></div>
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">Should the company go into receivership the
series A pref shares will recover their capital before the series B, C or D
even though all are “preferred shares”.</span></div>
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<span style="font-family: Calibri;">The above example is intended to show that a preferred share
is a subordinated debt instrument. When determining the risk profile of a pref
share it is important to understand the security backing the share series and
how it ranks relative to both corporate bonds, loans, and other outstanding
pref series of the company. That also means it is important to understand the debt
risk profile of the issuing company. The failure to understand this debtor risk
is proving to be a significant issue for many investors who hold bank pref
shares. More on this later!</span></div>
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<span style="font-family: Calibri;"><i style="mso-bidi-font-style: normal;">Price Risk</i>:
Preferred shares tend to trade off the dividend yield as mentioned earlier. The
price risk is often misunderstood as it is much more difficult to measure and
understand. Again, let’s use a hypothetical example to clarify the issue:</span></div>
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<span style="font-family: Calibri;">An investor has his eye on two high flying firms that have
great free cash flow and solid balance sheets. Not wanting to risk investing
directly in the equity markets he decides to invest $10,000 in pref shares of
each firm, Sino China and Banana. Subsequent to the purchases each company has
a very different experience. Banana launches a new computer tablet and shares
soar to massive heights with common share prices tripling in value. Sino China,
in contrast, is subject to fraud charges and the company goes into
receivership.</span></div>
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<span style="font-family: Calibri;">So how did our investor do when the share prices fluctuated?
Taking the positive first; the pref shares of Banana are still worth $10,000
and dividends are very secure. As a pref shareholder however, our investor
receives no direct benefit from the remarkable success of Banana and the increase
in common share price. As for Sino China, the company is taken into
receivership and eventually taken over by the creditors. There are insufficient
assets to pay all debtors and as such banks are paid, bond holders lose much of
their investments and the pref shares are priced to $0.00. Our investor gets no
dividends and no return of capital from Sino China. </span></div>
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<span style="font-family: Calibri;">Had our investor bought common shares he would have still
lost $10k on Sino China but also would have made $20,000 profit on Banana
shares. He would be ahead by a net $10,000.00. Instead he avoided the risk of
the equity markets and miscalculated the risk in the pref share market to his
determent. As an aside, this example works equally well if you substitute
Nortel or Lehman Brothers for Sino China in our hypothetical scenario. The
bottom line is that investors need to determine the relative risk of holding
pref shares instead of common shares or bonds. The investor needs to consider
both an upward and downward scenario for share prices before deciding to buy
pref shares. </span></div>
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<span style="font-family: Calibri;"><i style="mso-bidi-font-style: normal;">Interest Rate Risk</i>:
Preferred Shares are similar to bonds in that the value of the preferred shares
can be greatly impacted by interest rate changes. As you would expect, a pref
share paying 6%, all things being equal, would have a greater value than a pref
share paying 4% dividend. Unlike bonds, the income payment on a pref share is not
generally set for a fixed period. Pref shares are generally issued for a set
amount such as $25.00/share and the owner would expect to receive $25.00 on redemption.
As discussed earlier, however, pref shares are issued based upon what the
market will accept. Given that the big brokerages make more money from issuing
companies than from investors in a pref issue; some of the common terms have
greatly increased the risk to the investor and lowered the risk to the
corporate issuer. This is the only way I can think of to explain “</span><a href="http://bing.search.sympatico.ca/?q=perpetual%20pref%20shares%20investopedia&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">perpetual
preferred shares</span></a><span style="font-family: Calibri;">”. These shares are issued with no maturity date or reset
date and are redeemed at the option of the issuing company. In effect the
issuing company will leave these pref shares outstanding only if the dividend
is below the current market rates. This means these shares will trade either at
or below the expected debt market yield available to the company. As an
example, if the perpetual pref share pays 4% yield then the company will not
redeem the shares unless they feel they can issue new shares at less than 4%.
If the market rates should rise significantly then the value of the 4%
perpetual would be expected to plunge. With no way for investors to improve
yield and no way to redeem the shares, the investor must watch the value
continue to erode or the share must be sold at a loss based upon the current market
price of the share. Interest rate sensitivity of securities is based upon </span><a href="http://bing.search.sympatico.ca/?q=perpetual%20pref%20shares%20investopedia&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">duration</span></a><span style="font-family: Calibri;">
which generally means the longer the time until maturity the higher the
sensitivity of the security value to interest rate changes. The duration would theoretically
be at its absolute highest when there is no maturity date. In contrast, when
market yields drop below the 4% the issuing company can call the shares for a
forced redemption thus lowering the companies borrowing costs. In short you
lose out if market yields rise and you are bought out if yields drop.</span></div>
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<span style="font-family: Calibri;">Why preferred Shares? The issuing companies generally pay
more to raise money via a preferred share issue than from a bond issue. The
reasons they would choose to do so reflect the current needs of the company and
of the market place. </span></div>
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<span style="font-family: Calibri;">For example:</span></div>
<div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;"><span style="mso-spacerun: yes;"> </span>If the
company has poor credit ratings it may not wish to go to the debt market
directly and thus will pay a premium in the pref market to raise money.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">If the company is concerned it may need to miss
interest/dividend payments in the future it is easier to miss a dividend
payment than a mandatory bond or loan payment</span></div>
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">If the company finds it cannot sell common
shares due to a poor market it may issue pref shares instead. The company may provide
an option to convert the pref shares to common shares at a set date at either
the company or investor’s option.</span></div>
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<span style="font-family: Calibri;">Benefits to the Investor: Pref shares do have some benefits
that can make the shares attractive to investors.</span><br />
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">Greater security than the common shares</span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">Dividend income can have favourable tax
treatment versus the interest income earned on bonds</span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">Dividend rates may be higher than the bond rates
available in the current market</span></div>
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";">
</span></span></span><span style="font-family: Calibri;">Pref shares may have conversion rights imbedded
in the share terms</span></div>
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<span style="font-family: Calibri;">Convertible Preferreds: Some pref shares come with an option
to convert the pref share to common stock based upon a pre-set formula. Typically
these offerings have a set period of time when the holder can elect to make the
conversion (retractable prefs) such as quarterly after the 5<sup><span style="font-size: x-small;">th</span></sup> year
and until the 10<sup><span style="font-size: x-small;">th</span></sup> year after the issue date. As a hypothetical example;
the pref share may trade at $25.00 and be convertible to common shares based
upon the $25.00 pref face value plus all dividends earned divided by the 20 day
average market price prior to the conversion dates. Convertible pref shares
would be expected to be issued at a premium to perpetual pref shares due to the
implied value of the conversion option. Occasionally the company will have an
option to force the conversion after a set period of time regardless of the investor
wishes. There is also a risk of declining market price for the pref if the
convertibility option loses value (i.e. shares drop significantly in price).</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">Variable Preferred Shares: Our preference in preferred share
options would be variable preferred shares. These pref shares have a reset date
at which dividends are adjusted to reflect market rates. In these situations
the risk of holding a perpetually “under market” dividend rate is mitigated. As
an example, the dividend payout may be reset every five years at bank prime
plus 4%. This allows the rate to adjust up or down but assures the yield
remains somewhat consistent with the current benchmark market rates.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">Flat Tail Risk</b>:
Pref shares are susceptible to significant losses when markets or companies are
in turmoil. The lack of understanding of event based risks are leaving many
investors with significant risk that they are not qualified to understand or
evaluate. A perfect example is now playing out in Europe with respect to pref
shares of large Spanish banks. The banks are experiencing significant losses as
sovereign bonds they hold are being reduced in value. This in turn has left a
number of banks nearly insolvent and turning to governments to be nationalized
rather than facing bankruptcy. As the banks negotiate terms with creditors the
pref share investors are left holding the bag. The bond holders can negotiate
from some strength as they hold hard asset security in most cases. Many of the
pref shares hold only a claim against general revenues. As these banks work out
terms with creditors the pref share holders will likely be decimated.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;"><span style="mso-spacerun: yes;"> </span>Now we ask some
relevant questions: Did the retail pref share holder know that she was exposed
to a significant loss based upon the bonds of sovereign nations being reduced
in value? Did the retail pref share holder know that central banks encouraged
large banks to hold sovereign debt in their capital reserves even though these
bonds were of questionable value when issued, thus putting pref shares at significantly
higher levels of risk? Did the average advisor/salesperson understand the risk
of holding bank pref shares in a financial crisis?</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">Preferred shares do have a place in the security markets.
They are not however your plain vanilla investments. They are not an equal risk
substitute for investment grade bonds. Hybrid, complex financial instruments
should not be sold to unsophisticated investors and should not be sold by your
basic stock salespeople. I suspect that a number of income hungry seniors will
be burnt by poor advice and basic overconfidence. After the fact many will
complain they should never have been sold these securities....and they will be
right.... and they will suffer significant losses that will not be recoverable.
The most likely causes of a large loss will be dysfunctional credit markets,
spiking corporate cost of borrowing, and lack of foresight to get out of the
security before the prices collapse. Only sophisticated investors with support from
top quality independent analysts should invest in complex securities.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">p.s. Your mutual fund salesperson is not independent and is
not likely an analyst.</span></div>
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<br /></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-85522399001754481732012-07-03T15:27:00.001-04:002012-07-03T15:34:21.926-04:00False Prophets Revisited<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxvD16P51047An93HlPX2qqB3EBKer_S-I-mxtsPgPDvvuPDnivKjobNb7hYDx7fkphYcrH2NCNBLgzaJBVC5tmrB6zVdVsbkirACihcmW63yQbKWCXBXGMzIJd7vTl6J-cXUikvotvwGK/s1600/false.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="213" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxvD16P51047An93HlPX2qqB3EBKer_S-I-mxtsPgPDvvuPDnivKjobNb7hYDx7fkphYcrH2NCNBLgzaJBVC5tmrB6zVdVsbkirACihcmW63yQbKWCXBXGMzIJd7vTl6J-cXUikvotvwGK/s320/false.JPG" width="320" /></a></div>
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<span style="font-family: Calibri;">On Feb 14<sup><span style="font-size: x-small;">th</span></sup> our blog for <a href="http://weighhouseblog.wordpress.com/2012/02/17/false-prophetsprofits/">Weigh House</a> Investor Services commented on the poor job of
forecasting by the financial industry. We expressed concern that the market
forecasters were glossing over a lot of real problems that had yet to be
solved. Specifically on the macro side we referenced the Euro crisis and
Greece’s bond default, significant on-going debt issues for consumers, and a
dysfunctional U.S. government. Our take on these issues was that advisor/salespeople
were ignoring the storm clouds that were obvious to everybody and pushing
equities as the best option for your portfolio. The common mantra was “dividends
can pay you nearly 4% per year while bonds and GIC’s are stuck at 1-2%”. It seemed "risk" was being treated as equal for equities and fixed income securities.</span></div>
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<span style="font-family: Calibri;">We had also discussed pending credit downgrades from Moody’s
for the big banks and sure enough those downgrades arrived recently and
included Royal Bank of Canada. We discussed the dysfunctional U.S. government and we are
disappointed to see that no solution is in sight for the pending mandatory
spending cuts and the expiry of investment tax credits in the new year. It
seems the U.S. politicians will be arguing immigration policy issues when the
country drives over the debt cliff! </span></div>
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<span style="font-family: Calibri;">We pointed out that the Greek fiscal problems were far from
solved and now find the world watching the recent Greek elections to see if the
tiny population of Greece could cause the whole of Europe to plunge. If Greece
should chose to reject Europe’s requirement that Greece drive it’s economy
(what little is left) into the ground - then look for a massive bank run across
southern Europe as everybody tries to safeguard their bank savings under a
mattress.</span></div>
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<span style="font-family: Calibri;">In the financial markets we noted the challenges brokers
were having with selling overpriced IPO’s into the market. It appears that the
folks over at FaceBook were too busy counting future option payments to pay
attention. FaceBook has the potential to be the worst IPO ever by the time the
dust settles but it did serve to expose the price fixing strategies of the deal
makers. They clearly were able to prop up an over-priced IPO while waiting for
retail suckers to buy in.</span></div>
<br />
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<span style="font-family: Calibri;">On the debt side we commented on how the 99% needed two jobs
to pay their debt payments and the housing market was still in the dumps. Now
we have seen the Canadian government adjust mortgage insurance policy for the
third time in an effort to cool the debt growth in Canada.</span></div>
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<span style="font-family: Calibri;">When we wrote the article forecasters were priming the RRSP
pump to flood the equity markets with what is lovingly known as “dumb money”.
The TSX index ETF “XIU” ( it represents the major Canadian stocks) was at $17.82 and would be pushed up to $18.25 by Feb
28<sup><span style="font-size: x-small;">th</span></sup> as salespeople drove RRSP deposits into the equity markets.
Today, with all the troubles still bubbling, the “XIU” sits at $16.46! It has
dropped almost 8% but more importantly for RRSP investors it is down almost 10%
since you made your end of February purchase. Even with your 4% dividend yield
paying out over the next 12 months, that looks like a bad bet in the short term
and who knows how it will look by year end.</span></div>
<span style="font-family: "Calibri","sans-serif"; line-height: 115%; mso-ansi-language: EN-CA; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US;">So
what? Are we suggesting we “knew” what would happen over the last quarter or
that we are smarter that the stock guru’s? <b style="mso-bidi-font-weight: normal;">Absolutely
not!</b> </span><br />
<br />
<span style="font-family: "Calibri","sans-serif"; line-height: 115%; mso-ansi-language: EN-CA; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US;">What we can say however is that we saw the high level of risk in the
markets the same as everybody else did. It did not take a genius to see this
was a pretty likely outcome for both the past quarter and likely for the next
several quarters. The key difference is that we were not motivated to ignore
the risk in the markets in order to exploit retail investors heading into the
hype of the RRSP season. </span><br />
<br />
<span style="font-family: "Calibri","sans-serif"; line-height: 115%; mso-ansi-language: EN-CA; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US;">The solution is for investors to follow
a comprehensive investment policy statement. Based upon the policy guidelines
it is possible to use RRSP deposits to re balance to the low end of the high
risk assets and the high side of the low risk assets. While we do not suggest
you can time the markets, we do suggest your financial advisor/salesperson has
the flexibility to make tactical decisions to keep you off the train tracks
until the obvious danger has passed. After all, what are you paying for if not
prudent advice and commonsense for your investing strategy. </span><br />
<br />
<span style="font-family: "Calibri","sans-serif"; line-height: 115%; mso-ansi-language: EN-CA; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US;">Or, referring back
to the original blog’s ending statement; it was a time “not to be all in” to
the equity markets. At the end of the day the issue is rarely about good
forecasting and almost always about having a quality strategy and an
advisor/salesperson who follows your investment plan first and his/her commission schedule
second.</span>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-21922691951356457672012-06-07T15:11:00.001-04:002012-06-07T15:11:18.092-04:00Generational Challenges<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzugx1gvTen0zYPV4gln0bySX3EHrZ5-9mDsf9nuM4gDKAEmvtV8XCfAYwwBnme77jOsgqJIVQHG1_oHIm7t9Ymw0N7l3Kd1p4-4rIb30fkj9dLOnoYNWRd7eM3fkmhT2cPFn9iDR0ETuy/s1600/generations.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="168" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzugx1gvTen0zYPV4gln0bySX3EHrZ5-9mDsf9nuM4gDKAEmvtV8XCfAYwwBnme77jOsgqJIVQHG1_oHIm7t9Ymw0N7l3Kd1p4-4rIb30fkj9dLOnoYNWRd7eM3fkmhT2cPFn9iDR0ETuy/s200/generations.JPG" width="200" /></a></div>
<span style="font-family: Calibri;">A common theme in today’s financial news is to bemoan the
large debt obligation which will be a legacy to today’s youth. In fact this is
not really a new idea as Canadian federal governments since Trudeau have piled
on the debt with little thought beyond the next election. However, many
commentators look at direct comparisons of dollars owed today versus the
deficits in say 1980 or 1990. A dollar in 1980 is not the same value as a
dollar in 2012! Similarly debt as a percentage of GDP can often ignore the
differing impacts of high versus low interest rates on debt repayments.</span><br />
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<span style="font-family: Calibri;">A number of journalists have focused on the challenges of being a University student today versus back in the "good old days"! On a smaller scale let’s look at an example of a
university student graduating in 1979 ( like me) and one graduating today. Recent
articles have suggested today’s youth have a much tougher road to hoe, however
I would suggest it is just a different road to a similar end. I graduated with
$9,000.00 in Student Loan’s and my interest rates (2 loans) averaged just over
10%. My payments were roughly $100/mo for 15 years (note: I paid it off in 5
years). Today’s students are graduating with more debt but with lower interest
rates as well. A student graduating with $18,000.00 in debt and with a 5%
interest rate would have payments of $143/mo. </span></div>
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<span style="font-family: Calibri;">Here is where the current thought
process on debt comparisons becomes questionable. While today’s students have a
larger monthly payment, my job after graduating in 1979 paid $9,000.00 per year. The
equivalent graduate level full time job today pays well over double my 1979 stipend. Similar to today's youth, I was underemployed for a couple of years after graduating and I ended up moving several hundred miles to find the job I took. As well,
unemployment was virtually the same as today but in 1979 was on its way to 12% within
the next 36 month. We can only hope not to repeat that same mess today. My
point here is not to say how easy today’s students have it but rather to
suggest the change to a more stable employment( trust me 7.5% is more stable
than 12%) and lower interest rate environment have provided some advantages
that are being ignored by many. Again, this is NOT an attempt to say it is easier today but rather it is an attempt to show each generation has it's challenges. The end group of baby boomers did not have an easier ride given early boomers took all the good jobs and were too young to be retiring as us tail-enders tried to climb the ladder of success. Similarly today, boomers turning 65 still do not seem to want to get out of the way and let younger workers move forward; effectively blocking late boomers in the early years and also blocking graduates looking for work today!</span></div>
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<span style="font-family: Calibri;">On a much larger scale, today’s young families are
benefiting from the low cost of borrowing and the much lower inflation
rate today versus the early 80’s. Carrying costs on homes are much lower and
today’s youth are buying homes larger than their parents could even
contemplate. Yesterdays 900 square foot bungalows are replaced by homes over
double that size and still called “starter homes”. Obviously homes today are
significantly more expensive; however wages, interest rates, and living
standards are also very different. My first mortgage was at 14%!</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">A more significant legacy benefit today is the income
and lifestyle transfer from today’s seniors to today’s youth. Seniors have
given up significant portions of their income as a consequence of low interest
rate policies. By keeping rates artificially low the government is effectively reducing
investment income seniors require for living expenses and forcing seniors to
spend their capital assets. This is dramatically reducing the income, lifestyle
and asset base of seniors and benefits borrowers who are accumulating assets.
A senior who saved $500,000 would have expected to earn 5%-6% in a bond/GIC
portfolio using long-term return trends. That should provide $27,500 in income
before taxes. Instead seniors buying bonds today can expect returns of 2%-3% or
$12,500 in income. The net result is seniors are eroding their capital as they
attempt to increase cash flow for living expenses. At the same time young
families are financing homes and cars at historic low rates of interest. As for the debt bomb, I am not sure any generation will ever pay back our debt. We will cover the interest payments for generations to come and wait for long term inflation to erode the value of the debt.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">So who has it easier yesterdays tail-end boomers or today's new graduates? Neither, I would suggest. Today’s
youth face today’s challenges and yesterday’s youth faced equally challenging
but different issues. We all hope that the hyper inflation,
stagflation, “price and wage controls” (6 and 5 for those old enough to
remember) and twelve percent unemployment are never repeated. Today’s parents
are accustomed to having the children move back in after school to offset
school loan expenses and to help the young adults save money for their first
car and first home. Youth today feel constrained by challenging job markets and
a sense of peer pressure to have it all “day one” and work out the payments
later. Today’s seniors worry about how long the money will last, pensions under
threat, eroding benefits and a government that is still and always spending too
much and saving too little. Perhaps it is time to chill and all agree that we
can be glad we faced our biggest deficit challenges in the 90’s and young and old alike
can be glad we are in Canada and not Greece!</span></div>
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<span style="font-family: Calibri;">mike</span></div>
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<span style="font-family: Calibri;">p.s. I know readers do not come here for social commentary but I felt the need to stray a bit today. Next blog will be back on topic, I promise.</span></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-71291300400785845722012-05-25T14:18:00.000-04:002012-06-07T14:17:44.855-04:00One Small Step For Investors, One Small Set Back for Investors Group<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1lP2698dFm_8_loNqkeLIT0BU69UEA2iIJuR663ctkJ47U6ipxVdBW_-jGAAxw1Sn4vcJa7KLuFF55OZJfJTjGHzhmWdnJ6lH0AxTnNAqi-SWzyxqQmX5n9JCpNZQvUguMZYTnveiAREz/s1600/victory.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="213" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1lP2698dFm_8_loNqkeLIT0BU69UEA2iIJuR663ctkJ47U6ipxVdBW_-jGAAxw1Sn4vcJa7KLuFF55OZJfJTjGHzhmWdnJ6lH0AxTnNAqi-SWzyxqQmX5n9JCpNZQvUguMZYTnveiAREz/s320/victory.jpg" width="320" /></a></div>
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<span style="font-family: Calibri;">The sudden announcement that Investors Group will lower MERs
(the hidden fee an investor pays every year to hold a firms mutual funds) on
two thirds of their funds is a victory for retail investors (that’s you if you
own IC funds). The fees are being reduced by approximately 0.4% to 0.5% per
year. In short you will save approximately $450.00 every year for each
$100,000.00 in IG funds you own! Given IG has approximately $60 billion in funds
it manages, and using the two thirds ratio, that means Canadian investors will
see annual fees drop by a collective $180 million dollars annually!</span></div>
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<span style="font-family: Calibri;">As a backgrounder, IG is extremely large in the Canadian
Fund industry and has been known historically for charging MERs that were
relatively high compared to their peers. In fact, IG is a primary reason why
fund fees in Canada are deemed the highest in the developed world! Given the
size of IG you would have expected an economy of scale advantage that would
have enabled the firm to be a low cost provider in Canada. Instead, Investors
Group took the approach that Canadian investors are fee tolerant and either did
not care or did not react to very high fees. In short, small uninformed
investors are ripe for being fleeced on fees. In fairness to IG, that seems to
have been a smart bet over the past couple of decades. IG has built a huge
business by being everywhere with a horde of well trained sales people. The
sales pitch has been slick and having sales people coming into investors homes
has built a huge base of goodwill and trust. Almost every Canadian town has a
ball team, hockey team, or soccer team sponsored by the local IG office. In
fact, IG has been to fund companies as Tim Horton’s has been to coffee shops.....that
is if Tim’s charged $3.00 for a double double! </span></div>
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<span style="font-family: Calibri;">Investors Group has always downplayed fees and promoted the
softer benefits of having a financial plan and a trusted hand to guide
investors. At the same time, however, IG has kept fees high across the board.
If investors try to leave IG they often find themselves having to pay thousands
in penalties that the investor did not really understand. By selling large
quantities of funds with Deferred Sales Charges (DSC or Back-end Loads) IG has
reaped a windfall of profits even as dissatisfied investors have left. Which
brings us to the crux of the matter for Investors Group: Investors have been
paying the penalties, albeit not happily, and moving on to firms that charge
lower fees. Consumers have become more informed, thanks in no small part to
journalists such as Jonathan Chevreau (ex-National Post, Money Sense) and Rob Carrick
(Globe & Mail), and fee only advice firms such as Weigh House. As well
blogs, a new breed of low cost fund firms (Steadyhand, Mawer, ING, TD eFunds),
and a more cynical attitude towards big financial firms has helped spread the
story on fund fees in Canada.</span></div>
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<span style="font-family: Calibri;">How has this impacted Investors Group? For a long time now
the IG fund family has struggled to provide quality returns. Since returns are
shown net of the MER, the fund managers at IG need to overcome the impact of
the large fees when comparing returns with funds who charge lower fees. This
problem becomes even more challenging when fund performance is measured against
low cost exchange traded funds (ETFs are the fastest growing segment of the
fund market worldwide and in Canada). The result is that IG has amongst the
lowest percentage of funds of all the major fund families ranked in the top
categories by independent rating firm, Morningstar. Although very large, IG has
only 18% of funds ranked 4 or 5 stars out of 5 on the Morningstar scale. On
average fund families have 28% of funds ranked in the 4 or 5 category.</span></div>
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">This has resulted in retail investors shunning the mediocre
performers. IG has had net outflows of funds for the last three quarters. In Q1
2012, year over year inflows dropped by 65%. When these types of numbers are
appearing it likely follows that the sales team at IG is starting to defect.
With sales driven by relationships, a salesperson often takes a large number of
clients with them when they defect. In the fund industry competitors will often
make it attractive for sales teams to switch firms. Being able to show existing
clients that a new firm has better ratings and lower fees is a big sales assist
for disgruntled sales people.</span></div>
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">So, in the end IG is making the changes necessary to ensure
they can continue to retain sales teams. They are not making changes in order
to benefit investors nor are they reducing the fees on all their funds. What is
happening is that IG is being forced to acknowledge that the days of fat profit
margins and poor performance are threatened. IG is a smart company and they
will spin their decision to seem more consumer focused than it is. The way to
force changes is to threaten profits and thousands of small investors have done
just that! It is the first small step in a long journey but it is a welcome
site for all investor advocates.</span></div>
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">In the end IG will act in an economically sensible way, as
they always have. The company still has a large profitable business and a large
well trained sales team. They will make revenue adjustments when forced to and
not a moment before. That is no different than a bank lowering a credit card
rate or a car company dropping prices. The main difference is that MERs are hidden
from monthly statements and thus consumer awareness is slower to develop. While
many advocates hold IG in contempt for gouging consumers for decades, the truth
is always somewhere in the middle. IG exploited a business opportunity which is
now being slowly eroded. As retail investors continue to become more
enlightened IG will find new areas to exploit. This is more evolution than revolution
but it is a great start on the road to a fair and level investment market for
Canadians. </span></div>
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">In the meantime, congratulations to the thousands of
investors who voted with their wallets and forced a major change in the
behaviour of the fund industry! Keep up the great work!</span></div>
<br />
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<span style="font-family: Calibri;">mike</span></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com2tag:blogger.com,1999:blog-872609959597709892.post-71830237389912272622012-05-10T11:43:00.002-04:002012-05-10T11:43:16.873-04:00Leafs, Mutual Funds, and Other Addictions<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrYID3oQ4Sd9RJllvojBhyP1Ur539udI5e5Zms6l9NtJpE6vJf9TGDL-LkeE9GSeuFpUHyTrRxT7nzlU272qpALonUO0jrjl61_BiFEmkz-Gd36bmOlQ9AC0E9uClr9hdjuaAfj5FPz7W_/s1600/leaf.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrYID3oQ4Sd9RJllvojBhyP1Ur539udI5e5Zms6l9NtJpE6vJf9TGDL-LkeE9GSeuFpUHyTrRxT7nzlU272qpALonUO0jrjl61_BiFEmkz-Gd36bmOlQ9AC0E9uClr9hdjuaAfj5FPz7W_/s200/leaf.jpg" width="200" /></a></div>
<span style="font-family: Calibri;">As I watched in awestruck horror, my Maple Leaf hockey team
slowly disintegrated before my eyes this winter. It is a very difficult time to
be a Leaf fan and it is getting harder to say ‘we will get’em next year”.<span style="mso-spacerun: yes;"> </span>Of course my friends all claim to be long
time fans of Boston or Chicago or anybody else that has had recent success.
Many who claim to be friends seem to take great joy in pointing to the folly of
being a fan of such an incredibly bumbling organization. The senior leaders in the
Leaf hierarchy continue to insist they care more about winning than making
enormous profits; yet year after year they manage to seem cheerful when they
tell shareholders about the huge profits they have ‘earned’ (?) for the owners.
As I watch this unfold I struggled to find an analogy for being a loyal Leafs
fan. </span><br />
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">Then, I had an epiphany!<span style="mso-spacerun: yes;">
</span>I opened my investment statement and it all became clear. Cheering for
the Leafs is the very same as investing in Mutual Funds! How could I not see it
before? Think about the following points and see if you agree:</span></div>
<br />
<div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">1.</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">They
both seemed like a good idea years ago when I invested in them. In the early
years (I am mid-fifties in age) the Leafs were winners and life was good for
Leaf fans. In the early years Mutual Funds paid double digit returns and
investors all made money!</span></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">2.</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Being
a fan of the Leafs is an emotional journey. They raise you up just to knock you
down again and then they repeat the pattern endlessly. My Mutual Funds have
also had great days, weeks, months and even years but they are now worth no
more (and often less) than they were worth when I originally invested in them.
The crashes are sudden, without warning, and devastating. Sound familiar? </span></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">3.</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">The
Maple Leafs cannot seem to recognize quality assets. They trade draft picks and
young ‘stars- to- be’ for old tired and worn out players. When they do get a
good spot in the draft they still manage to find a dud. Not surprising all the
top free agents stay away. Funny, when I look back at my fund holdings I see
the same story. Stocks bought when they were past their prime and stocks sold
just before they went on a tear. Top fund managers leaving for better firms and
no quality replacements in sight.</span></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">4.</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Leaf
tickets are priced as if the Leafs of old were still here winning championships.
Why am I forced to pay huge ticket prices to see a team that stinks! Similarly,
Mutual Fund fees are the highest in the world here in Canada and performance
also stinks. Paying a couple or 3 per cent on returns of 12-15% was not bad in
the eighties. But paying over 2% now for funds that return nothing over a
decade seems a bit much. I am being ripped off every way I turn!</span></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">5.</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Sports
analysts (talking heads) continually pump up the volume on how great the Leafs
will be soon..... not now, but soon! Come the trade deadlines or draft day you
would think the Leafs had phenomenal assets to trade or the next great star
about to be drafted. Soon we realize it was all B.S. designed to get us to buy
more tickets and Leaf jerseys with a new saviors name on the back. As for
Mutual Funds, every terrible statement comes with an explanation of why now is
the time to invest. Markets are just about to go on a bull run and the newest
stock picker hired by the fund company is a real genius! Remember this RRSP
season you need to double up on your deposits because this coming year is the
big one for investors.....right?</span></div>
<br />
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">6.</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Perhaps
the biggest similarity is my inability to wean myself off of these addictions.
Why would I continue to work with an advisor that I have come to realize is
just a salesperson sucking me dry? Why as a Leafs fan do I still turn on the
game and start every season thinking this year will be different? Alas to this
simple question there is no simple answer!</span></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">Having carried the analogy far enough I now see there is one
huge difference. I do not really love my advisor/salesperson. I can picture
life without them. I can manage my own investments or I can find a low cost
fund firm like SteadyHand or Mawer or Leith Wheeler or I can buy low cost ETFs.
In short, I have control over whether I use an advisor/salesperson. </span></div>
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">As for the Leafs, well matters of the heart are more
difficult. I will continue to try to grow apart from the Leafs but I can never,
ever, ever, ever cheer for Montreal or Ottawa! That would just be too much to
ask of a recovering Leafs addict!</span></div>
SoisMike<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<br /></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com8tag:blogger.com,1999:blog-872609959597709892.post-23447333620246295512012-04-22T12:02:00.000-04:002012-04-22T12:02:22.562-04:00Investor Traps: Covered Call ETFs<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilg74SfcSqncUfrXU1qRgT54lI1ibB9vLeP9XPU0uJUPk7a_hANw1a3DpH1mYBTpJi7CN5cq5Ks7tkPjzflW_0uZwmfALoaUxbeHpFnezZ3YlMVRvoZbj_IDoeIcKf3pZ17EClDCYLOHMZ/s1600/trap.bmp" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilg74SfcSqncUfrXU1qRgT54lI1ibB9vLeP9XPU0uJUPk7a_hANw1a3DpH1mYBTpJi7CN5cq5Ks7tkPjzflW_0uZwmfALoaUxbeHpFnezZ3YlMVRvoZbj_IDoeIcKf3pZ17EClDCYLOHMZ/s1600/trap.bmp" /></a></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">One significant challenge for investors is to ignore
information that they discover while researching investment options. A classic
example of this is information which seems straight forward but may not be
suitable for the portfolio strategy an investor is trying to implement. Part of
the challenge is that the marketing arm of the product manufacturers (mutual
fund or EFT companies specifically) do a great job of hyping the benefits and
an even greater job of downplaying or ignoring the risks of the product. Often
new investment products are created for a specific requirement, such as
enhancing income or hedging a long position and then they become popular as the
“new hot product”!</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">Let’s look at the example of Jane Smith, an investor in her
60’s approaching retirement shortly and managing her portfolio with a
conventional diversified ETF portfolio. Her holdings include ETF’s tracking the
TSX60, the S&P 500, EAFE Index (Europe, Australia & Far East) and the
Dex Bond Universe. Jane has a strategic asset allocation that is 75% fixed
income and 25% equity exposure. This strategy is designed to protect her
substantial RRSP holdings from market volatility while holding sufficient
equity exposure to protect against any uptick in inflation through equity growth.
Jane is looking for returns of inflation plus 2%.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">In researching her investment options Jane comes across a
new ETF that has been gaining in popularity; a fund that writes <a href="http://www.investopedia.com/terms/c/coveredcall.asp#axzz1smhyGRRR">covered calls</a>
on bank shares. In checking out the ETF Jane sees that the current yield is
over 6% at a time when her fixed income portfolio is yielding 3.68% in
comparison. Given her concerns about the low interest rates on her large fixed
income portfolio Jane contemplates reducing her fixed income ETF holdings by 10%
of the portfolio and adding 10% to a “covered call elf” holding.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;"><strong><em>What Could Go Wrong?</em></strong></span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">In further reviewing the covered call strategy Jane starts
to feel a little less excited about her new strategy. While current yield is
great, Jane begins to understand that the greater yield comes with certain
risks that are not always readily apparent. That prompts Jane to run through a
few scenarios to see how her “new” strategy would react to certain market
changes that might occur.</span></div>
<br />
<div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">1-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">What if interest rates remain low or even
go lower?</b> The covered call strategy is based upon implied volatility in
stock prices so it does not directly react to interest rate changes. As such it
does not directly assist the portfolio to have low interest rates; however if
the ETF continues to provide a 6% yield it should have a positive impact on
Jane’s portfolio.....right? In fact, since current yield is defined as recent
period income divided by portfolio value, a $6 income on a $100 portfolio
provides a 6% current yield. If the portfolio drops in value to $75, the
current yield becomes 8%. In looking at the 1 year performance of the new fund
(just over 1 year old now) Jane discovers the rate of return has been -1.5%
from March 2011 to March 2012. That seems perplexing given the fund is yielding
such a high amount? Maybe current yield is not the best way to look at this ETF!</span></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">2-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">What if rates rise sharply? </b>If rates
rise the value of Jane’s existing fixed income will likely drop. Fixed income
values generally move opposite of interest rates. Obviously the higher rate
scenario favours holding covered calls versus fixed income..... right. Well,
maybe! If rates rise what will the bank stocks held by the ETF do? Will
investors sell stock and buy fixed income when rates rise? If so what will
happen to the value of the underlying bank stock? In fact, banks tend to
benefit from higher interest rates (think of interest rate spreads as banks
raise mortgage rates and credit card rates). While no outcome is guaranteed,
Jane is comfortable that if rates rise this strategy should be either slightly
positive or neutral in her portfolio.</span></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">3-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">What if stocks go on a big bull run?</b> If
bank stocks benefit from positive stock markets there could well be a doubling
or tripling of some bank stocks. After all, TD Bank common stock went from the
high $20’s to the low $70’s after the 2008 crash ended! Holding the long
positions on bank stock in the ETF might bring a real growth spurt to the
portfolio. Right? <em>Well, actually no</em>. While the ETF holds a lot of bank stock,
the gain from an increase in the underlying stock values would benefit the
investors that bought the covered call options. If a stock was valued at $60
and a covered call was sold at $62.00, the ETF would make a profit of $2.00
plus the option premium of perhaps $1.00. If the bank stock went to $80/share
the ETF would still only see a maximum of $3.00 from the $20.00 increase!
Suddenly giving up a $20/share gain for $3 does not seem as positive.</span></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">4-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">What if the stock market plunges downward?</b><span style="mso-spacerun: yes;"> </span>The covered call strategy is a “defensive
strategy” (according to the marketing material anyway) so it must protect my
portfolio from large losses.....right? It would seem to make sense that the
offset to sacrificing large gains when markets rise (scenario 3 above) would be
that my portfolio would be sheltered from large losses in return..... right? <span style="mso-spacerun: yes;"> </span><em>Well, actually, no</em>! That is not the case with
covered calls. If the bank stocks dropped from $60/share to $40/share the fund
would need to hold the shares for the length of time that the call option
remains in place to insure the option remains a “covered call” and not a “naked
call”. The fund holds the stock regardless of the market performance and the
only income to offset the loss is the small call premium (our $1 theoretical
premium as above). The net result is that the fund looses $19/share instead of
the $20/share the market drop infers.</span><b style="mso-bidi-font-weight: normal;"><o:p><span style="font-family: Calibri;"> </span></o:p></b></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;">
<span style="font-family: Calibri;">Given
the above analysis, Jane pulls out her original <a href="http://www.investopedia.com/terms/i/ips.asp#axzz1smhyGRRR">Investment Policy Statement</a> and
reviews her strategy. The equity holdings are designed to provide growth which
protects the portfolio from being eroded by inflation. That is accomplished by
using gains from a rising stock market to cushion any losses in fixed income
values caused by inflation. Since the covered call strategy limits market gains
the covered call strategy works against Jane’s overall strategy.</span></div>
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;">
<span style="font-family: Calibri;">
Jane's original strategy called for limited equity exposure to ensure stock market
losses do not diminish Jane’s nest egg. The covered call strategy leaves the
portfolio exposed to any significant market drops so that also works against
Jane’s original strategy.</span><o:p><span style="font-family: Calibri;"> </span></o:p></div>
<br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;">
<span style="font-family: Calibri;"><strong>Decision</strong>:
In looking at all options Jane realizes that the covered call option is a
higher risk strategy than holding fixed income and it has the potential to 1)
dampen equity growth, 2) expose the portfolio to large equity losses, and 3) in
a low volatility stock market with concurrent low interest rates, it could
increase current yield slightly. In short the covered call strategy can help a
little or hurt a lot, but it cannot significantly improve her portfolio. Jane
reviews her portfolio performance against her goal of making returns of
“inflation plus 2%” and finds she is currently still meeting her target rate of
return. As such she decides not to utilize the covered call ETF that all her
friends are excited about. What she will do is file away the information. Every
product serves a purpose but not every purpose serves a portfolio strategy. In
this case doing what is popular with investors today and what appears to offer
some immediate benefit, would actually weaken the investment strategy and change the
risk profile on Jane's portfolio. Sacrificing equity gains while taking full
equity market risk is a poor trade off. As well, not making the addition to the
portfolio keeps the MER lower, reduces trading costs to rebalance the
portfolio, and makes the portfolio simpler to monitor. Jane knows that an
investment portfolio is like a bar of soap....the more you handle it the
smaller it tends to get!</span><o:p><span style="font-family: Calibri;"> </span></o:p></div>
<br />
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt; mso-add-space: auto;">
<span style="font-family: Calibri;"><strong>Note:</strong>
Covered calls on bank equities were the most popular strategic ETFs in the
first quarter of 2012. The largest volume growth was a bank shares focused
covered call ETF that provided returns of just over 7%. Holding direct common
shares in TD bank provided over 10% capital gains as well as additional dividend
income. The covered call strategy provided an enhancement in returns versus
fixed income however it provides the risk profile of equity. When properly
compared to narrow focused bank equity returns the results were less than
stellar. The message is not that covered calls are a bad strategy for
everybody. The important message is that any security you purchase needs to
support your overall investment strategy, your portfolio risk profile, and your
investment return requirement. Covered call strategies are marketed as a lower
risk strategy and generally compared to fixed income investments. In fact they
are equity and should be considered a higher risk strategy with a potential
downside far greater than any typical fixed income strategy. Risking a 20% or 30%
downside or missing a 20% or 30% gain are high prices to pay for the extra
yield you may see in the short term.</span></div>
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt; mso-add-space: auto;">
<span style="font-family: Calibri;">sois mike</span></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-46813944961046094992012-03-27T12:17:00.002-04:002012-04-11T12:01:12.208-04:00SROs Fiddle While Investors Get Burned<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPHw81X2Ek4KC3wPXIZchKzGiS-UvODDEURY0Qgfu9UAR_3fgsS-0u4go8BAJc2HHmfQX1SBSDCu_BYBMi0qlQQdgMq7TIW-teNrjLJ8YKasyb-pUgC5KXw1NFnQnYw2vZc9nQ96acJjlW/s1600/MP900385373.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPHw81X2Ek4KC3wPXIZchKzGiS-UvODDEURY0Qgfu9UAR_3fgsS-0u4go8BAJc2HHmfQX1SBSDCu_BYBMi0qlQQdgMq7TIW-teNrjLJ8YKasyb-pUgC5KXw1NFnQnYw2vZc9nQ96acJjlW/s320/MP900385373.JPG" width="228" /></a><span style="font-family: Calibri;">IIROC has recently released new information on the implementation of its chosen Customer Relationship Model (CRM). Before I add any comments let us take a look at how IIROC describes itself and the quality of their efforts.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="color: red; line-height: 115%;"><span style="font-family: Calibri;">“IIROC is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada. IIROC sets high quality regulatory and investment industry standards, protects investors and strengthens market integrity while maintaining efficient and competitive capital markets.”</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;">This gem is found in the March 26<span style="font-size: small;"><sup>th</sup> news release issued by </span></span><a href="http://www.iiroc.ca/English/Pages/home.aspx"><span style="color: blue; font-family: Calibri;">IIROC</span></a><span style="font-family: Calibri;">.<span style="mso-spacerun: yes;"> </span>Perhaps a less egocentric organization might have stated that it has “a mandate to set high quality regulatory and investment industry standards.....”, however IIROC appears to have declared victory. </span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;">Sadly, IIROC acts just like most self regulatory organizations (SRO). They react late, water down the regulations to reflect the desires of the dealers, and generally only act when the pressure to do something becomes embarrassing. And do not kid yourselves, these folks do not embarrass easily.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;">The move to clarify fees in the CRM is far too late and the ability of salespeople to call themselves advisors regardless of any qualification standards seems to go unnoticed. As to having salespeople provide better information on risk, well that is almost impossible since no credible standard exists on how to rank a mutual fund’s risk profile. In effect, the standard is that each fund can set its own risk ranking so long as they feel it is appropriate. Wow, feel safe?</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;">The mandate to set high quality standards was never intended to read as “minimum standard that is acceptable to all stakeholders”. In fact the idea of utilizing an SRO seems to be something that is never questioned in Canada. Whether it is the Canadian Medical Association never seeming to sanction doctors until the media gets involved or the regulatory bodies that rarely expel a Certified Financial Analyst in spite of the numerous investor complaints; it seems that in Canada the major role of an SRO is to lie low, deflect criticism, and act only when forced to. It is safe to say no bold initiative ever originates with an SRO.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;">“So what”, you say? The net result is that Canada continues to fall further behind other nations when it comes to protecting investors. Specifically, I mean small retail investors. So what would make me happy you ask? How about some big thoughts! Some regulations that would actually drive real change and turn the industry in a different direction. Here are three ideas that would change the landscape for investors in Canada:</span></span></div><div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">1-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">The first is a very simple move to protect investors and is at least partially in place in a number of countries. Ban deferred sales charges (DSC, Back End Load) and trailer fees. Investors can either pay the salesperson an up-front fee or pay an on-going fee to the salesperson directly. hidden third party fees are never a good solution for investors.</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">2-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Require all mutual fund salespeople to become licensed to sell ETF securities. No salesperson selling mutual funds should be able to do so without providing a comparison to the top selling ETF fund in terms of performance and fees, as well as the cheapest priced mutual fund in the same category. This is a low threshold but one that is not even being talked about. Consumers do not know their options and this would force salespeople to at least acknowledge that lower cost options are available.</span></div><br />
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="line-height: 115%; mso-bidi-font-family: Calibri; mso-bidi-font-size: 11.0pt;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">3-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Any person selling securities should have a fiduciary obligation to put the client’s interest before their own. Most investors already think this is the case and are shocked to find their interests are not primary and often not even secondary in the process. Salespeople currently can first look to what pays the most commission, then look to see what most benefits their parent company, and then select any fund that meets those requirements and is deemed “suitable” for the client and sell it to an unsuspecting investor.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 18pt;"><span style="font-family: Calibri;">Do I think any of these changes will happen? Actually, yes I do. They will happen when every other major country has already made similar changes. It will be very late and not likely in my lifetime. Look to Australia where governments are not afraid to challenge the financial status quo; look to the U.S. where litigation helps shape regulations; and look to Britain where government has created regulatory bodies with a true focus on protecting investors.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 18pt;"><span style="font-family: Calibri;">In Canada we can dream big......but we do not have the courage to take on the establishment....yet!</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 18pt;"><span style="font-family: Calibri;">Mike</span></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-84525742298485357572012-01-24T16:50:00.001-05:002012-01-24T16:52:13.934-05:00INVESTING IN BAD TIMES!<span style="font-family: Calibri;">The current investment climate is about as bad as it gets when you look back over an extended time period. Canadian investors have watched as equities vary between days of terror (huge market drops) and days of despair (slow death via multiple days of small declines). The odd good day or week in the markets seems to just tease us for what might have been had we invested in the 90’s instead of this century! Even the old standby, the Money Market Fund, has proven to be neither safe nor profitable. We lamented the lost decade for equities from 2000 to 2010, and then started the new decade with negative equity markets for 2011.</span><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">So what can we do and what should we do! </span></div><div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">1-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">We CAN stop adding to the problems by making poor decisions about our investment strategy. The typical investor in a MF or ETF Index fund will make significantly less than the fund itself over the course of a typical year. That is because investors jump in and out of the equities market based upon the current emotions they are feeling. Studies show that this undisciplined approach will cost investors up to 4% less return than a mutual fund would make on average. Professionals do NOT jump in and out of the markets based upon emotions. They follow an Investment policy Statement (IPS) that outlines the minimum and maximum percentages of equity that MUST be held in the portfolio. For those that wondered about the definition of “rebalancing” a portfolio; that is the term used for bringing a portfolio in line with its IPS guidelines. Without an IPS you CANNOT rebalance your portfolio!</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">2-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">We CAN stop pretending that the folks who make a good living managing investments have an ability to predict what stocks will go up or down next week or next year. Professionals can help you select stocks which have good balance sheets and good management in place. They can also help you ensure your portfolio is well diversified. Other than that, professional stock traders are of little use unless they can provide insider information (which in general is illegal). In 2011 the consensus forecast of investment managers in Canada was for stocks to outperform bonds and commodities. It will come as no shock that a) they were wrong, and b) they have made the same forecast for 2012. In fairness.....they eventually will be correct just based on the law of averages!</span></div><br />
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">3-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">We CAN reduce the fees we pay. With investor returns at historic lows we cannot continue to give a guaranteed 2-2.5% return to investment salespeople. If markets were to provide you with the 4%-5% returns we expect in the near future, a fee of 2.25% would be 45-55% of your total investment return. In years where markets drop, like 2011, the fee just increases your losses. If you negotiated a fee of 1.25% you would be giving up only 25% of the same return forecast! If you used ETF Index funds you could reduce the fee drain to a fee of .25% and have only a 6% fee drain.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">While markets are certainly tough it does not mean we cannot do better. A little effort, some simple strategies and a calm demeanour can go a long way to lessening the pain of being an investor today!</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">If you need an IPS then ask an independent (non-selling) firm to customize one for you!</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Soismike </span></div><br />
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</div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com1tag:blogger.com,1999:blog-872609959597709892.post-38545612181249157342012-01-23T10:55:00.000-05:002012-07-03T15:31:30.716-04:00<div class="separator" style="clear: both; text-align: left;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEie-_sWs5qjWO6JFrsnGMaYtzWdvx6LJEwDHhbMO2oOh0lWDpdpiIvlAJEW-oJvIFCxV1d2w86HGwwaEYN1jG-uxtnbn9MTIdAIEfZCq6DIdwq6B9D7L6sqXSa9WYn3Kg_Q3RM5ui7r-WCR/s1600/sock+chart.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEie-_sWs5qjWO6JFrsnGMaYtzWdvx6LJEwDHhbMO2oOh0lWDpdpiIvlAJEW-oJvIFCxV1d2w86HGwwaEYN1jG-uxtnbn9MTIdAIEfZCq6DIdwq6B9D7L6sqXSa9WYn3Kg_Q3RM5ui7r-WCR/s320/sock+chart.JPG" width="228" /></a><span style="font-family: Calibri;">Well, it was another year of frustration for “real investors”. By “real investor” I mean those of us who trade without access to inside information and who cannot augment our returns through hidden fees or commissions. While we will lick our wounds and carry on, we should also track where the smart “professionals” were focused in 2011 to see where we missed the boat.</span></div>
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<span style="font-family: Calibri;">Consensus Forecasting for 2011: The “professionals” forecast the market performances every year and then a “consensus report” is tabulated to allow us to peak under the curtain and see what active traders are doing to beat the markets. The asset class forecasts were very clear that security performance in 2011 would see returns ranked as follows:</span></div>
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<div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 54pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Equity stocks would be the best performing asset class</span></div>
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<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 54pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Commodities would be the second best performing class of assets, and</span></div>
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<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 54pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Bonds would trail the above classes and provide weak performance</span></div>
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<span style="font-family: Calibri;">Based upon the forecast, you would overweight equities, diversify with commodities, and minimize your bond holdings.</span><span style="font-family: Calibri;">Let’s see how well the smart money did in forecasting 2011.</span></div>
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<div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 54pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Equity returns in Canada ( TSX broad market total return index) -8.71% and if you choose to look just at the blue chip TSX 60 returns were -9.08%</span></div>
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<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 54pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Commodities as measured by the Auspice Broad Commodity Index was 1.78% to the positive side</span></div>
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<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 54pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -18pt;">
<span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Bonds as measured by the Dex Bond Universe was up 9.7%</span></div>
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<span style="font-family: Calibri;">Wow, the smartest guys on the street managed to show an amazing dyslexia of returns! They used thousands of analysts to crank out the research math and got everything backwards! In fairness however, the forecasts were great for revenues at the brokerage firms as investors traded heavily into the markets based upon the forecasts. By the end of the investment rich RRSP seasons investors had bid up the equity markets and the research looked great. However, once all the suckers....um, investors were fully invested, the professionals did a quick sprint to the exits, leaving the retail investors holding a smelly mess of equities. The TSX dropped from the lofty mid 12,000’s to the more realistic low 11,000’s. Unfortunately, those who followed the advice in late February and early March can only wish they had lost 8 or 9%! In fact many will see 15-20% drops with their RRSP investment money.</span></div>
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<span style="font-family: Calibri;">So, how did a conservative indexer do in this type of market? If the pro’s got it wrong we can only assume the indexers got creamed! Our conservative 50/50 balanced model would have received the returns of a typical mix of ETFs somewhat like the following:</span><o:p><span style="font-family: Calibri;"> </span></o:p></div>
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<table border="1" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; border: currentColor; mso-border-alt: solid windowtext .5pt; mso-border-insideh: .5pt solid windowtext; mso-border-insidev: .5pt solid windowtext; mso-padding-alt: 0cm 5.4pt 0cm 5.4pt; mso-yfti-tbllook: 1184;"><tbody>
<tr style="mso-yfti-firstrow: yes; mso-yfti-irow: 0;"> <td style="background-color: transparent; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 76.3pt;" valign="top" width="102"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">ASSET CLASS</span></div>
</td> <td style="background-color: transparent; border-color: windowtext windowtext windowtext rgb(0, 0, 0); border-style: solid solid solid none; border-width: 1pt 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.85pt;" valign="top" width="94"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">WEIGHTING</span></div>
</td> <td style="background-color: transparent; border-color: windowtext windowtext windowtext rgb(0, 0, 0); border-style: solid solid solid none; border-width: 1pt 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.9pt;" valign="top" width="95"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">ETF SYMBOL</span></div>
</td> <td style="background-color: transparent; border-color: windowtext windowtext windowtext rgb(0, 0, 0); border-style: solid solid solid none; border-width: 1pt 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 2cm;" valign="top" width="76"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">RETURN</span></div>
</td> </tr>
<tr style="mso-yfti-irow: 1;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 76.3pt;" valign="top" width="102"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">Cdn Equity</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.85pt;" valign="top" width="94"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">25%</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.9pt;" valign="top" width="95"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">XIU</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 2cm;" valign="top" width="76"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">-9.22</span></div>
</td> </tr>
<tr style="mso-yfti-irow: 2;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 76.3pt;" valign="top" width="102"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">US Equity</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.85pt;" valign="top" width="94"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">12.5%</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.9pt;" valign="top" width="95"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">XSP</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 2cm;" valign="top" width="76"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">1.07</span></div>
</td> </tr>
<tr style="mso-yfti-irow: 3;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 76.3pt;" valign="top" width="102"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">EAFE</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.85pt;" valign="top" width="94"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">12.5%</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.9pt;" valign="top" width="95"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">XIN</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 2cm;" valign="top" width="76"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">-12.7</span></div>
</td> </tr>
<tr style="mso-yfti-irow: 4;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 76.3pt;" valign="top" width="102"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">Bond</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.85pt;" valign="top" width="94"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">50%</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.9pt;" valign="top" width="95"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">XBB</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 2cm;" valign="top" width="76"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">9.38</span></div>
</td> </tr>
<tr style="mso-yfti-irow: 5; mso-yfti-lastrow: yes;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 76.3pt;" valign="top" width="102"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">Total</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.85pt;" valign="top" width="94"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">100%</span></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 70.9pt;" valign="top" width="95"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<br /></div>
</td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 2cm;" valign="top" width="76"><div class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt;">
<span style="font-family: Calibri;">0.92%</span></div>
</td> </tr>
</tbody></table>
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">Well, it was definitely a tough year; however staying diversified reduced the damage significantly. Even if investors reduced the risk by splitting the fixed income between short and long duration bonds (50% XBB and 50% XSB), the overall return would be -0.3% for the year 2011.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;">
<span style="font-family: Calibri;">Obviously the higher the Canadian equity component or the EAFE equity component, the worse the overall portfolio performance. For those active traders that jumped on the gold bandwagon the entry point was a challenge. On the whole XGD (the gold ETF) was down 14% and the much recommended emerging markets saw a decline of 16.4% as measured by the emerging market index. So, if you followed the professionals you were heavy equities, heavy emerging markets, heavy gold and light weight bonds. If you followed your Investment Policy Strategy as a conservative investor you retained your capital! Thank goodness I am a dull investor with a conservative IPS!</span></div>
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<br /></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-90904216827095499352012-01-09T11:22:00.002-05:002012-01-09T11:35:44.444-05:00Part Two: Why Mutaul Funds are like Popcorn.....Explaining The Fee Gap<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4QcE2IhLxiBAUko28UuZLY4yKVxLhWT6y5XAioiaw6Afbr1n8WU_nBsa0AHb1FEKTzBINLXMYaJW6QXomqg0PFnnx-EIKV4z1Alu6gDdTnGetr3ozRh8PZd-2q3LBIAvvzcGl3QsL8gNV/s1600/fat+cat+executive.JPG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4QcE2IhLxiBAUko28UuZLY4yKVxLhWT6y5XAioiaw6Afbr1n8WU_nBsa0AHb1FEKTzBINLXMYaJW6QXomqg0PFnnx-EIKV4z1Alu6gDdTnGetr3ozRh8PZd-2q3LBIAvvzcGl3QsL8gNV/s320/fat+cat+executive.JPG" width="320" /></a><span style="font-family: Calibri; font-size: large;">Mutual Fund Fees: Part Two </span><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">In part one we discussed the position put forward by Fund Companies and Advisor/salespeople that the </span><a href="http://www.investopedia.com/terms/e/expenseratio.asp#axzz1ibqGVF8a"><span style="color: blue; font-family: Calibri; font-size: large;">Management Expense Ratios</span></a><span style="font-family: Calibri; font-size: large;"> in Canada represent fair value for investors. The logic they use does not hold water when you break down the component parts of the MER between investment management, sales channel expense, and the “advise” component.<span style="mso-spacerun: yes;"> </span>As we showed in the previous blog, the portion that is reasonably assigned to “advice” seems to be far too high. In an efficient world we have shown that a typical Canadian Mutual Fund with an MER of 2.4% per year would have approximately 1.2% available to cover the advice cost. In fact, the fund companies generally pay a “trailer fee” to sales people to cover the cost of the annual advice component of the fee. That trailer can vary between 0.5% and 1% per year. This would suggest an average advice fee of .75%. This suggests that there is another fee component that we are not accounting for?</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">Formula: MER = investment management expense + sales channel expense + advice fee + ?</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><span style="mso-tab-count: 1;"> </span>2.4%= .7% + .5% + .75% +?</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><span style="mso-tab-count: 1;"> </span>? = 2.4% -.7% -.5% - .75% = 0.45%</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">Where does the mysterious 0.45% go? In fact, on the typical mutual fund with a 0.5% trailer the mysterious “?” factor is 0.95%. In effect, we can surmise that Canadians are paying an extra half to one per cent on mutual funds after all reasonable fees have been accounted for. Who gets the extra fee?</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><b style="mso-bidi-font-weight: normal;">Alternative Scenario</b>: Mutual Funds in Canada are priced to reflect what an uninformed investor can be convinced to pay. The mutual fund industry and the “advisor” industry have set up an ideal world for the exploitation of investors. The key components are as follows:</span></span></div><div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="font-size: large;"><span style="font-family: Wingdings; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings;"><span style="mso-list: Ignore;">Ø<span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">A closed market where prices can be set by a few large companies. </span></span></div><div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="font-size: large;"><span style="font-family: Wingdings; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings;"><span style="mso-list: Ignore;">Ø<span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Self regulatory oversight where the same companies can dominate the rule making process</span></span></div><div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="font-size: large;"><span style="font-family: Wingdings; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings;"><span style="mso-list: Ignore;">Ø<span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">A sales channel that can act to keep the investor unaware of low cost alternatives</span></span></div><div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="font-size: large;"><span style="font-family: Wingdings; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings;"><span style="mso-list: Ignore;">Ø<span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">An uninformed Government that can be manipulated to support the ongoing deception</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">For those that think this is about a big “conspiracy theory”, let me assure you it is not. Conspiracies are too complex and the details would eventually leak out. Instead this is about a combination of ignorance, laziness, and business strategy.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><b style="mso-bidi-font-weight: normal;">Ignorance & Laziness:</b> <span style="mso-spacerun: yes;"> </span>Most of us slowly and almost unwittingly enter the world of investing. Our first investment need is often an RRSP or TFSA account. Investors are typically directed to their bank or “advisor” to teach them how to manage their investments. <span style="mso-spacerun: yes;"> </span>Often young adults will learn important skills from their parents; however the financial world has changed so fast that we do not have a pool of knowledgeable parents to educate the young investors. The educational system does not teach money management and, in truth, most investors are unaware of the problems and thus of the need to become educated. Investors are focused on their jobs, family, and day to day life. The path of least resistance is to be a part of the current system and use the bank or fund company sales channel. This is a combination of laziness ( not getting ourselves educated about investing) and ignorance (not knowing the current process is a problem).</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">Governments are also a part of the ignorance problem. Rather than regulating the investment process the governments have chosen to allow the industries to regulate their selves. These “</span><a href="http://www.investopedia.com/terms/s/sro.asp#axzz1ibqGVF8a"><span style="color: blue; font-family: Calibri; font-size: large;">SRO</span></a><span style="font-family: Calibri; font-size: large;">’s” include the Investment Funds Institute of Canada (IFIC) and the Investment Dealers Association “IDA” whom have morphed the regulatory duties into the Investment Regulatory Organization of Canada </span><a href="http://www.investopedia.com/terms/i/investment-industry-regulatory-organization-of-canada-IIROC.asp#axzz1ibqGVF8a"><span style="color: blue; font-family: Calibri; font-size: large;">(IIROC)</span></a><span style="font-family: Calibri; font-size: large;">. In short, those who profit the most from unfair fees are the group the government allows to set their own rules and standards. The result of this has been a government who does not protect investors and who then actually looks to the industry SRO to provide guidance to the government on industry policy. An example of this collusion was the decision by the government of Ontario to exempt fund companies from disclosing the HST paid on mutual funds. The only possible purpose in doing so was to hide any information that could allow investors to determine their monthly fund fees. The government bought into the bizarre suggestion to exclude the information from statements and the industry benefits at the expense of the investor. </span><br />
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<span style="font-family: Calibri; font-size: large;">Currently we are seeing an even more egregious example of an industry run amok as the various levels of governments defer “investor education” programs to committees dominated by executives of financial firms who sell funds. Most people who understand the industry are left to shake their heads and mutter about the “wolf guarding the henhouse”. As for the government, they appear to be happy to defer to the industry in a way very similar to how the average investor defers to the mutual fund sales status quo. Governments are not being so much duplicitous as they are being ignorant and lazy. Why look for problems and solutions if investors are not making waves.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><b style="mso-bidi-font-weight: normal;">Business Strategy</b>: The fund executives are in the business to make profits for investment firms who employ them. Period! They are not in the business of providing advice, education, or regulatory oversight. Their business strategy, however, necessitates that they control the advice, education and regulatory processes that impact the fund industry. Their strategy has been to control the process from start to finish and create a closed loop. <span style="mso-spacerun: yes;"> </span>The industry controls the production of funds, the regulatory oversight, the distribution of funds, investor education, provides guidance on government policy decisions and sets the pricing of all services to the investor. It is a great business model and one that generates massive surplus profits for the fund industry.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><b style="mso-bidi-font-weight: normal;">On the Street Impact</b>: The impact of the strategy is felt directly by the investor. While most investors are not aware of the strategy they are very aware of the impact it has had on investors.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="font-size: large;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Canadians pay the highest fund fees in the world</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="font-size: large;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Canadians deal with “advisors” who are in fact licensed sales people and have no legal duty to put the client’s interests before their own. In actual practice advisor/salespeople clearly prioritize their own benefits ahead of their clients. For proof look only as far as the next point.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="font-size: large;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Over 80% of mutual fund sales people are NOT LICENSED to sell competing products such as low cost index funds that trade on the TSX. These funds are amongst the top performing funds every year and cost as little as a tenth of the cost of equivalent mutual funds.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="font-size: large;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Canadians buy a significant portion of their mutual funds with deferred sales charges. These charges are being banned in a number of countries (Britain, Australia) and are rarely sold in the U.S. where investors are much quicker to sue an advisor over improper advice. These fees are designed to lock an investor into a single mutual fund company for up to seven years with little or no corresponding benefit to the investor.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="font-size: large;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Canadians have no binding complaint process that allows for arbitration of investor complaints with multi-billion dollar financial firms. If a firm does not pay up the individual investor faces the daunting task of suing a firm that has the top securities lawyers on speed dial.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="font-size: large;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Canadian mutual fund statements and disclosures are amongst the worst in the world. Investors are not provided with monthly cost of fund fees, personal rates of investment return, nor proper benchmarking information.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="font-size: large;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-family: "Times New Roman"; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="font-family: Calibri;">Risk ranking of various mutual funds has been left to each individual fund company. In fact, the same fund can be rated at a different risk level by two different distributors at the same time. The acceptable risk rankings have no basis in quantitative analysis and thus are at best useless and at worst dangerous.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;">The above are only a few of the negative impacts we can attribute to the business strategy of Canada’s large fund firms. However, as any fund executive will tell you....<i style="mso-bidi-font-style: normal;">it’s not personal, it’s just business!</i></span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">As Canadians struggle to build their retirement nest eggs it should be clear that at least part of the problem for investors is the significant skimming of retirement funds by mutual fund companies and so-called advisers. In the real world the cost of the additional and excessive fund fee is reflected in delayed retirements, eroding retirement portfolios, improper retirement planning advice, and a general sense that the average Canadian cannot seem to get ahead.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;">Perhaps this is part of the issues that pushed some people to Occupy Wall Street! Add in the bank strategies on increasing consumer debt, excessive credit card fees, excessive chequing account fees and you begin to see a pattern of skimming that leaves the 99% with little to cover basic living expenses. Of course ignorance and laziness are somewhat self induced so we can solve these issues ourselves. <strong>However the solution will have to start at the ballot box because currently the fund firms hold all the trump cards!</strong></span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">Wow, that sounded more political than I intended! This blog does not take political stands but fortunately (or unfortunately in this case) all political parties currently bow to the financial firms with equal deference.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">Sois mike</span></div><span style="font-size: large;"><br />
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</div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-68574225759869424192011-12-29T15:52:00.001-05:002012-01-04T11:03:02.196-05:00Quick Hit on Index Linked GICs<div id="ie-warning" style="display: none;"><div id="ie-nag"><div class="s6of12 column ie9"> Drag our Leaf Icon above to your taskbar to bookmark TGAM in <span>Internet Explorer 9</span>. </div><div class="s2of12 column"><a href="http://windows.microsoft.com/en-CA/windows7/pin-a-website-to-your-taskbar" target="new">Show me how</a></div><div class="s2of12 column ie9"><a class="ie6-no-upgrade" href="http://www.blogger.com/">Please don't show me this again</a></div><div class="s2of12 column remind"><a class="remind-later" href="http://www.blogger.com/">Remind me later</a></div></div></div>I know I said my next blog would be on fund fees however I wanted to acknowledge a great article by John Heinzl in the Globe today. It fits into the investor education debate that is ongoing.<br />
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<strong><a href="http://www.theglobeandmail.com/globe-investor/investment-ideas/yield-hog/why-the-blue-chip-gic-isnt-a-blue-chip-investment/article2285633/">Why the Blue Chip GIC isn’t a blue chip investment</a></strong><br />
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<span style="font-family: Calibri;"><span style="background-color: lime;">Investor Education</span>: I noted a great article in the G&M today by John Heinzl. For those that do not follow John, he is one of the best writers when it comes to both understanding and explaining investment products and strategies. His topic was a follow-up on one he wrote when BMO introduced its unfortunate “Blue Chip GIC” product. John felt it was a product designed to heavily favour bank profits and was highly unlikely to be a great product for the clients of BMO who were sold this product. Note John made this call a year ago!</span><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">John had explained the basics of the product and how the structure was likely to work against clients expecting a reasonable return from a product offering “guarantee of principle” but little in the way of upside returns. Not surprisingly, the GIC paid investors a paltry 0.2% for a one year term. We thank John for the follow up article as it clearly shows not just that the product was a poor performer; but more importantly it shows how predictable the poor results were. John “forecast” the performance as opposed to merely stating it after the fact. Thanks John!</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">For investor advocates, John’s original comments were no surprise and the performance of the GIC was equally predictable. BMO is not alone in this cynical exploiting of investors through “index linked GICs”. TD bank also pushes staff to maximize the sales of these products and rewards those who do so. So does most every other bank in Canada. The marketing pitch is to play on the fear that markets are unpredictable and that investors should try to keep their money safe. Given the losses generated by mutual funds over the past few years, one would expect that many investors are ripe for this sales pitch. The reason the pitch works is based upon a few key investor attributes:</span></div><br />
<div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">1-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Most investors trust bank employees and do not realize that most bank employees do not understand how the actual investments work.</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">2-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Investors are not educated or trained to understand the full impact of the underlying terms and conditions on these complex products. What the investor hears is “GIC” and “guaranteed”. The belief is that any market gains will increase returns and any losses will be absorbed by the bank. Unfortunately that is not the case! The underlying terms were designed to minimize payouts such that even a positive average return on the underlying stocks would not necessarily generate a bonus. In effect, the game was tilted in favour of the bank.</span></div><br />
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">3-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">In general, the more complex the product, the larger the profit margin is for the bank. This suggests that the bank benefits from having both the staff and the client uninformed.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">With the banks all pretending to support investor education, this is a practical example of why you cannot believe the basic information provided by your trusted local banker. The issue is that the employee does as they are told/trained in the belief their employer would not treat customers unfairly. </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">The customer in turn trusts that the local bank employee would never do anything that would treat a loyal customer unfairly. In fact, a highly paid bank executive signed off on the product because it generates much higher bank profit than a conventional GIC....period! Client investment returns or “fairness” never enters the picture for the executive. So long as it is possible to market a scenario where the client might have done better with the “linked GIC” the bankers can sleep at night without acknowledging how unlikely a positive outcome is for most clients. If a client complains the banker will simply suggest the GIC was better than if the client had actually bought the stocks and lost much of their investment capital. Of course the problem with that answer is that <span style="color: red;">the client never intended to buy the underlying stock! They went to the bank to buy a simple GIC and were sold this crap instead!</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="color: red;">Beware bankers bearing gifts!<o:p></o:p></span></span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Mike</span></div><br />
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</div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com1tag:blogger.com,1999:blog-872609959597709892.post-14307723780259503302011-12-16T12:24:00.002-05:002011-12-18T11:58:56.222-05:00Why Mutual Funds are like Popcorn<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPANEJGh1hsQefgnjmu_hJy7y-LqUbryQ9_BUiTie1r-d0tK6EetOBy58eiP6NQeRBXpRX48z1IbhgSPwY6AXOsx5sHtj2y-S7WssP1zcBqv5WmsUNLY_9ZIp5TcfRNbLVxJ3qfyulkELs/s1600/popcorn.bmp" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPANEJGh1hsQefgnjmu_hJy7y-LqUbryQ9_BUiTie1r-d0tK6EetOBy58eiP6NQeRBXpRX48z1IbhgSPwY6AXOsx5sHtj2y-S7WssP1zcBqv5WmsUNLY_9ZIp5TcfRNbLVxJ3qfyulkELs/s1600/popcorn.bmp" /></a><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: Calibri;"><span style="font-size: large;"><span style="mso-spacerun: yes;"> </span>Why Mutual Funds are like Popcorn!<o:p></o:p></span></span></b></div><span style="font-size: large;"><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">The Canadian mutual fund industry runs on the theory that Canadian investors will voluntarily pay annual fees to mutual fund salespeople in return for selling a mutual fund and providing advice. The main players in this business are a) the investor, b) the mutual fund company, and c) the salesperson.</span></div><span style="font-family: Calibri; font-size: large;">The key to implementing this strategy has been to ensure that the investor is not provided with either a minimum service standard for the “advice” component nor a summary of the fees being paid for the “advice” service.</span><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">If we focus on the retail investor; the investor is paying an annual </span><a href="http://www.investopedia.com/terms/e/expenseratio.asp#axzz1gdL1T3Cn"><span style="color: blue; font-family: Calibri; font-size: large;">MER</span></a><span style="font-family: Calibri; font-size: large;"> which covers everybody’s expenses and profits. <b style="mso-bidi-font-weight: normal;">In fact, the investor is the only source of money and the only person who is not guaranteed a profit every year. </b>As such, we can conclude the embedded cost of the “advice” is equal to the fee paid by the investor less all expenses involved in fund manufacturing and sales.</span></div><span style="font-size: large;"><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><b style="mso-bidi-font-weight: normal;">Formula</b>: Investor Cost is defined as: MER= manufacturing cost + sales cost + advice costs</span></span></div><span style="font-size: large;"><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><b style="mso-bidi-font-weight: normal;">The Advice</b>: When fund companies talk about “advice” being provided they do not attempt to explain why the advice would need to be facilitated through the fund company’s salesman. Since fund companies are not promoted as being in the business of providing advice, it would seem that the advice component would be a distraction from the core business of managing money. Fund companies do have expertise in managing investments and that is where they are most efficient. In many cases the fund company will outsource the “advice” component to an independent salesperson. These salespeople generally call themselves “financial planners” or “advisors”, although these titles mean nothing specific in terms of knowledge. The “advice” component is non-defined in terms of either quality or frequency of the advice investors should receive. As such the salesperson does not need to meet any standard for advice nor confirm any advice has been provided in order to collect the advice fee. In fact, the commission for providing the advice is often paid to the salesperson up front before any follow up advice service would be expected to take place.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><b style="mso-bidi-font-weight: normal;">COGS</b>: Fund companies are in the manufacturing business. As such the fund companies are fully aware of the accounting term “COGS” or cost of goods sold. The COGS for a fund company is likely in the order of 0.4-0.5% based upon the wholesale pricing that is available. Some would argue the number is more likely between 0.2-0.4% but let’s assume the higher number to be conservative. Adding a margin for strong profits, the manufacturing company can thrive on a <b style="mso-bidi-font-weight: normal;">price of 0.7</b>%. This is on the high side of the estimated cost range and provides a profit margin of 75%-100%.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><span style="mso-spacerun: yes;"> </span>Having solved for what appears to be a generous but reasonable manufacturing cost, the formula can be updated as below:</span></span></div><span style="font-size: large;"><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;"><strong><span style="font-size: large;">Investor Costs (MER) = manufacturing cost + sales cost + advice cost<o:p></o:p></span></strong></span></span></div><span style="font-size: large;"><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;"><span style="font-size: large;"><span style="mso-tab-count: 2;"> </span><span style="mso-tab-count: 1;"> </span>= 0.7% + sales costs +advice costs<o:p></o:p></span></span></span></div><span style="font-size: large;"><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><b style="mso-bidi-font-weight: normal;">Sales</b>: Mutual fund manufacturers also need to sell their product. The cost of the sales process varies based upon the sales channel(s) the company uses to distribute their funds. Some companies such as Steadyhand sell manufactured products directly to investors. As such, a large investor can achieve MERs as low as 0.77% for a Canadian equity fund and just below 1% on foreign equity funds. Steadyhand is not a manufacturer, but is a low cost distributor of custom funds they create through investment management firms who provide wholesale services to Steadyhand. Steadyhand does not utilize an “advisor” sales force, but handles sales via phone and internet which is lower cost and quite efficient.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">Alternatively, bank mutual funds are sold by a “captive” sales channel. The bank’s employees are most often salaried and the salary cost is spread across multiple product lines. This sales channel is low cost and efficient as the banks’ leverage internet sales, discount brokerage sales and branch staff sales. TD bank offers a balanced mutual fund through its e-series for 1.28%. The e-series does not provide an advice component so the fee is comparable to Steadyhand. The Steadyhand pricing reflects a small focused sales channel approach, while TD represents a large multi-channel sales approach, neither of which is advice focused.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">The combined manufacturing and sales channel costs for Steadyhand <span style="mso-spacerun: yes;"> </span>are assumed to be mid way between the lowest Canadian and foreign equity MERs. Subtracting the 0.7% manufacturing cost leaves a sales channel cost of 0.14% ( 0.84 - 0.7 = 0.14%). <span style="mso-spacerun: yes;"> </span>TD sales costs using the balanced fund as the average would be 0.58% (1.28-0.7= 0.58%). Let’s assume the sales channel expense of a fund company is on the higher end of the range provided by the two examples, and we can set sales channel expenses at 0.5%. Our formula now looks like this:</span><span style="font-size: large;"> </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><strong><span style="font-size: large;"><span style="line-height: 115%;">Investor Costs <span style="mso-tab-count: 1;"> </span>= 0.7 + 0.5 + advice costs</span>.</span></strong></span><span style="font-size: large;"> </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">Given the average MER for Canadian equity funds is approximately 2.4%, the formula can be solved as follows:</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;"><strong><span style="font-size: large;">Investor costs= manufacturing cost + sales cost + advice cost</span></strong></span></span><br />
<span style="font-size: large;"> </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;"><span style="font-size: large;">2.4% = 0.7% + 0.5% +advice cost</span></span></span><br />
<span style="font-size: large;"> </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri; font-size: large;"><strong>Advice cost= 2.4% - 0.7% -0.5% = 1.2%</strong></span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="color: red;"><span style="font-family: Calibri;"><span style="font-size: large;">The advice component is thus valued at 1.2%. That is half the cost of a typical equity fund MER in Canada. In effect, if this is correct, fund companies are in the primary business of selling advice since it accounts for the largest component of their MER fee.</span></span></span><span style="font-size: large;"> </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;"><strong>U.S. Comparison</strong>: If we were to use an example of typical U.S. mutual fund fees the formula appears to work reasonably well. Based upon an average MER of 1.4% for US equity mutual funds the formula looks like this:</span><span style="font-size: large;"> </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="line-height: 115%;"><span style="font-family: Calibri;"><span style="font-size: large;">Investor costs= manufacturing cost + sales cost + advice cost</span></span></span><span style="font-size: large;"> </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;">1.4% = 0.7% + 0.5 % +<strong> 0.2%</strong></span></span><span style="font-size: large;"> </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">The advice cost is 0.2% and the fund companies are definitely in the primary business of manufacturing and selling investment funds. If we assume U.S. funds have a lower cost environment and economies of scale, the advice component may be as high as 0.3%-0.4%, but it is still the smaller component of the various fees in our formula. Regarding economies of scale, the Canadian fund firms manage hundreds of billions of dollars in mutual funds yet the largest firms such as Investors Group have amongst the highest fees. This suggests economies of scale are not passed down the line by fund companies in Canada.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><b style="mso-bidi-font-weight: normal;">Popcorn Theory</b>: A similar approach can be used to look at the movie theatre business. This comparison would provide a glimpse of what may be wrong with the conclusion that fund companies are really charging fees for “advice” as opposed to investment skills. </span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">When my wife and I head to the theatre it is for the express purpose of seeing a movie. We understand the evening will cost a set amount of money and we are prepared to spend accordingly. We do not divide the cost of the event into “movie cost” and “snack costs”. We understand we will have popcorn, a soft drink and we will watch the movie and it will cost around $30.00 for the evening.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">The theatre owner, however, does care how we spend our money. Movie theatres make extremely large profits from selling popcorn. Expenses in preparing popcorn are very low, popcorn profit margins are very high, and little skill is needed to train staff. The actual movies by contrast are expensive to make and thus expensive for a theatre to purchase. Movies can be big winners or they can be expensive duds for the theatre owner. On the surface, it would appear the theatre owner would be better off if they focused on selling popcorn and not on the low margin movie component of the business. However, here is the catch: <strong>in real life nobody would travel to a theatre just to buy popcorn.</strong> The movie is the sizzle that creates the opportunity to sell the popcorn! <em><span style="color: red;">Without the movie there is no opportunity to distribute the extremely profitable popcorn!</span></em></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="font-size: large;"><span style="mso-spacerun: yes;"> </span>Applying the <strong>popcorn theory</strong> to the investment business; few investors would buy mutual funds without the confidence they were getting valuable investment and planning advice. In essence, investors do not seek mutual funds, they seek advice!</span></span><br />
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<span style="font-family: Calibri;"><span style="font-size: large;"> The fund companies know that the "advice" component attracts investors who otherwise would not purchase mutual funds. The "advice" performs the same function as the "movie" does.... it attracts clients who can then be sold a very profitable secondary product. In the case of investors, the very profitable secondary product is the mutual fund.</span></span><br />
<span style="font-family: Calibri;"><span style="font-size: large;"> Further proof that this comparison is correct is found in the high volume of expensive mutual funds sold with an advice commission, versus the much smaller sales volume of lower cost, direct sale mutual funds. <strong><u>Investors overpay for the mutual fund to get the perceived advice they are seeking.</u></strong> The main difference is moviegoers know what the popcorn costs them while investors face a hidden "advice fee" buried in the MER costs.</span></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri; font-size: large;">In the next blog we will delve a little deeper into why the Canadian mutual fund fee model does not make sense and how that contributes to Canada's exorbitant mutual fund fees. </span></div><span style="font-family: Calibri; font-size: large;">mike</span>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-61863196333929633512011-12-04T15:46:00.002-05:002011-12-05T10:56:22.436-05:00A discussion on Risk<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8kp4NHqimOJ_Ear36NN6JtXSVCocCAX93oD8_fKJ9pQggLF5P1x1BNciJ_2UVPVa1-i1OvH2JlH9FGS_I1vUF1K19Q3nuf9P2CqYTEbUN_wLfFIHxGS01trnuurDUz4z888c8uiozG8dA/s1600/MP900342073.JPG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8kp4NHqimOJ_Ear36NN6JtXSVCocCAX93oD8_fKJ9pQggLF5P1x1BNciJ_2UVPVa1-i1OvH2JlH9FGS_I1vUF1K19Q3nuf9P2CqYTEbUN_wLfFIHxGS01trnuurDUz4z888c8uiozG8dA/s320/MP900342073.JPG" width="228" /></a></div><span style="font-family: Calibri;">RISK: Deviation from an Expected Outcome!</span><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">The current economic climate is the perfect backdrop to an examination of the “four letter word” most likely to scare an investor today! <span style="color: red;">Risk </span>is the most misunderstood word in investing and yet we all seem to believe we know what the word means in most every other context. “Drink & Drive” and you risk injury, death, increased insurance rates, public condemnation and potential fine and jail time. If you do not wear a hard hat on a construction site you risk injury or death. These seem obvious as well they should. So why is it that investing is different? Well there is one very significant reason for this: in the scenarios listed above you cannot imagine a potential profit that would make the risk worthwhile. Is saving a taxi fare worth a death; is saving the cost of a hard hat worth being paralyzed in a construction accident? Of course not! Attaching the concept to “reward” to “risk” causes emotions to become involved. Add a thousand different opinions on “market risk” from a thousand talking heads and it makes your head hurt to even try to quantify risk. </span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Investing is one of only a very few areas where “risk” is directly associated with “reward”. In economic theory any investment return greater than that of a “90 day treasury bill” is considered “return on risk”. Investment managers measure “risk adjusted return” on a portfolio or security. Investors often act as if the expression “no risk, no reward” was a balanced equation. In fact, taking risk can enhance returns but taking risk does not ensure enhanced returns. <span style="mso-spacerun: yes;"> </span>MF Global Holdings is a hedge fund that most recently learnt this tough lesson when it invested in “high risk” Euro bonds and lost billions in a few short weeks. The lesson here is that professional investors quite often ignore risk and the results can be devastating....<span style="mso-spacerun: yes;"> </span>not for the investment manager, but for the investors who provided the money! Risk is NOT owned by the “manager” but by those who provide the capital!</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Risks are wide and varied when it comes to investments. In fact, there are so many different risks that the mutual fund industry has undertaken a strategy of hiding risk from the investor rather than spend a ton of time explaining the risks. The fund investment industry has lobbied hard to ensure the Point of Sale Disclosure document will report only a singular risk factor to investors. This type of misleading information is based upon the widely held belief by fund executives that investors are too dumb to understand more than one simple thought at a time. Unfortunately the securities administrators who vet the POS document have taken a pro-fund company approach and ignored investor needs. This is not surprising since the securities administrators are a cozy group of insiders who spend significant time with fund executives and next to no time with normal investors.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: Calibri;">Risk Factors: The risks listed below are a small sample of what risks lie out there for investors. It is not in any order of importance but is meant to provoke questions when investors are looking to buy securities/funds.<o:p></o:p></span></b></div><br />
<div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">Price volatility: The amount a fund/security varies in price is a measure of the swings you might expect in the value of a fund you invest in. In short, if a fund has a history of values rising or falling by as much as 30% in a given period, then that fund has twice the risk of losses compared to a fund that tends to fluctuate by 15% up or down in the same period. The typical fluctuation for each security or fund is measured by the “</span><a href="http://bing.search.sympatico.ca/?q=standard%20deviation%20investopedia&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">standard deviation</span></a><span style="font-family: Calibri;">” of returns and is generally represented by a “</span><a href="http://bing.search.sympatico.ca/?q=standard%20deviation%20investopedia&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">bell curve”</span></a><span style="font-family: Calibri;"> of probable outcomes. Most of us will remember bell curves being used to standardize test results so that a predetermined average outcome is obtained on test scores. This approach to measuring risk makes a ton of sense if you ignore the warning that comes with every fund prospectus that “past performance is not indicative of future performance”. A simple way to express the short comings of this approach is to look at the past experience of a turkey in the year prior to Thanksgiving. Every morning the farmer feeds and cares for turkey so in the days leading up to Thanksgiving, the turkey would see the farmer as being of no risk to the turkey! For 364 days the performance of the Farmer shows no variance! Like the turkey discovers on day 365, a lot can change in a day even if past history has not prepared us for the change. However, as a general rule it is good to know the volatility of a fund before you invest so long as you do not look at the information in isolation and suddenly become a turkey for the slaughter one day.</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 54pt; mso-add-space: auto; mso-list: l3 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">a-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;"><span style="mso-spacerun: yes;"> </span>A subset of this volatility risk is “event risk”. Like Thanksgiving to the turkey, certain events occur which alter the volatility measure for a security/fund. Since a 1 yr, 3 yr, or 5 yr horizon will not likely capture all the possible or even likely “events”, it is a fact that risk will be understated. This chronic understatement is exposed when a </span><a href="http://bing.search.sympatico.ca/?q=standard%20deviation%20investopedia&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">black swan</span></a><span style="font-family: Calibri;"> or flat tail event occurs. For example, a tsunami wipes out a Japanese nuclear plant and uranium producers see their stock values plummet as nuclear energy is exposed as having more risk than suggested by the </span><a href="http://bing.search.sympatico.ca/?q=standard%20deviation%20investopedia&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">standard deviation</span></a><span style="font-family: Calibri;"> in price volatility. While advisor/salespeople will shrug and say you cannot foresee such an event, in fact tsunamis in Japan are a well known fact and both Chernobyl and Three Mile Island accidents had the same effect on uranium markets. These events are plausible but hard to predict accurately over the short term but not over the long term. Most time periods used for standard deviation are very short term and in many cases the time period is manipulated to provide a desired outcome.</span></div><br />
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<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">Market Risk: Market risk is considered a systemic risk and thus cannot be easily avoided. <span style="mso-spacerun: yes;"> </span>In recent times we have learnt a lesson on the importance of </span><a href="http://bing.search.sympatico.ca/?q=standard%20deviation%20investopedia&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">correlations</span></a><span style="font-family: Calibri;">. Prior to 2008 we had forgotten that in a terrible recession all securities can drop together and the past price volatility of securities means little or nothing. While diversification can add value in many instances; when the whole market decides to move in unison even the best past price history or quality business model can get trashed. Contrary to market advisors, sometimes a </span><a href="http://bing.search.sympatico.ca/?q=standard%20deviation%20investopedia&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">falling knife</span></a><span style="font-family: Calibri;"> is dangerous and not a buying opportunity. Interestingly, a group of wise money managers have created a strategy around bucking the market as ‘contrarian investors”. Equally, a different set of wise money managers have created a strategy of buying into market movements as “momentum investors”. Typically one side will guess right and claim they are truly wise and the other side will fail and bide their time until they eventually guess right and can reclaim the status of “wise investors”. Either way, market movement is a real risk for all investors.</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 54pt; mso-add-space: auto; mso-list: l2 level1 lfo2; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">a-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">“Market risk” is very hard to measure in the short term. A number of managers claim they have the secret formula to understanding market moves and they provide advice based upon “market timing”. This is generally a macro strategy that claims to understand future market moves based upon a series of trends or analytics. In fact, given the number of salespeople who perpetually recommend buying securities in every market it is very likely that market timing is a sales strategy more often than an investment strategy. Guess wrong and the losses can be huge.</span></div><br />
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<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">Political Risk: Those Canadians that piled money into the expanding income trust markets will know exactly what I mean by political risk. One simple regulatory change can wipe billions in supposed value from the markets. I say “supposed value” because in the case of income trusts, the value being created was not a reflection of a business strategy or performance, but was rather a combination of business value plus a regulatory tax value. Unfortunately investors were sold on the notion that the price was a reflection of simple business value. Something every analyst knew was false. When the tax laws changed many investors claimed the government caused the market losses. In fact the government created the value through poor tax laws and corrected the values by fixing the tax loophole. The decision was clearly political but the risk was financial. Common political risks include countries such as Venezuela nationalizing oil assets or the Congo extorting funds from mining companies. These risks tend to appear suddenly and cause rapid drops in stock/fund prices. Some political events are hard to predict such as the collapse of a government while others are well known risks such as war in the Middle East disrupting oil prices. A more recent political risk was the failure of the U.S. to approve the Keystone XL Pipeline expansion which caused shares in pipeline companies to drop. </span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 54pt; mso-add-space: auto; mso-list: l0 level1 lfo4; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">a-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">A subset of political risk is “country risk”. Certain countries are prone to a combination of regulatory risk, government changes, civil wars and trade embargos that affect securities issued in the country. A rash of kidnappings in a country can result in companies closing down foreign operations and losing revenue streams vital to the company. Whole regions can be affected in some areas such as the Middle East, when a single country has a significant political or military event.</span></div><br />
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<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">Advisor Risk: </span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">The number one risk to your investment success and often your retirement success is<span style="mso-spacerun: yes;"> </span>“advisor risk”. The vast majority of “advisors” are using a title they have not earned and should not be using. Most people who sell securities are licensed as “sales representatives” but utilize the terms “advisor” or “planner” to self describe their functions. In fact, the vast majority of sales people are licensed ONLY to sell Mutual Funds. As such they can sell you a fund managed by somebody else, and typically can offer very basic financial advice. Obtaining a license to sell Mutual Funds is quite easy and requires very little additional education on either financial planning or portfolio management. The typical “planner” is trained by a fund company on how to “sell” funds. The complexity in the job is around issues such as maximizing commission revenue, sales pitches to convince investors that high MER fees are acceptable and that deferred sales penalties are a good way to purchase funds. The fact is that the business is taught to sales people by the companies who benefit from commissions the most. As such many salespeople actually do not understand the damage they can do by selling high cost funds or complex funds. Investors learned this lesson the hard way when the U.S. asset backed commercial paper market became illiquid in 2008. Sales people had unwittingly sold funds holding ABCP as no-risk money market funds or fixed income products. The fact is, that most salespeople are not qualified to make the decision on what was a safe fund and they just sold what their fund firms told them to! Combine that with the fact most are not licensed to sell<span style="mso-spacerun: yes;"> </span>alternative products such as exchange traded funds, stocks or bonds, and you can see how the “advisor”/salesperson<span style="mso-spacerun: yes;"> </span>has no choice but to believe that the funds they sell are a great solution for every client.</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">Advisor performance is difficult to determine as, unlike investment counselling firms, the salespeople who sell funds or non-discretionary stocks and bonds do not provide audited performance results for their clients. Typically only “investment counsellors” working on a discretionary basis can do so.<span style="mso-spacerun: yes;"> </span>So basically investors choose an advisor based upon the recommendation of other uninformed investors. While that sounds harsh, the other investors are uninformed because the mutual fund firms refuse to inform them. As an example fund firms generally refuse to provide:</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l1 level1 lfo3; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">A clear rate of return for each investor every quarter or year (the return of the fund rarely equals the return received by the investor, which studies show to be consistently lower than the funds stated returns)</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l1 level1 lfo3; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">A measure of how the fund performed against the normal benchmarks used by investment managers (ex. how did your Canadian Equity fund perform against the TSX 60 index?)</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l1 level1 lfo3; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">A monthly, quarterly or annual summary of fees paid to the fund by the investor</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l1 level1 lfo3; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">A similar summary of commissions paid from the MER to the sales person each period</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l1 level1 lfo3; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">An accurate asset allocation for the portfolios held by a fund investor ( mutual funds are not an asset class despite what many statements claim)</span></div><br />
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<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">Interest Rate Risk:<span style="mso-spacerun: yes;"> </span>The values of many securities are sensitive to changes in interest rates. The classic example is Fixed Income securities such as bonds. Once a bond has a set coupon rate (the percent paid out to investors each year), any increase in current interest rates will cause bond values to drop as new bond purchasers will seek the higher current coupon rates/ payouts that are available. Any decrease in current interest rates will cause bond values to rise as investors are willing to pay a bonus rather than accept the lower coupon rates that are the new norm. This risk is measured by “</span><a href="http://bing.search.sympatico.ca/?q=standard%20deviation%20investopedia&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">duration</span></a><span style="font-family: Calibri;">” and typically the longer the term of a bond the higher the duration measure is on a bond. Other securities such as preferred shares will often reflect the same general fluctuations since they trade predominantly on the payout levels fixed to the security. On a more macro level, when interest rates are higher or equity prices are extremely volatile, money may move out of the equity markets and into the generally less volatile fixed income markets. In today’s market we are hearing the terms “risk-on” and “risk-off” to reflect capital flows into and out of equity markets respectively. With current interest rates at historic lows, the risk of a significant interest rate increase makes long term bonds susceptible to greater price risk.</span></div><br />
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<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">Management Risk: Funds are generally managed by a professional portfolio manager. The manager or management team will make the crucial decisions on when and what to purchase in a fund. The track record of the fund manager is often the major selling feature of a fund. When the key decision maker decides to leave a fund the investment decisions are made by a new fund manager. Given the abilities of the fund managers to attract investors, the fund can often lose a large number of investors if the manager changes. This can require funds to sell securities at a bad time and incur losses. Also, the track record of the fund is used in the marketing material even though the new manager has no ownership of the track record. What often makes this even worse is that sales people lock investors into a deferred sales penalty that can prevent them from following the fund manager that they were told was the reason the original investment was made.</span></div><br />
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<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">Fraud: the risk of an investor being defrauded is higher than it should be in Canada. The reason is that the Canadian securities regulators are ineffective. Billion dollar frauds such as Bre-X and Nortel occur with no significant action by the regulators. Numerous frauds have occurred in Canada over the past decade and many are by firms who operate with no regulatory oversight right under the noses of our watchdogs. The best an investor can do is to confirm the licensing of the investment firm with a regulatory body such as IIROC or IFIC or the OSC. The most recent issue suggesting fraud is the Sino-Forest debacle which happened while the OSC was napping. Expect more frauds until some regulatory action is taken to curb the profits of the fraudsters.</span></div><br />
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<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt; mso-add-space: auto;"><span style="font-family: Calibri;">Foreign Exchange Risk: Investors who buy securities in a currency that is different than the currency they use to fund the investment will have foreign exchange risk. In the case of Europe we can see the high risk currently associated with the value of the Euro versus the Canadian Dollar. If I buy a European security denominated in Euros and the Euro drops 5% against the Canadian dollar, then my investment loss on selling the security at the same price I bought it is 5% plus any sales fees. Investors have seen the Canadian dollar fluctuate strongly against the American dollar. A share bought when the Canadian dollar was worth $0.67 required almost $1.5 CDN dollars to buy one US dollar worth of shares. If it was sold when the Canadian dollar was at par the same share returned only $1 CDN dollar. Foreign exchange risk can be removed with currency hedging strategies but it does have a cost in increased expenses for the hedging.</span></div><br />
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<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt; mso-add-space: auto;"><span style="font-family: Calibri;">Many investors take a simple view of risk and thus underestimate the consequences. This tends to show up in portfolios in a number of predictable ways: too much equity, too much low quality fixed income products (high yield), too many complex securities, and fees which are far higher than they should be. Many of these risks should be dealt with by a competent investment sales person. Unfortunately there are very few quality investment sales people in the industry and even fewer who do not have a conflict of interest due to the commission structure used in Canada. The above list of risks is not exhaustive. Issues around liquidity and leveraging risk are two more examples of risks that come to mind when I reflect on portfolios I have reviewed. It is difficult to make a comprehensive list that covers everything. In fact it would be overwhelming to read such a risk. In ending I will just say “risk needs to be understood and managed not totally avoided”. It is never the bus you are waiting for that runs you over, it is the one you did not see coming! Demand your sales person better understand the risks in what they sell and ask questions until you are satisfied you understand the whole picture.</span></div>sois mike<br />
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p.s. Sorry for the long delay between posts!Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com3tag:blogger.com,1999:blog-872609959597709892.post-12433958828073741692011-08-09T14:53:00.000-04:002011-08-09T14:53:23.003-04:00NEWSFLASH OBSI In Critical Condition <span style="font-family: Calibri;"><strong><em> <span style="font-size: large;">Canada: Banks Stomp OBSI to Near Death</span></em></strong></span><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRMHl1LMGlhG_0nk1kfmU7m9NrfRPpo5qlPtflbEZPtC1Ex9qtCaa0LtSCsACAcU661q8H8-bMo73HzEZ6Z-N-w_6CrhUdsCVhBa52FzcyRHi9KFOgXsRYgqfnzY4Tvd4IwLGilLwlTSP1/s1600/hospital.JPG" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRMHl1LMGlhG_0nk1kfmU7m9NrfRPpo5qlPtflbEZPtC1Ex9qtCaa0LtSCsACAcU661q8H8-bMo73HzEZ6Z-N-w_6CrhUdsCVhBa52FzcyRHi9KFOgXsRYgqfnzY4Tvd4IwLGilLwlTSP1/s320/hospital.JPG" width="250" /></a><span style="font-family: Calibri; font-size: large;">“In a shocking news development, we get word that a gang of extremely large, powerful and petulant banks have stomped the current Ombudsman for Investments to near death”!</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">In investigating the disturbing allegations we, like most Canadians, are confused as to why such large and powerful beasts would suddenly turn on such a small, frail, and youthful position. </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">For those requiring more background, the </span><a href="http://bing.search.sympatico.ca/?q=obsi&mkt=en-ca&setLang=en-CA"><span style="color: blue; font-family: Calibri;">OBSI</span></a><span style="font-family: Calibri;"> is the “ombudsman for banking services and investments”. This position was formed in the late 1990s when rumours were heard about a rampaging group of banks beating up small business owners and stealing their lunch money. No charges were laid as the surviving small business owners were hesitant to risk future lunch money. In 2002 the OBSI added the investment industry to its mandate; attempting to provide fair resolution to small retail investors who wondered how their current lunch money and future lunch reserves (RRSPs) had seemingly disappeared from their investment accounts. Of course many of these nest eggs were “prudently” invested by the gorillas in the Investment industry including of course the bank gang.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Many speculate that adding the investment bullies to the mandate of the ombudsman was short-sighted. Like a British police constable, the ombudsman carries no weapons when confronting these wild marauding gangs. Apparently the governments of the day felt that moral suasion and a proper upbringing would keep the gangs in line. Unfortunately, it would appear that power and greed have tilted the scale away from any fear of public condemnation. The large powerful bank investment firms appear to actually believe that whatever they do is always correct and any opposition is to be immediately crushed!</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"> In fairness, it appears that the ombudsman did not even get his weapon (public disclosure) out of his holster before he was set upon. Despite clear warnings of the dangers, the ombudsman actually thought he was a respected friend of the gangs and appears to have walked into the back alley willingly and without back-up. <span style="mso-spacerun: yes;"> </span>One can only wonder at his surprise when the organized criticisms began raining down on his unprotected skull. Early word from investor advocates familiar with the case is that the ombudsman was guilty of having his own opinion on both the veracity of the banks documents and the claims made by the banks commissioned sales forces. Indeed, some have actually charged the ombudsman with talking to investors who lost their savings and in several radical cases, believing the word of a lowly common client over that of the banks commissioned sales person.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Medical staff tells us it will be some time before we know if the ombudsman will survive his injuries. While the powerless neighbourhood watch (investor advocates) keep a vigil at the hospital bedside of the ombudsman; the power, wealth and sheer overpowering influence of the gangs continues to threaten any recovery. Amid rumours that the gangs are looking at appointing their own “gang controlled” ombudsman to fill the void they are attempting to create; government and regulatory officials appear to be keeping a very low profile. Apparently the gang is so powerful even the government is leery of challenging their tantrum.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Back to you in the mainstream media for our next follow up on this troubling story......</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">soismike</span></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-22976483029709088532011-07-29T12:19:00.000-04:002011-07-29T12:19:52.545-04:00Why Canadian Fund Investors are Confused<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidXdgeIJ7cWPzn3AW6ryweZC-K9DFXZib0yTx1N4v0Ki2mCFfSdP1qr_7po3G5-J2tTiyVuDGzADnQqFUhqwzrlQm0n85m6vUGiOlRlHwryVm2MMyPVWdk2oCIKBmIrAkjBhcF7XNFrGZ4/s1600/lighthouse.bmp" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidXdgeIJ7cWPzn3AW6ryweZC-K9DFXZib0yTx1N4v0Ki2mCFfSdP1qr_7po3G5-J2tTiyVuDGzADnQqFUhqwzrlQm0n85m6vUGiOlRlHwryVm2MMyPVWdk2oCIKBmIrAkjBhcF7XNFrGZ4/s1600/lighthouse.bmp" /></a><span style="font-family: Calibri;">Canadian fund owners have every reason to be confused.....and it is likely to be getting worse not better! The average investor often makes the assumption that they just don’t have the time to sort things out, when in fact the industry is ensuring the investor does NOT sort things out. The basic information required by investors is either completely lacking or is provided in a format that cannot or will not be understood by investors.</span><br />
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<div class="MsoListParagraphCxSpFirst" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Ask why we pay higher fees on Mutual Funds than other countries and you get a resigned shrug of the shoulders. Ask the fund companies and they will assure you 1% and 3% are the same fee really! (Canada ranks last in fund fees on virtually every international study)</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Ask why salespeople who sell funds are called “advisors” and not “salespeople” and you get a shrug. (Industry lobbyists pushed for changes to use other terms in regulatory requirements and the salespeople call themselves "advisors" which means nothing)</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Ask why so many Canadian investors purchase funds on a deferred sales charge basis and you get a funny look, like “what is that?” from the investor who has bought the punitive </span><a href="http://www.investopedia.com/terms/d/deferred-load.asp"><span style="color: blue; font-family: Calibri;">DSC</span></a><span style="font-family: Calibri;"> option of a fund. (check your statement for initials such as DSC, or BEL beside your fund name; some countries just regulate there can be no DSC fees, which solves the problem)</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Ask how much an investor is paying each month, quarter, or year to have their funds managed and the investor shrugs. Even the GST/HST fees are hidden for some reason? (government complicity allows fund firms to hide HST fees so investors cannot calculate their MER fees)</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Ask how a fund can lose money and yet still issue tax slips for dividends, capital gains, and interest supposedly received by the investor, and you get a shrug.</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;"><span style="mso-spacerun: yes;"> </span>Ask what the annual rate of return on an investor’s portfolio is and you get a shrug. (funds advertise their performance when it suits them but will not tell you your fund performance....can you guess why?)</span></div><br />
<div class="MsoListParagraphCxSpMiddle" style="margin: 0cm 0cm 0pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Ask how you’re fund has performed against the relative benchmark for the last month, quarter, year etc, and you will get a shrug. (<a href="http://financialedge.investopedia.com/financial-edge/0210/Active-Managers-Market-Beating-Claims-Debunked.aspx">SPIVA</a> reports consistently show funds perform very poorly against passive index strategies)</span></div><br />
<div class="MsoListParagraphCxSpLast" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Ask how a <a href="http://www.investopedia.com/terms/b/balancedfund.asp">balanced fund</a> can be called “balanced” when it rarely is a 50%/50% split between equity and fixed income and almost always holds more equity holdings. Many investors actually believe balanced means “equally balanced”! (International rules define the amount of allowable asset mix in a fund that is balanced)</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 18pt;"><span style="font-family: Calibri;">....as you can see the list of reasons to be confused can be quite high for a typical Canadian trying to invest their RRSP and/or TFSA into something paying more than 0.10% annual interest. Most Canadian investors wrongly blame themselves. Their thought process is that “they must be too busy to understand all the information they get”, or perhaps “they just do not have the interest or aptitude for investing”. In fact, the real reason investors do not comprehend answers to the above concerns is because the information is being withheld by the manufacturers and sales people. That’s right; information is not unknown to the fund firms and sales people. It is simply withheld from the paying client! Apparently we are too “simple” to understand the information or explanations. </span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 18pt;"><span style="font-family: Calibri;">In fact the fund industry has a policy of ensuring the language in fund information documents does not exceed the comprehension level of a child in grade six! No, I could not make that up folks! This is official policy! (</span><a href="http://www.osc.gov.on.ca/documents/en/Securities-Category8-Comments/com_20091014_81-101_delaurentiisj.pdf"><span style="color: blue; font-family: Calibri;">National Instrument 81-101</span></a><span style="font-family: Calibri;">; </span><span><span style="color: black; font-family: "Arial","sans-serif";">Section 4.1 (3) (f) requires the document not to exceed a </span><strong>grade 6</strong></span><span class="st1"><span style="color: black; font-family: "Arial","sans-serif";"> reading level on <b>...).<o:p></o:p></b></span></span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 18pt;"><span class="st1"><b><span style="color: black; font-family: "Arial","sans-serif";">So, why do I say it is getting worse? </span></b></span><span class="st1"><span style="color: black; font-family: "Arial","sans-serif"; mso-bidi-font-weight: bold;"><span style="mso-spacerun: yes;"> </span>While foreign securities regulators continue to advance the requirements for transparency, Canadian regulators continue to lose ground with newer and dumber approaches to fund disclosures! The next blog will discuss the new “risk” disclosure approach recommended for Canadian funds. It is misguided, misleading, and another fund industry sham supported by what appears to be a totally out of touch and disinterested regulatory body! Here is a clue to how bad this new risk disclosure is.....the same fund manager managing two identical versions of the same fund can have the <i style="mso-bidi-font-style: normal;">identical funds</i> ranked at two different risk levels depending on who is sponsoring the fund. Apparently, risk is just a state of mind!<o:p></o:p></span></span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 18pt;"><span class="st1"><b><span style="color: black; font-family: "Arial","sans-serif";">Sois mike</span></b></span></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-64501721501007229232011-07-09T13:29:00.000-04:002011-07-09T13:29:31.312-04:00TRUST BUT VERIFY<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZxrZWQZ_eOQrnKdb9qfrtisVmFqWkM3s4729vigNn5SDOoXoGQRY591aspEjXMX2vBQlx9JzadrbFhsOfdrxqEX3v-pE20jlwjBlD3Y0OeWdLUWwz1MwHeV2m5igNdLMQBeI22Z3zujYa/s1600/coin.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="212" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZxrZWQZ_eOQrnKdb9qfrtisVmFqWkM3s4729vigNn5SDOoXoGQRY591aspEjXMX2vBQlx9JzadrbFhsOfdrxqEX3v-pE20jlwjBlD3Y0OeWdLUWwz1MwHeV2m5igNdLMQBeI22Z3zujYa/s320/coin.jpg" width="320" /></a></div><span style="background-color: white; color: blue; font-family: Calibri; font-size: large;"><strong>Is the Truth Good Enough? I think not!</strong></span><br />
<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">One of the great challenges for all investors (and especially DIY investors) is determining what information you should accept as truthful and valid. All information is provided from a specific perspective by the source of the information. This blog is no exception!</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">The easiest part of the process may be determining if information is factually true. If I say “the ETF symbol XIU is a broad based Canadian Equity fund with a MER of 0.17%”, you can determine if that is true quite easily by checking the iShares site or better yet, by reading the </span><a href="http://www.investopedia.com/search/default.aspx?q=prospectus"><span style="color: blue; font-family: Calibri;">prospectus</span></a><span style="font-family: Calibri;"> for XIU. Of course, other information can be more challenging to validate. If I stated “the XIU was the most liquid Canadian Equity ETF” or “the lowest cost EFT”, that would require you to do a little more research (it is not the lowest cost but is arguably the most liquid Canadian Equity ETF based upon the liquidity of the underlying securities and daily trade volumes).</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">OK, if we assume you accept my comments on XIU as being accurate; you then need to ask yourself “why would I believe this blog or any argument it may present with respect to the information provided?” It may be that you have validated the accuracy of previous blogs or it may be that you have checked for confirmation from another source you trust. The important thing is that you do not just assume the information is correct or the correct information is being presented in a proper context. For example, if I stated “you should always buy XIU for your portfolio because it is the most liquid Canadian Equity ETF” then I am using accurate liquidity information to support an improper suggestion. Strong liquidity is not a compelling argument on its own for you to select an ETF for your portfolio. </span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Ask yourself some critical questions: what association or affiliation does the blogger (Mike) have with iShares? Does he sell the security for profit? Does he own shares in iShares parent company? Is he trying to induce you to pay for advice by providing some basic facts to build trust with you? Is he an amateur “wannabe” advisor playing on the internet from his basement apartment? <i style="mso-bidi-font-style: normal;">(In the interests of full disclosure: I do not sell or recommend any securities and carry no license to do so, I do not own shares of iShares parent company {I do own some units of XIU in my portfolio}, I do not solicit clients via my blog, I have a BA from UWO with a major in economics, hold a FMA designation from the Canadian Securities Institute and have 27 years experience working with major Canadian financial institutions.)</i></span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Assuming we can accept that I have no obvious conflict of interest in making the above comments about XIU and that I have sufficient experience to suggest the data is likely correct; the challenge becomes determining why I shared the comments and whether I am might be unknowingly passing along inaccurate assumptions. Given the above disclosures, my motives are likely somewhat more pure than an industry originated blog. Given my experience I should know what is accurate and what data is not trustworthy.....right?</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">The investment world, more so than most others, is filled with people who write with conviction about investments that they do not understand. Most advisors do not read a prospectus before selling a fund or stock offering. Information that is passed along is second, third, and often fourth hand by the time it reaches an investor. An analyst might work for a major bank and recommend stock “ABC.com” for a portfolio. The analyst then shares the report with the senior executives who decide to pass the recommendation to the company’s advisors. The advisors then receive a “hot sheet” with a number of analyst recommendations, including ABC.com. In order to support the recommendation a small sales blurb is included with the hot sheet and this is what the advisor reads. The advisor is looking to make a sale so they approach clients with the recommendation, often pretending to have researched the stock and determined that it is the most suitable for the investor. The challenge for the investor is that the motives and skill of the analyst, bank brokerage executives and the advisor are all built into the risk of the investment. If we lift the hood on the whole process and peer inside we might see the following:</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">The bank is trying to win business from ABC.com as a securities advisor, commercial lender, or corporate banker. They approach the analyst and suggest a strong recommendation might help our sales pitch. The analyst reviews the company, and not finding any major problems and knowing the banks business plans; the analyst uses some extra positive adjectives to ramp up excitement about ABC stock as an investment. The bank executives love the report and strongly suggest the advisors jump on this opportunity as supported by the analyst report. The advisor, looking for a security to sell, reads the sales blurb from the tip sheet and feels comfortable selling the securities of ABC because a top analyst has recommended the firm and the tip sheet sounds very positive on the future of ABC. The investor is overwhelmed by the opportunity as described by the advisor, recommended by the bank, and supported by a respected analyst. The analyst has a CFA designation and plenty of experience. The bank executives see no obvious problems with ABC and benefit from accepting the analyst report and adding their full support to the recommendation. The advisor trusts the firm he works for and feels the analyst must have done the hard research before making such a positive recommendation. The analyst gains positive stature and a reputation for being dependable from his companies senior executives. The executives get a positive reception from the management of ABC when they suggest their services to ABC at a significant revenue gain for the bank. The advisor gets a positive story they can sell to investors about a stock the investor will likely buy thus generating commissions for the advisor. Nobody lied to anybody. No factually incorrect statements will be made to anybody. Everybody feels good and has benefited..... With one exception. The investor has bought a mediocre stock based upon marketing hype that is not supported by ABC’s relative strength as an investment. While nothing is “wrong” with ABC, it is just not the best option the investor could have bought. There is no way for the investor to know what motives were behind the recommendation and it is difficult to point to other securities you might have bought a year or two after the fact when ABC has lagged the market by a few per cent. It might even have gained in value versus the book value.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><strong>Solution</strong>: So, “buyers beware” is the key when investors receive advice from ANYBODY! Check multiple sources. How many analysts are following ABC and how many of those rate ABC as a strong buying opportunity? Ask the advisor the right questions: have you read the full analysis yourself, what are the key risks outlined, is your bank soliciting business or doing business with ABC and how did you confirm that, what other securities did you consider and why is ABC a better choice, why do I need another stock in my portfolio and why this sector of the market at this point in the business cycle?</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">As my good friend Joe always says.....”It is good to trust but safer to not trust”! That translates to <span style="color: red;">“trust but always verify”</span> when you are an investor!</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">soismike</span></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-9162927368537853662011-06-04T14:05:00.001-04:002011-06-22T11:09:06.100-04:00<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSz8nnwh7gFvC4zIciRfzO3fuTXUlPB0SL7Fge46W9fzIXybLcN0MUki2fagW9vciWIL4nSr1MtIetfv3ZjQ6lxKXCEXIyoCThErL4OMIDCIGodxexUMNXoErqu6l-u7RUX1CqodG9_P2X/s1600/teeter+totter.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="228" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSz8nnwh7gFvC4zIciRfzO3fuTXUlPB0SL7Fge46W9fzIXybLcN0MUki2fagW9vciWIL4nSr1MtIetfv3ZjQ6lxKXCEXIyoCThErL4OMIDCIGodxexUMNXoErqu6l-u7RUX1CqodG9_P2X/s320/teeter+totter.JPG" width="320" /></a><strong>Part 3b) ETF Strategies</strong><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Following up on the <b style="mso-bidi-font-weight: normal;">passive/passive</b> discussion in the previous blog, the focus of this blog will be on the DIY investor and the passive approach.<span style="mso-spacerun: yes;"> </span>Keeping with proper investment protocols we first look at the Investment Policy Statement or , as it is commonly known, the IPS.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">Investment Policy Statement:</b> As a general rule, if you do not have a written investment policy statement, you do not have an investment strategy. If you do not have an investment strategy you are not an investor. So what are you? If you are managing your own investments, likely you are either 1- a gambler who unknowingly takes risk in the markets; or 2- you are frustrated and often find yourself frozen and not knowing what to do next. </span><span style="font-family: Calibri;">The vast majority of investors without an IPS are “customers”! They trusted an advisor/planner and thought that they had a strategy. They are caught in the overlapping active/active or active/no strategy categories and are seeing modest market returns eaten up by excessive active management fees (well, not actually seeing that happen as most fees are hidden, but you know what I mean). </span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Developing an IPS is a blog for the future so for now suffice to say, you need to know your <a href="http://www.investopedia.com/terms/s/strategicassetallocation.asp">asset allocation targets</a> and ranges. Specifically, what percentage of cash, fixed income, equities and any other asset classes you wish to use in constructing your portfolio. In our basic passive/passive strategy<span style="mso-spacerun: yes;"> </span>we will fill the asset requirements with broad based ETF Index funds.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Example only. </span></div><br />
<div align="center"><table border="1" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; border: currentColor; mso-border-alt: solid windowtext .5pt; mso-border-insideh: .5pt solid windowtext; mso-border-insidev: .5pt solid windowtext; mso-padding-alt: 0cm 5.4pt 0cm 5.4pt; mso-yfti-tbllook: 1184;"><tbody>
<tr style="mso-yfti-firstrow: yes; mso-yfti-irow: 0;"> <td style="background-color: transparent; border: 1pt solid windowtext; mso-border-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;"><b style="mso-bidi-font-weight: normal;">ASSET<o:p></o:p></b></div></td> <td style="background-color: transparent; border-color: windowtext windowtext windowtext rgb(0, 0, 0); border-style: solid solid solid none; border-width: 1pt 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;"><b style="mso-bidi-font-weight: normal;">STRATEGIC TARGET<o:p></o:p></b></div></td> <td style="background-color: transparent; border-color: windowtext windowtext windowtext rgb(0, 0, 0); border-style: solid solid solid none; border-width: 1pt 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;"><b style="mso-bidi-font-weight: normal;">RANGE<o:p></o:p></b></div></td> <td style="background-color: transparent; border-color: windowtext windowtext windowtext rgb(0, 0, 0); border-style: solid solid solid none; border-width: 1pt 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;"><b style="mso-bidi-font-weight: normal;">SECURITY<o:p></o:p></b></div></td> </tr>
<tr style="mso-yfti-irow: 1;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">Cash</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">5%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">2.5-15%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">Money market account, high interest savings acct</div></td> </tr>
<tr style="mso-yfti-irow: 2;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">Fixed Income</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">25%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">15-35%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">1-5 year bond ladder or GIC ladder, Dex Universal Bond Index, Corporate bond index, government bond index</div></td> </tr>
<tr style="mso-yfti-irow: 3;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">Canadian Equity</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">35%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">25-45%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">TSX 60, TSX Composite Index</div></td> </tr>
<tr style="mso-yfti-irow: 4;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">U.S. Equity</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">17.5%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">7.5%-27.5%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">Dow Jones Industrial Average, S&P 500, Russell 2000</div></td> </tr>
<tr style="mso-yfti-irow: 5;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">International Equity</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">17.5%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">7.5%-27.5%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">EAFE, World Index (ex North America)</div></td> </tr>
<tr style="mso-yfti-irow: 6; mso-yfti-lastrow: yes;"> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext; border-style: none solid solid; border-width: 0px 1pt 1pt; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;"><br />
</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;">100%</div></td> <td style="background-color: transparent; border-color: rgb(0, 0, 0) windowtext windowtext rgb(0, 0, 0); border-style: none solid solid none; border-width: 0px 1pt 1pt 0px; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding: 0cm 5.4pt; width: 119.7pt;" valign="top" width="160"><div align="center" class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: center;"><br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">The above is an example of a "basic broad based passive strategy" that would be fairly easy to build with common broad based and low cost ETF Index funds.<span style="mso-spacerun: yes;"> </span>The characteristics of this strategy are very positive: low management expense costs, very low trading cost, low tax impact (due mainly to the low trade characteristics of Index funds), broad diversification, and high liquidity. In fact this basic approach will meet the needs of the vast majority of investors and very likely out- performs an existing mutual fund portfolio over time.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">While the broad based strategy is highly recommended, it does also have its weak points. </span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">1-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">The risk level in a broad based strategy has a </span><a href="http://www.investopedia.com/terms/b/beta.asp"><span style="color: blue; font-family: Calibri;">beta</span></a><span style="font-family: Calibri;"> of one. That level of risk is too high for some investors. As a general rule, if the risk is too high you can lower the equity components (which reduces return and risk), or you can reduce diversification by adding lower beta securities such as replacing part of a broad based index with a lower risk sector fund having a beta of less than one. ( a <a href="http://finance.yahoo.com/news/Utility-ETFs-Split-the-ifunds-2708858133.html?x=0">utilities sector</a> fund might have a beta of approximately 0.5%)</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">2-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Broad based strategies generally will have less income potential than a dividend focused equity fund. Again, the solutions seem obvious (add a dividend fund) but the consequence is reduced diversification and overweight holdings as the dividend fund replicates a portion of the broader index fund.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><b style="mso-bidi-font-weight: normal;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">3-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span></b><span style="font-family: Calibri;">While the strategy is low tax, it is not the lowest possible tax strategy. For those willing to sacrifice some of the benefits of the broad based portfolio, you can pay for securities that offer greater tax relief, such as "<a href="http://www.globeadvisor.com/magazine-ccf/static/archives/issue1/rob_carrick.html">corporate class funds</a>".</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: Calibri;">A Word On Tax Strategies:</span></b></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">ETPs have a very useful tax profile for higher income earners. In fact, after fees and performance benefits, the tax benefits are the next best feature of exchange traded products (ETPs). Most investors in active Mutual Funds do not understand how tax inefficient mutual funds often are. Funds are legally established as trusts and as such are required to flow through income to the unit holders (you). Each active trade has the spin off outcome of generating a) trade costs charged to the fund, b) a capital gain or loss recorded on the fund tax slips. As well, stocks held in the funds spin off dividends that are also recorded on your annual tax slip. With active funds often trading 50-100% of the securities they hold each year, these tax events are very common regardless of whether the fund is making any market gains or not. When funds face high redemption levels securities are sold and again generate capital gains and losses to all fund holders. As you can see, structurally active mutual funds are not able to remain very tax efficient.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">ETNs are even more tax efficient as they entail use of contracts that reflect dividend payouts but do not actually receive nor distribute dividends to unit holders. The dividend value is reflected in the "contract" maturity value of the fund. The value of dividends are treated as a distributed capital gain only upon the sale of the units or contract maturity date. For high income investors looking to defer taxes and earn income as tax favoured capital gains, the ETN is a great security. Obviously if you are seeking income via dividend distributions, these notes are not for you. ETNs also carry default risk not generally associated with typical ETFs.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Cautions: Tax strategies are often a means of disguising poor investments as a “strategy”. Who has not been burned by “labour sponsored funds” sold strictly as a tax strategy!</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: Calibri;">ETPs As Portfolio Insurance<o:p></o:p></span></b></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">When discussing ETPs it is good to remember that many of the strategies are used by professional traders and portfolio managers. As “exchange traded” securities, you can trade ETPs on the stock exchange. That means you can “short” the securities or you can buy inverse versions of many ETFs. For professionals that may result in </span><a href="http://www.investopedia.com/terms/l/long-shortequity.asp"><span style="color: blue; font-family: Calibri;">long/short strategies</span></a><span style="font-family: Calibri;"> where, as an example, a trader buys a stock long (say RBC) and then shorts the financial sector. This attempts to select the winners (RBC)<span style="mso-spacerun: yes;"> </span>and discount the less attractive sector players (the other major banks), thus removing market risk from the final trade outcome.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Portfolio Insurance: If an investor has a large net gain in a Canadian stock portfolio, they want to protect the gains but may not want to sell the securities and face a capital gain tax. In this scenario the investor might short the Canadian market ETF to insure their capital gains against a market drop. If the market, including the investor's securities, drops 10% then they make up for the stock losses with the gains on the short position. Rather than buying a short position against every stock held, the investor could simply short the broad based stock index using an ETF Index fund.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">Interest Rate Anticipation Strategies</b>: A number of investors are concerned about interest rates rising and hurting returns on fixed income portfolios. Within the ETP product scope, investors can customize interest rate sensitivity (measured by duration) by mixing fixed income ETFs with a variety of durations. Purchasing a Dex Universal ETF Index is the broadest based Canadian bond index fund. By mixing in a ladder strategy (Claymore has popular laddered ETFs) or using the BMO Index funds, an investor can mix long, short and medium term Fixed Income ETFs. By doing so you can shorten the duration and thus lower the interest rate sensitivity of the fixed income holdings.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><strong>ETF Passive/Passive:</strong> The "broad based strategy" outlined in the chart provided, is the preferred approach for most DIY investors. It is a simple approach with few securities and few moving parts for an investor to monitor. While variations exist, an ETF Index portfolio utilizing 5 funds remains the most basic strategy with the greatest diversification and the most bang for your buck.</span><br />
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<span style="font-family: Calibri;">Some investors use this as a core strategy within a "Core & Explore" portfolio. With the bulk of the portfolio in the well diversified broad ETF strategy, the "explore" portion of the portfolio (10-20% as an example) can pursue other strategies without tilting risk too far off the intended levels. This approach works well for those that want to mix a little personal stock picking or additional diversification (say gold bullion) into the portfolio, without letting the riskier components distort the overall strategy.</span></div>That wraps up the basic ETF review discussed in the last four blogs. Hope it helps you better understand the ETP world!<br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Mike</span></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-36895922978627806392011-05-17T12:52:00.000-04:002011-05-17T12:52:29.363-04:00Passive vs Active Portfolio Strategies: Which do you use?<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnSSg-CLQIzUF9HK4yJbAyeXNPSE8Qfq1QxVw0Pj8A98Uiz13vMZItgcg9PZPOtYvY-aXwNQNTrZZeS8n0gRrr_m5sCLtfplbQE0P-5H33ywYIFe6689RzDMDLdQdbee3-vyIgJlJJ7389/s1600/j0398791.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnSSg-CLQIzUF9HK4yJbAyeXNPSE8Qfq1QxVw0Pj8A98Uiz13vMZItgcg9PZPOtYvY-aXwNQNTrZZeS8n0gRrr_m5sCLtfplbQE0P-5H33ywYIFe6689RzDMDLdQdbee3-vyIgJlJJ7389/s320/j0398791.jpg" width="228" /></a> How do you know if a "passive" strategy is what you want or need?.....and what exactly is a passive strategy?.....and how do Exchange Traded Products (ETP), such as ETF Index funds fit into a strategy?<br />
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<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">Exchange traded products, for our purposes, will include exchange traded funds (ETF) and exchange traded notes (</span><a href="http://www.investopedia.com/terms/e/etn.asp"><span style="color: blue; font-family: Calibri;">ETN</span></a><span style="font-family: Calibri;">). Both of these products are an effort to reflect the performance of a chosen index as a general rule. Notes will typically use debt instruments (forward contracts) to obtain the index returns while funds generally hold the underlying securities (stocks or bonds) from the index to accomplish the same results. The blog will talk about ETFs, however in most instances you can use ETNs to accomplish the same goals.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">ETF’s have changed the game when it comes to investing regardless of whether you are a professional or an individual investor. The goal of serious investors is to: diversify risk, make a positive return, and to keep as much of the return as possible. Professionals generally try to “beat” an index while most individuals aim for a reasonable after tax “total return” relative to the market indexes.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">One of the challenges of being an individual investor is the difficulty in understanding which strategies are for “professional investors” and which ones are for “retail or DIY” investors. I want to start with a couple of broad statements to set the stage for how this blog will approach the strategies:</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">1-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Individuals who “think” they are experts will often take on high risk strategies and often confuse luck with skill. If you “play” the markets, use your “instinct” to tell you when to buy or sell, or feel you have the ability to determine the “sector rotation” timing or market momentum at any given time, then please feel free to skip this section (and perhaps this whole blog) as you won’t accept what I have to say. If you believe a well balanced broadly diversified portfolio can help you share in market gains then please read on.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l0 level1 lfo1; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">2-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">The terms “passive” and “active” are often utilized when discussing ETF Index Funds and Mutual Funds. The term “passive” can be used to reflect both a type of “security” and an investment “strategy”. Thus an index fund that has a strategy of mirroring a chosen index will be called a “passive” security. An investor who, in turn, tries to hold a diversified strategic allocation of passive funds will be said to have a “passive” strategy. Conversely, an investor who attempts to buy and sell securities in an effort to outperform markets will be considered to have an “active” strategy. If the investor holds funds that also attempt to beat the benchmark indices, the funds will be deemed an “active” security. As you will have rightly assumed, "passive" means a hands-off approach while "active" means on-going trading of investments.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">So, what does that mean? Well, it suggests we can have 4 different scenarios:</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">1-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Passive Security and Passive Strategy</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">2-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Passive Security and Active Strategy</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">3-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Active Security and No Strategy</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l1 level1 lfo2; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">4-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Active Security and Active Strategy</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: Calibri;">Passive/Passive:</span></b><span style="font-family: Calibri;">This is what I will call the “true” indexing strategy and is the only strategy this blog site recommends for Do-it-Yourself investors. This approach requires an investor to determine the strategic asset allocation model they wish to maintain, and then to fill that allocation with passive index funds. As an example, a 3 asset class model with 3 equity sub-classes can be utilized to create a great allocation model using 5 passive index funds.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><strong>The 3 asset classes are:</strong></span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><span style="mso-spacerun: yes;"> </span>A-Cash – short term low risk debt securities maturing in less than one year, bank account</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">B- Fixed Income- Interest bearing debt securities maturing in one year or more (1-30 years typically)</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">C- Equities – individual funds or securities in “stocks” whether common or preferred</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">Equities sub-classes</b>: Within the equity class we might further break down the holdings into three geographic sectors: Domestic, U.S., and International</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">In this scenario a simple “passive/passive” portfolio might include 5 securities:</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l2 level1 lfo3; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">1-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;"><span style="mso-spacerun: yes;"> </span>a money market fund</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l2 level1 lfo3; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">2-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">An ETF reflecting the Dex Canadian Bond Universe</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt 36pt; mso-list: l2 level1 lfo3; text-indent: -18pt;"><span style="mso-bidi-font-family: Calibri;"><span style="mso-list: Ignore;"><span style="font-family: Calibri;">3-</span><span style="font-size-adjust: none; font-stretch: normal; font: 7pt/normal "Times New Roman";"> </span></span></span><span style="font-family: Calibri;">Three equity ETF Indexes reflecting – the TSX 500, the S&P 500, and the EAFE index</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">The joy of this type of investing is that it is easy to understand, easy to implement, and easy to monitor. Investors have some research to do as they need to decide which broad based index they wish to follow i.e. the S&P 500 versus the Russell 3000 or the Dow Jones Industrial Average, but the basic concept is the same.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: Calibri;">Passive/Active: </span></b></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">A number of professional investment managers are utilizing passive securities to implement an active strategy. The primary reason is that index funds allow an investment manager, using a single trade, to enter or exit from an asset class or sub-class. As an example, if the previously shown model was utilized by an active manager, trading the ETF Index fund representing the TSX 500 allows the manager to completely enter<span style="mso-spacerun: yes;"> </span>(buy) or exit (sell) the primary Canadian stock market. This easy approach to making significant portfolio changes appeals to managers who follow a “macro” approach to their investment strategies. This would not appeal to an investment manager who has a “<a href="http://www.investopedia.com/terms/b/bottomupinvesting.asp">bottom-up</a>” approach which entails looking at each and every company that you invest in, however for “</span><a href="http://www.investopedia.com/terms/t/topdowninvesting.asp"><span style="color: blue; font-family: Calibri;">top-down” strategies</span></a><span style="font-family: Calibri;">” it is quick, effective, and cheap. Similarly, a strategy of “<a href="http://www.investopedia.com/terms/s/sectorrotation.asp">sector rotation</a>” can be implemented by buying or selling a variety of “sector ETFs”. The proliferation of ETF funds has created a large base of index funds representing a wide variety of slices or sub-sets of each broad based index.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><strong>Caution</strong>: A number of DIY investors have been caught in the trap of holding ectors such as a Canadian Dividend fund or a Canadian Financial sector fund alongside the TSX 500 Index ETF . This causes a loss in diversification as a result of both the sector funds and the broad based index ETFs holding large positions in the same stock. Most true passive/passive investors do not require subsets of the large broad based ETF funds they hold.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">Active/Active</b>:</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;">One of the challenges of “active” investing is doing it in a way that prevents one strategy from counteracting a second active strategy. As an example we often see investors with equities split between a “value” fund and a “growth” fund. The net result is similar to holding the full index as whichever style does well is being off-set by the opposite style which is likely underperforming the market. It is rare for the two styles combined to both enjoy a strong year simultaneously unless the whole index also did well. A true active strategy works best when the strategy has a singular favoured approach (pick value or pick growth as an example) at any given time. Some claim they can rotate from one to another effectively and that would seem to be a valid active/active strategy; however if you own a bit of everything in your funds then you are going to reflect a passive strategy at a substantially higher cost.</span></div><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">Active/No Strategy</b>: A large number of folks that sell mutual funds have an approach that utilizes active managed mutual funds alongside a non-existant strategy. That is, they buy and hold active funds with no strategy to make tactical changes to reflect market conditions. While I believe this approach likely does less damage than a poorly implemented active/active approach; this strategy is not really a strategy but rather an abdication of the advisor/planner role as an investment strategist. Investors are sold funds, often with seven year DSC penalties, and the advisor/planner never look at the portfolio again until there is more deposit money to invest (think your annual RRSP phone call). This non-strategy was very evident in 2008 when markets crashed and advisor/planners told clients to “do nothing”. Doing nothing generally reflects a lack of tactical decision making in a strategy. While the active security managers (fund managers) maintain their strategy throughout the market cycle, the advisor driven portfolio strategy is frozen in place and no course corrections are made.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"><b style="mso-bidi-font-weight: normal;">Summary</b>: Within each category there will be room for more than one approach. A proper Passive investment strategy will include tactical rebalancing, strategic rebalancing, and of course adjustments made to the index components by the index committees of the various exchanges. The passive/passive investor may also favour a market capitalization approach, average price, equal weighting or a fundamental analysis approach. Passive does not mean abandoned or ignored and does not imply zero decision making by the investor.</span></div><div class="MsoNormal" style="margin: 0cm 0cm 10pt;"><span style="font-family: Calibri;"> As a rule you can typically classify yourself in one of the four categories above. If you are passive/passive or passive/active then ETPs are worth considering. The next installment of the blog will deal with strictly passive/passive investing strategies.</span></div>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com1tag:blogger.com,1999:blog-872609959597709892.post-38475618517519399682010-12-20T14:24:00.004-05:002010-12-24T12:28:48.484-05:00ETF Education Part 3 Construction of an ETF<div class="separator" style="clear: both; text-align: center;"></div><strong>ETF Education Part 3 CONSTRUCTION OF AN ETF</strong><br />
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<div class="separator" style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFA5mRJwegpsc3gga5Cajf06SFexVzjOKCVmnDvtsmc485MC5z4w5tNMZlF8e11viS1iY1bco71I1b_O8pmBi6fwvtM0G3xjvc4yS0X2qAWM-SrwwfTOU_LutZqXSMLoPBomB89VgHbfN1/s1600/basement+notl+254.JPG" imageanchor="1" style="clear: left; cssfloat: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="240" n4="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFA5mRJwegpsc3gga5Cajf06SFexVzjOKCVmnDvtsmc485MC5z4w5tNMZlF8e11viS1iY1bco71I1b_O8pmBi6fwvtM0G3xjvc4yS0X2qAWM-SrwwfTOU_LutZqXSMLoPBomB89VgHbfN1/s320/basement+notl+254.JPG" width="320" /></a></div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><strong>Review</strong>: It is hopefully obvious to those following the recent series of blogs, that <strong>ETF</strong>s are not quite as simple as we might have believed when they first arrived on the scene. They are like a house in that we look at the furnishings and carpeting to see if we like it, but we rarely check the foundation or the attic to see if it is solid.<br />
We have reviewed how indices were created, how that in turn lead to index mutual funds, and then eventually to ETF Index funds. We noted that the names were often misleading (DJIA for example),that there are differences in how various indices were weighted, and we also looked at who the "players" were in the ETF world. We also looked at several of the common characteristics of ETFs and noted they could be positive (low cost) or negative (tracking error) for investors.</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"> Now we will dissect some ETF structures to see what we actually own when we buy an ETF. We will look at four common structures that can be used to replicate an index.</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">1- <strong>“Basket of Securities” Structure</strong>: Let’s start with a plain vanilla ETF Index Fund. This simplest “open ended structure” is what most people believe they are purchasing when they buy an ETF. In this structure the ETF creators duplicate the performance of an index by actually holding a basket of all the underlying securities through a “designated broker”. As an investor you buy a “unit” from another investor or sell a unit to another investor. The underlying stock is transferred in kind which means no capital gains or trading costs need be incurred with respect to the underlying index components. If you attempted the same trade on your own using, for example, a Dow Jones index of stocks, you would make 30 buys on acquisition of the stocks and 30 sells when you sold out; with each transaction generating a tax event (gain or loss)and brokerage fees. A typical simple ETF structure should be able to closely track an index because it directly owns the index components and thus the index performance, minus fees to maintain the ETF.</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">2- <strong>Representative Bundle Structure</strong>: If I want to create a Canadian Fixed Income ETF to track the Dex Bond Universe ( 1,100 bonds at last check), I would need to make an extremely large number of bond purchases to capture the whole index. A significant number of the bonds would be difficult to acquire since they may have been a small issue to begin with. Rather than attempt such a ridiculous approach, a creator can do a statistical measure of the characteristics of the DEX Index. The analysis might look at traits such as average term, duration, yield to maturity, and credit rating of the full universe of bonds. They can then select a smaller number of bonds that, on aggregate, match the characteristics of the full Dex Index. Thus with a basket of 30 or so bonds I can reasonably expect to track the Dex Index performance, at a much lower cost for the unit holders. Of course the risk of the ETF not performing exactly as predicted does exist. When you purchase an ETF Index that uses the “representative bundle” approach you should monitor tracking error closely. It is reasonable to assume that this structure can and should reasonably track the index with minimal risk of performance variance and generally lower costs.</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">3- <strong>Future Contracts</strong>: Another way to play the market is to buy a futures contract which promises to deliver the value of the underlying securities at a given time. For example, let’s say a one month future contract on the TSX60 can be purchased on a futures exchange. The contract pledges to pay me the value (or actual shares) of the TSX60 at the end of trading on a specified date. If the index goes up I get the higher value and if the index goes down I receive a lower value. An ETF using the future contract structure, is thus not holding the underlying stocks, but is actually exposed to the “contract” which will fluctuate in value. The future value of a share should not be expected to reflect the “current” value of a share. Markets have expectations for price moves that are reflected in the contract values but not necessarily in the stock’s current price. As well the ETF will need to roll over the contracts as they mature and again will pay for “an expected future price”, not the current price. This roll over process is inefficient and as such this type of structure has a greater risk of tracking error. In fact, the ETF is actually exposed to the futures market, not the index itself. With the increased risk comes a few significant benefits as well.</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">One benefit of this type of structure is that it allows for increased exposure to commodity markets which are not available as a straight stock strategy. Recently oil has been a commodity that many investors are tracking via an ETF, but corn futures or hog futures are also possible to track when you utilize contracts. At the end of a contract the ETF trades out of the contract so that it does not actually take delivery of the underlying asset. The process has some complexity and contract roll over’s can bring significant tracking errors into the picture. This is especially evident in commodity ETFs. For those wanting more information you can look up the impacts of either <a href="http://en.wikipedia.org/wiki/File:Contangobackwardation.png">contango</a> or backwardation on contract rollovers.</div><div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;"><br />
</div>4-<strong> Exchange Traded Notes</strong>: ETN’s are very similar to future contracts in that the “note” is a promise to deliver a value on a given day. Typically a note is an agreement with a large financial firm such as a bank. The agreement requires the note issuer to pay the note holder a given value on a given day. An Investor could for example sign a note with BNS to deliver the value of the TSX60 on Jan1st of 2012. They would agree to a price and the bank would likely hedge the underlying stocks and make money on a price spread built into the cost of the note. Of course, in the event BNS becomes insolvent before 2012, the investor may face a large loss due to the inherent credit risk of the note holder. Default risk may seem obscure but it is a large part of the reason for the current market crash we are working out way through.On the positive side, <a href="http://www.investopedia.com/terms/e/etn.asp">ETNs</a> offer a great deal of customization since any agreement can be structured as a note as long as two parties agree to the terms and fees.<br />
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The above structures are all in common use today. If you buy an ETF Index Fund you will need to know the structure to know what you are holding (stocks or contracts) and whether or not you are taking on counter party credit risk (notes ). Each structure has its benefits and its drawbacks and you need to understand when you should favour one structure over another.<br />
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<strong><u>Proliferation</u></strong>: One of the reasons for the wide variety of structures in the ETF market is because institutional investors are often looking to build securities that offer either exposure or protection from price fluctuations in a specific asset class or commodity. As these products get built they are also offered to retail investors as an ETF they can use for similar exposure or protection. While institutional investors have a very specific requirement to fill a strategic goal, investment sales people often just want to offer something new and flashy for retail investors. A classic example is leveraged ETFs which were sold to unwitting investors by supposed advisors who often had no understanding of how they worked or what risks they exposed investors to. Eventually the industry had to back off leveraged ETFs under a barrage of negative media coverage.<br />
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<strong>ETF Securities</strong>: Below is a list of some of the more common types of ETF Index funds that are common in the market place.<br />
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1- <strong>Broad Market ETF’s</strong>: An ETF that encompasses a significant portion of a large market index is considered to be a broad based ETF. These are the indexes that started the whole indexing phenomenon. In fact, many ETF gurus will tell you that these are the only ETFs a retail investor should purchase. Examples are ETFs tracking the TSX 60 or TSX Composite index, the S&P500 or the Russell 3000. The concept is that with one ETF you gain full market exposure.<br />
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2- <strong>Sector Indexes</strong>: A number of indexes are provided to allow investors to focus on stocks within a specific sector of a market. An example would be Energy ETFs, Technology ETFs, or Financial ETFs. Typically these ETFs follow international guidelines for determining which securities fit in which category of the standard “sectors” . All the sectors added together will form the whole of a broad based index. As such these are often called sub-indexes. In effect this becomes a bet on a single sector outperforming the general market and is useful for traders who use a sector rotation strategy.<br />
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3- <strong>Style Based ETFs</strong>: You can purchase an ETF to allow you to take a bet on one style of investing being more profitable than the whole index. The most common examples are <strong>Growth</strong> and <strong>Value</strong> style ETFs. During a bull market where stock prices are rising rapidly you would expect growth stocks to outperform the market. In periods of recovery or market fluctuations you might expect stock selection to favour those who can find under- valued stocks reflected in the Value Index. Similarly you can focus on small cap stocks or dividend paying stocks to outperform the general market or to better match your investment needs.<br />
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4- <em><strong>Fixed Income ETFs can also track sub-indexes</strong></em>. Typical sub-indexes would include short term, mid term or long term bond sectors. These can be subdivided again by high, medium, or low credit quality. The fixed income options listed can also focus on government bonds or corporate bonds. As well an ETF can track “real bonds” for inflation protection.<br />
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In fact, an ETF Index can be created to track anything from world markets, to African Banks, to Companies that sell mouthwash! The positive is that we get access to cheap fees and strong diversification; the negative is that we have to sort between hundreds of different ETF Index funds. The key point is that <strong>JUST BECAUSE THEY CAN TRACK IT DOES NOT MEAN IT IS WORTH BUYING!</strong> As such you can expect to see many new indexes come and go on a regular basis to meet the investment whim of the moment.<br />
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So, it has been a longer than normal dialogue for this blog, but there is a lot more to ETFs than meets the eye. If you have gotten this far you can have some confidence that you know more about ETFs than many sales people who sell them and certainly far more than your neighbour who is telling you to buy an ETF to track Outer Mongolian Natural Gas Pipeline Companies! Next blog we will look at some ETF investment strategies! See you in the New Year!<br />
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Soismike.........with a special thank you to Ken Hawkins at Ohow.ca for his suggestions on how to work my way through this topic.Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com3tag:blogger.com,1999:blog-872609959597709892.post-91033142919435798842010-12-10T13:29:00.005-05:002010-12-10T14:21:47.854-05:00ETF Education: Part 2 Lifting the Hood on ETFs<strong><u><span style="font-size: large;">ETF Characteristics</span></u></strong><br />
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<div class="separator" style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgck650J5VgyVndMV_HfDmGE-f2yCLcyaJ9Aajik6nNqqYzxz9Kwv6s6b6HC_5U21wxxQQk5MJgCkpj1taHKowcV3mNEw7fe9ukI0nKrAJGC9R4yBJxfdUpXinMpeYXMhPzXDIoZE5zx0zk/s1600/00436379.png" imageanchor="1" style="clear: left; cssfloat: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" n4="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgck650J5VgyVndMV_HfDmGE-f2yCLcyaJ9Aajik6nNqqYzxz9Kwv6s6b6HC_5U21wxxQQk5MJgCkpj1taHKowcV3mNEw7fe9ukI0nKrAJGC9R4yBJxfdUpXinMpeYXMhPzXDIoZE5zx0zk/s1600/00436379.png" /></a></div>In part one, we reviewed the history of Index tracking, index weighting, and the transformation from Index Mutual Fund to an ETF Index Fund. We also remind investors of a comment concerning the increasing complexity of ETF’s. <br />
In today's blog we will explore ETF’s to see <strong>why</strong> they exist. The key learning point we are focusing on here is the need to understand that ETFs are built to deliver specific characteristics. It can be more challenging to compare one ETF structure to another if you do not know why it was built a certain way! When we know what characteristics are important to ETF investors we can see how different structures best capture different characteristics that investors seek. We will also get an introduction to the players who make index investing possible.<br />
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We will start by looking at <strong>ETF characteristics</strong>. Contrary to the beliefs of many retail investors, ETF investing is dominated by the big <a href="http://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional </a>players in the industry. As such an ETF is most often constructed to meet the needs of the institutional investors first. In general, the plain vanilla low cost ETFs based on popular indices were designed for cost conscious institutional investors – the more expensive ETFs were targeted to smaller investors without sufficient dollars to build comparable investment pools at low cost. As an example the <a href="http://ca.ishares.com/product_info/fund/overview/XBB.htm">XBB</a> although based on a popular index is too expensive for many institutions. They can buy or create cheaper investment pools on their own. This is an example of a characteristic (low fee) being the motivator to build a fund and the absolute cost determining the target market (retail clients). We need to understand why specific ETFs are created and what characteristics are driving their new found popularity. When we know "<strong>why"</strong> they are being created, we can better understand the different approaches that can be used to structure an ETF.<br />
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It is important for retail investors to understand the logic behind ETF construction, because while the large investment managers are extremely qualified to analyse the various security characteristics of an ETF structure, that knowledge is not always obvious to investors nor to the poorly trained front line sales staff (typically your so called advisor). These complex structures then bleed down to retail products which are sold as “ETF Index Funds” with no explanation with respect to the ETF structure. The ETF disclosure/sales material is vague at best and often the product is sold without investors being informed of the different risks and characteristics associated with different structures.<br />
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<strong>More ETF Basics</strong><br />
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While it is always dangerous to issue blanket statements about securities, it is fairly safe to say that most ETF Index funds do have some similar characteristics.<br />
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<strong><u>A. The Players</u>:</strong> <br />
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1- The “<strong>creator</strong>” of the fund is the company that establishes the fund concept and acquires rights to use the target index from the index owner. S&P for example owns the rights to the S&P500 Index and will issue a license to allow a fund company to create an ETF based on the S&P500 Index.). The creator will issue any required prospectus and get approvals to issue the new securities. As an example <a href="http://www2.blackrock.com/ca/en/AboutUs/InvestorRelations/index.htm?pt=false&exitTrackingFlag=false">Blackrock</a> who own the iShares brand are the “creators” of iShares ETFs. Creators are motivated by gathering large pools of investment dollars and skimming a small peice of revenue from every dollar every year.<br />
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2- <strong>Market Maker</strong>: A <a href="http://www.investopedia.com/terms/m/marketmaker.asp">market maker</a>, according to an Investopedia definition, is a broker-dealer firm that assumes the risk of holding a certain number of shares of a security in order to ease the process of trading the security.<br />
Market makers are looking for the fastest way to hedge trades, create units, and maximize ETF trading capabilities. When an ETF launches, the lead market maker will typically create the first units, delivering the shares of an ETF product’s underlying index in exchange for units of the ETF. i.e. the market maker gets 100 units of a new TSX60 ETF in exchange for delivering 100 shares of each stock in the TSX60 to the creator.<br />
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Lead "market makers" must stand ready to both buy and sell their products on a continuous basis. They typically hedge all bets and make money on bid and ask spreads. It is desirable to keep the spreads as narrow as possible to prevent hedge funds from exploiting differences between the unit value of the ETF and the value of the underlying shares. This works, in live market conditions, to improve both the liquidity of the ETF and to minimize tracking error.Market makers make their profit on trade volumes.<br />
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3- <strong>Advisor/Salespeople</strong>: ETFs are marketed to both institutional investors (pension funds, insurance companies, hedge funds etc) and retail investors. The products sold are often identical, but the resources necessary to understand the product varies greatly between the two investor types. The role of sales people is to ensure the playing field is level by doing two things; learning how the product works before selling it, and clearly disclosing how the ETF works, what it costs, and the risks of owning the ETF to investors. Their track record at doing these basic things is dismal to say the least.<br />
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<strong><u>B- Dual Liquidity Characteristics of ETFs</u></strong>: <br />
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The liquidity of a normal widely held mutual fund or an individual stock security is based strictly upon trade volumes of the fund or security. With an ETF, because it is easy to create or release units on demand, the liquidity restrictions are not solely based on the “ETF unit” liquidity, but also on the liquidity of the underlying securities. This means a new ETF offering on the TSX60 can have high liquidity regardless of trade volumes in the actual ETF units. This is because the TSX60 has high liquidity in the underlying stocks. If I request 50,000 units of a new ETF, the market leader just puts in a request for the shares through computerized trading and issues the 50,000 newly created units within minutes (actually seconds). <br />
<span style="font-size: x-small;"><strong>CAUTION</strong>: While liquidity may appear better in the ETF structure, in actual practice an ETF with low trading volume will tend to have greater tracking error than an ETF with high trading volume even though the liquidity of the underlying securities might be the same. As an example the new and smaller BMO ETF will likely have greater tracking error than the XIU until volumes help the designated market maker to keep the bid and ask spreads narrower.</span> <br />
The one wild card in the liquidity situation , is if the market maker for the ETF abandons the market. The risk is similar for most securities but may be more relevant for ETFs given what happened in the “May 2010 flash crash”. (a story for another blog)<br />
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<strong>C- Cost Advantage</strong>:<br />
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Although some active managed expensive mutual funds are starting to use the term “ETF” in their name to confuse investors; a general advantage of the ETF structure is low cost. This low cost is a significant advantage and thus ETF index funds with higher <a href="http://www.investopedia.com/terms/e/expenseratio.asp">MER</a>s (expenses) generally are not desirable. ETF Index funds for major Canadian market indices can cost as little as 0.08% annual MER. Typically you will not see any deferred sales fees or trailing commission expenses with an ETF, unlike many high cost mutual funds.<br />
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<strong>D- Tax Advantage</strong>: <br />
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Typical ETFs have a more passive approach to investing and thus generate low trade volumes , which then translates to low tax costs. A broad based index ETF would rarely need to add or subtract securities from the underlying basket of securities comprising a unit, since most indices are quite stable. Exceptions would be where mergers eliminate a security or where a security was added or dropped from an index. <br />
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<strong>E- Tracking Error</strong>: <br />
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Index funds, whether ETF or mutual funds, attempt to duplicate an index’s performance. In all cases there is likely to be some level of tracking error since the index fund charges an annual expense ratio to cover the cost of maintaining the fund. Also, various structures may be prone to tracking error due to the fact the index fund lags the index when changes are made. An index fund is not generally allowed to make changes prior to the actual index making a change. This allows large investors to "front run" changes to the index which increases tracking error and reduces performance. Another significant cause of tracking error is the ETF structure, so without further ado let’s look at what makes an ETF tick!<br />
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So, in summary, in part two we learn:<br />
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- ETFs often start life as a specialized product to meet the needs of institutional investors, and then are sold later to retail investors through generally poorly trained advisors<em>(tip; some advisors are ETF specialists and better trained than a typical salesperson on the intricacies of ETFs)</em><br />
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<em>-</em> we now can recognize who the ETF industry players are and how they make their profit from ETFs <br />
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- we understand the common characteristics of ETF Index Funds that investors either seek to aquire (low cost, high liquidity, low taxes) or to avoid (tracking error, high bid/ask spreads)<br />
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I confess this blog was an added step to my initial ETF education series plan. In preparing the next section on ETF structure, I realized it is easier to understand the "what" of creating an ETF if we better understood the "why" and "who" of ETFs. Hopefully with this better understanding of the above ETF common characteristics, it will make the next section a little less confusing.<br />
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Our next blog, I promise we will get down to the serious business of how ETFs actually work! Part 3 coming very shortly!<br />
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SoismikeMike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-70777501010523710942010-11-05T17:18:00.002-04:002010-11-05T17:39:11.930-04:00ETF Education : Part 1 ETF Basics and History<span style="background-color: white;"></span><br />
<div class="separator" style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_JxLYOKrqDbEBS2kxxaGdL-flU3U7X5NcLgKUdPrCypFvU2TXZUUaWv_nmHotF0ZyfSkpacwaWx2qUt5is7cX_wQ5G_5yn8OtYKijmCidkErQ3uz6LPamnItvdWSS1JzCVTRk4kdcHHgP/s1600/j0439375.jpg" imageanchor="1" style="clear: right; cssfloat: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="211" px="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_JxLYOKrqDbEBS2kxxaGdL-flU3U7X5NcLgKUdPrCypFvU2TXZUUaWv_nmHotF0ZyfSkpacwaWx2qUt5is7cX_wQ5G_5yn8OtYKijmCidkErQ3uz6LPamnItvdWSS1JzCVTRk4kdcHHgP/s320/j0439375.jpg" width="320" /></a></div><span style="color: blue;"><strong><u><span style="background-color: white;">The Good, Bad, and Ugly of Understanding an ETF Portfoli</span>o</u></strong></span><br />
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Like many folks, I “get” the underlying premise of ETF Index investments. The basic premise is to replicate the performance of a given “<a href="http://www.investopedia.com/terms/i/index.asp">index</a>” of securities, without the need (or expense) to actively research individual securities. For example, if I want to replicate the performance of the TSX 60 index, I only need to buy one common share of each stock that comprises the TSX 60. Seems to be simple enough, right?<br />
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Unfortunately, nothing is ever quite as simple as we would like it to be in the financial world. While <a href="http://www.investopedia.com/terms/i/index-etf.asp">ETF </a>Index investing is not nearly as frightening as trying to evaluate hundreds of securities accurately in a timely fashion, you still need to do your homework. In the next few blogs we will look inside the world of ETF Indexes, and try to lift the hood on how they work, rather than just kicking the tires. The areas we will look at will include index construction, index history, index proliferation, ETF structures, and the increasing number of ETF strategies available to investors.<br />
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Today we will tackle "<span style="color: red;">Indices"; what they are and how they impact your ETF Index Funds.</span><br />
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Let’s start by going back a in time a bit and discussing “indices” and how they came to be. One of the oldest and most commonly followed indices is the <a href="http://www.dowjones.com/">Dow Jones Industrial Average</a>. This index was developed by Charles Dow in 1896 to provide investors with a timely overall measure of the performance of the U.S. markets. It was created by measuring the “average stock price” of the 12 biggest industrial firms and has expanded to include the stock of 30 of the largest companies trading on the U.S. exchanges today. The name remains unchanged but the index is not nearly as focused on “industrial stocks” as the name might imply. <em>The lesson we learn here is that you cannot trust the name of an index to be a totally accurate reflection of what is being measured.</em><br />
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Much later the merger of financial service companies created the <span style="color: red;"><a href="http://www.standardandpoors.com/home/en/us">Standard & Poors</a> </span><span style="color: #3d85c6;"><span style="color: black;">Index</span>. </span><span style="color: black;">This index</span> changed the weighting process to “<strong><a href="http://www.investopedia.com/terms/m/marketcapitalization.asp">market capitalization</a></strong>” of the component companies instead of the average stock price weighting utilized by Dow.<br />
<em><span style="color: red;">The lesson learned here is that not all indices use the same methodology to measure an index. You need to know <strong>both</strong> what underlying securities comprise the index AND what methodology is being used to weight the index</span>.</em> <br />
Since the simple start a wide range of indices have become available to track markets big and small. In every case you need to know what is being tracked and how components are being weighted.<br />
While in theory you can use any methodology to weight the value of an index, the common ones tend to be: <br />
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1-<strong>market capitalization</strong> ( pure or capped): market capitalization weights the components of the index by multiplying each stock price by the shares outstanding to get the market value of a firm. It then calculates the firms weighting by dividing that number by the total value of all the firms in the index. A “capped” index will generally restrict any single firm from having a weighting greater than a set value ex. 10% of the total index. This capping is valuable in situations where the index has a small number of companies in it or when a single company such as Nortel gets too big and impacts the index’s ability to provide diversification.<br />
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2-<strong>stock price average</strong>: as stated above, the Dow Jones uses the “price” of the stock to calculate the index weighting relative to the total prices of all the stocks in the index. In reality the math does get a little more complex to account for mergers and other events which disrupt pricing, but the basics hold true. <br />
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3- <strong>fundamental indexing</strong>: the London Stock Exchange and Financial Times created a company known as FTSE, which in turn developed a different weighting system commonly called “<strong><a href="http://www.ftse.com/Indices/FTSE_RAFI_Index_Series/index.jsp">RAFI</a></strong>”. (research affiliates fundamental index). This weights each stock on a collection of pre-set fundamentals such as sales, book value, cash flow etc. A number of index fund providers now use their own set of fundamental analysis calculations to weight indices.<br />
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4- <strong>equal weighting</strong>: as it implies, each component of the index is treated equally, regardless of share price or market capitalization. This approach puts more emphasis on smaller companies than you would find in a market capitalized index. In general an equal weighted index would be more volatile than one that was cap weighted.<br />
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<strong>Indices have been created and tracked for over a century so how is it that ETF Index Funds are such a new phenomenon?</strong> <br />
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Well, creating, tracking. and valuation of indices has benefited from computing power. To trade effectively on an exchange the index needs to be able to provide valuations every second of every trading day: So computerized programs make index trading possible by providing efficient valuations of the underlying assets in the index. <br />
The second thing that needed to happen was to find an innovator who was willing to break with the status quo in the securities industry. It is obviously more profitable to sell an investor 60 stocks through 60 separate trades than it is to buy one ETF unit and accomplish the same result. Similarly, it is more profitable to sell a mutual fund which pays both upfront fees and trailer fees to a broker. In 1976 <strong>Vanguard </strong>in the USA created the first index fund to track the S&P 500 Index and that opened the flood gates to the index world for fund investors.<br />
<span style="color: #38761d;">In 1990 Toronto was the origin of the first Exchange Traded Index Fund when <strong>TiPS</strong> was traded on the TSX to track the TSX 35 Index.</span> That first ETF Index Fund has transformed several times to become the iShares S&P/TSX 60 of today. <a href="http://onlinepressroom.net/vanguard/">Vanguard </a>in turn has become the worlds largest provider of ETF Index Funds for investors. To understand why ETF Index Funds are not more popular than mutual funds re-read the second paragraph above about profitability for advisors/salespeople!<br />
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So, we have an evolution that includes creating the concept of indices, expanding the methodology for weighting index components, turning an index into a mutual fund, and then turning the mutual fund concept into an Exchange Traded Index Unit. <br />
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<span style="color: red;">Some key learning's for Investors are: </span><br />
<span style="color: red;">1- You cannot trust the name of the index fund to provide sufficient information to understand the fund components</span><br />
<span style="color: red;">2- Two ETF Index Funds tracking the same index with identical components can behave very different if the components are weighted with different methodologies.</span><br />
<span style="color: red;">3- It is rarely beneficial to an advisor/salesperson to recommend an ETF Index Fund over alternatives such as stocks or mutual funds.</span><br />
<span style="color: red;">4- Canada was home to the world's first ETF Index Fund......TiPS!</span><br />
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Next blog we will look at how ETF Index funds have grown in number and complexity, leading to a variety of structures that are often difficult to understand.<br />
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Sois mikeMike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-65288194392945657232010-10-03T12:13:00.002-04:002010-10-03T19:53:19.590-04:00Bubble Trouble: Will We Ever Learn!<div align="left" class="separator" style="clear: both; text-align: center;"><br />
</div><span style="color: red;">BUBBLE TROUBLE!</span><br />
<div style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none;">One of the most recognized signs of a <a href="http://bing.search.sympatico.ca/?q=investopedia%20bubble&mkt=en-ca&setLang=en-CA">bubble</a> is when every person you meet feels they are an expert on investing. We are all good at looking backward and finding “inflection points” where it is obvious in hind sight what was happening. Where we seem to be myopic is in identifying the manure BEFORE we step in it. History is a good teacher; but alas investors are poor students. </div><br />
I arrived in Toronto in the late 80’s and was involved in mortgaging real estate as the prices skyrocketed. Today it is no big shock to look back and see how the late 80’s real estate collapse was inevitable. Buying real estate in 89 was dumb....in retrospect. Similarly we can look at the stock bubble of 1999 known as the <a href="http://encyclopedia2.thefreedictionary.com/Tech+wreck">tech wreck</a>. To those that bought a house in 1989 and then put their RRSP savings into <a href="http://www.theglobeandmail.com/report-on-business/article965444.ece">Nortel</a>....well our heart goes out to you!<br />
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The incident of back to back bubbles is obviously not unheard of. As money fled real estate it crowded into high tech stocks to create the perfect conditions for the double whammy. So how does this relate to today’s market? Well, money fled the stock markets in 2008 and as stocks crashed large amounts of capital began to flow into fixed income investments. The net result appears to be the creation of a perfect scenario for the second half of the double whammy.... a fixed income crash. <br />
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In the case of fixed income, there is even more reason for concern than usual due to both behavioural and macro economic factors. The behavioural concern is the belief by many investors that bonds are inherently low risk. This means investors often choose not to pay close attention to the fixed income markets and price fluctuations. As well, many investors unfortunately have an inflated sense of their knowledge of how securities work (as validated by <a href="http://www.jasonzweig.com/brainbook.html">Zweig</a> ). Fixed income instruments such as bonds are interest rate sensitive (<span style="font-family: 'Calibri','sans-serif'; font-size: 11pt; line-height: 115%; mso-ansi-language: EN-CA; mso-bidi-font-family: 'Times New Roman'; mso-bidi-language: AR-SA; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US;"><a href="http://www.investopedia.com/terms/d/duration.asp">duration</a></span>) and move inversely to the movement of interest rates. If rates rise then fixed income markets drop in value. Also, if the economy weakens then debt instruments like fixed income face credit defaults which cause values to drop as well.<br />
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When you combine those facts with the current macro scenario of historic low interest rates and very low economic growth, you create the conditions for a fixed income disaster! Investor capital will flow to wherever they can find better yield. When that happens, the product vultures kick into gear and create “high yield” products to sell to the retail markets. For those who are kicking the tires on fixed income it may not be apparent that “high yield bonds” are known in the business as “<a href="http://www.investopedia.com/terms/j/junkbond.asp">junk bonds</a>”. Once again we see retail investors pouring money into opaque fixed income and yield products, ignoring risk and paying higher fees that often exceed the yield they might gain.<br />
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It very much looks like the <strong>double bubble</strong> process has begun! Every investor seems to be “seeking yield” and new product offering are focused on lowering the bar on bond quality. Junk bonds are now buried in “hybrid fixed income” funds and every fund firm is keying the marketing department to hype higher yield going into the 2011 RRSP season. ETF’s are not excluded as iShares launches its new HYbrid fund, joining the BMO High Yield Corporate (U.S) fund launched in late 2009, the iShares U.S. High Yield Bond index launched in early 2010, and a slew of others. According to IFIC the global and high yield bond funds market sales are up 62% year over year to August 2010. <br />
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Hang on tight folks. The bond world can be cruel to those who see it as a sleepy back water investment. With cash flow and capital far exceeding the equity markets, bond markets are dominated by the big players and are far from being a transparent playing field. Just when you think you are finally safe investing your hard earned savings again.....WHAM!<br />
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Anecdote: I just spoke with a DIY investor who told me he has purchased a fund of emerging market high yield bonds...... what could go wrong!<br />
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Sois mikeMike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com2tag:blogger.com,1999:blog-872609959597709892.post-89366124684090117152010-09-11T11:22:00.000-04:002010-09-11T11:22:28.995-04:00National Post article Jonathan Chevreau re: DIY FolliesWe thank Jonathan for his coverage. "A Little Advice A Dangerous Thing" adds to the discussion started with our DIY Follies blog. Follow Jonathan at the National Post.<br />
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<a href="http://www.financialpost.com/news/Wealthy+Boomer+little+advice+dangerous+thing/3507590/story.html">http://www.financialpost.com/news/Wealthy+Boomer+little+advice+dangerous+thing/3507590/story.html</a>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-89326843294539539262010-09-07T17:01:00.001-04:002010-09-07T17:08:42.121-04:00Crawling Out From Under An IIROC<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjHamiHr8933JUSZszm_hrmvx5-U3YgAVqW3LiqixIDBOMHM-h4OIkV_2qyO81vnJMWokQSrf0HXD6Sh8Z8LtoK1iCP59cA6wIydFtSedRjySRm7muSdcl_CRQeTspXfKWGoHKqqi6li6-/s1600/rockpile.JPG" imageanchor="1" style="clear: left; cssfloat: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" ox="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjHamiHr8933JUSZszm_hrmvx5-U3YgAVqW3LiqixIDBOMHM-h4OIkV_2qyO81vnJMWokQSrf0HXD6Sh8Z8LtoK1iCP59cA6wIydFtSedRjySRm7muSdcl_CRQeTspXfKWGoHKqqi6li6-/s320/rockpile.JPG" /></a></div><span style="color: red;">IIROC REPORT: New Product Due Diligence Regulatory Review– Common Deficiencies and Requirements for Written Policies, Procedures and Controls</span><br />
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The good folks at IIROC have just released a fresh <a href="http://docs.iiroc.ca/DisplayDocument.aspx?DocumentID=F17D558137DF404A8FD920ED7834021E&Language=en">report</a> designed to hold the investment dealer industry’s feet to the fire! They had their rapid response SWAT team swarming over the latest dealer fiasco's to give investors the heads up on current and relevant deficiencies in the sales of both <a href="http://docs.iiroc.ca/DisplayDocument.aspx?DocumentID=D244B7C9F2DD472CBFAA859EB6F3A04A&Language=en">Principal Protected Notes</a> (PPN) and.... well, basically every new product that comes along! <br />
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The fact that these issues were extremely relevant in 2007 and are far less useful or timely now would seem to mean little to our conscientious industry sheepdogs, oops watchdogs, at IIROC. The inspectors at IIROC seem to believe the best time to inspect the barn is after the livestock has gone missing. The good news is that in only 2 short years from 2008-2010, the inspectors were able to confirm the barn door was and still is, wide open!<br />
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In effect, IIROC is really disclosing how useless their services are to investors. The reason you inspect is to head off problems not define what went wrong. The regulatory environment in Canada acts as a great coroner..... however what investors need is a good diagnostician! This problem is not new and does not appear to be getting any better!<br />
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<strong>Barn Door Warnings</strong>:<br />
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1- <strong>Mutual Fund Disclosure Practices</strong> are a mess in Canada. This is despite of regulatory reviews that have proposed, reviewed and analyzed the issue since as far back as 2002. According to an article in <a href="http://www.advisor.ca/advisors/news/regulatory/article.jsp?content=20090826_161437_5668">Advisor.ca</a> in 2009, “POS disclosure has been a major issue of contention in the industry for more than a decade. It was a major plank of the work done by former Ontario Securities Commissioner Glorianne Stromberg in the late 1990s.” So, if you cannot work out a simple two page disclosure in a decade, what actual value do you add?<br />
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2- <strong>LEVERAGED ETF’s</strong> were a significant addition to the product line-up for advisors heading into the current mess. These are high risk leveraged products which can drain an account faster than you can imagine. So what training and skills did advisors require before pushing them on investors in the stock crash of 2008.... apparently only the skill to calculate a large up front commission fee. And who was there to protect investors? Well, not IIROC since the issue was driven primarily by FAIR Canada, an investor advocacy group that issued a warning report on <a href="http://faircanada.ca/wp-content/uploads/2008/12/etfs-may-14pm-etf-sw-final-final1.pdf">leveraged ETF’s</a> in May of 2009 after IIROC had watched over $2 billion in these funds get traded over a period of over two years! Hello.....watch dogs are supposed to sound the alarm before I get robbed not after!<br />
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3- <strong>Money Market Funds</strong> were actually being sold at a time when the return was less than the fee to own them. One would think this would jump off the page as an opportunity for a regulator to regulate the actions of dealers managing and selling the products. But, again the outcry was from others but not from our watchdogs!<br />
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Without getting too sidetracked, I think you get the issue! Investors in Canada are not being proactively protected when a self regulatory body such as the IIROC only appears willing to pull its thinking appendage out of its output channel well after the damage is done. It appears equally obvious that reviews such as this one are only being organized after others have blown the whistle on abusive practices. It cannot be coincidence that these reports are general and never seem to provide concrete examples of who benefited from the problem at hand and what were the consequences to those who benefited.<br />
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<strong>Report Highlights</strong>: I think the report truly does speak for the industry practices, or lack their of, so let’s look at the conclusions from the report itself:<br />
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<span style="color: red;">COMMON DEFICIENCIES:</span> <br />
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1- <span style="color: red;">Absence of a clear definition of “new product”</span> : This conclusion is simply that dealers do not even know what a new product is. They can sell it no problem and they understand the commissions with no problems.... but knowing if a product was available before last week is a little tougher!<br />
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2- <span style="color: red;">Absence of an adequate analytical framework for the consideration of whether the “new product” should be offered :</span>I guess we should not be surprised if the dealers do not check on suitability of the new product given the point above that they do not even recognize a new product when they start selling it. I guess the dealers are not as professional and diligent as new car sales people who can tell you the features on a new car model within 30 seconds of the car arriving on the lot! I would bet however, every advisor knew within 30 seconds what commissions and trailer fees were available.<br />
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3- <span style="color: red;">Absence of consideration of proficiency, training and marketing issues</span>: Again, it is a wonder that new complex financial products can get on the shelf at major brokerage firms with no consideration whatsoever to the ability of the advisor to understand and properly explain the product. A great example was the variable annuities which were so popular that Manulife is choking on the sale of the product. An advisor told me straight up that they called in the product rep from Manulife and after the presentation the advisor had no clue how the product worked but was fine to begin selling it!<br />
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4- <span style="color: red;">Absence of Product Due Diligence Committees:</span> This last point helps explain the term “reasonable deniability”. The dealers do not create committees to review new products because then they would be aware of the risks and training needed before the product could be sold. It would also increase the risk of a lawsuit since written minutes acknowledging the concerns raised above would create liability for the firm. No, the decisions are made with open eyes and with malicious intent; never create a committee that exposes risk which must then be disclosed and dealt with.<br />
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“So, what now our hardy and tardy regulators? Another few years of study, another memo on best practices?”<br />
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“You have published findings that by your own report are atrocious! Investors have lost and are continuing to lose millions due to these deceptive and incompetent practices.”<br />
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“ What is the call to arms? How do we use this information to better improve our industry? How do we ensure investor rights and interests come first?”<br />
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<strong>“ What..... do I have a quarter......and I should call somebody who what?”</strong><br />
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Oh, I get it. Thanks for your report on what we should have done in 2006 but still are not doing in 2010; and will not be required to do now that you have filed your report! "<strong><em>We couldn't have <u>not done it</u> without you!"</em></strong><br />
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<strong><em>sois mike</em></strong>Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com0tag:blogger.com,1999:blog-872609959597709892.post-2677099359424778542010-08-27T15:11:00.000-04:002010-08-27T15:11:55.945-04:00DIY Follies<span style="color: red;">DIY Follies and The Danger Of Web Experts</span>!<br />
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<div class="separator" style="border-bottom: medium none; border-left: medium none; border-right: medium none; border-top: medium none; clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8yv73s9NalYq0pgmmzd4ApbAullPVONsSAD7GGykkaWXogFw_uGoNgjQsJOaOg5ZnJq1J5oHEV1npf1T6ek1NhTZA6cYSOTXvguXHaVHljJSG8VTCOrwS1JieU20Lp6cvDnDoqdJT5Tvr/s1600/00285290.gif" imageanchor="1" style="clear: left; cssfloat: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" ox="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8yv73s9NalYq0pgmmzd4ApbAullPVONsSAD7GGykkaWXogFw_uGoNgjQsJOaOg5ZnJq1J5oHEV1npf1T6ek1NhTZA6cYSOTXvguXHaVHljJSG8VTCOrwS1JieU20Lp6cvDnDoqdJT5Tvr/s320/00285290.gif" /></a></div>First let me start by saying I am a big supporter of DIY investing, both professionally and personally. I believe investing is too important for people to completely trust their money to a third party advisor, regardless of how qualified the advisor might appear to be. I also think that fees in Canada are so egregious that many investors can make a better return on any DIY portfolio than they will on a “fat fee” fund strategy.<br />
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So what frustrates me about DIY? It is the smug self assured certainty of many DIY investors I hear from or read comments from. The web has been a great source of information on DIY investing, and much of it is good stuff. Unfortunately a lot of it is also total crap. It seems that reading a single book and wasting a few hours an evening on web blogs is actually deemed sufficient training to become an unlicensed expert advisor to the masses. To make matters even worse, the advice is most often anonymously shared by somebody hiding behind an ego driven pseudonym. Who would not want to follow the advice of “dividendman” or “investpert”! (my made-up examples in case these pretentious pseudonyms are really being used by somebody out there)<br />
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So let’s take a look at some of the idiotic recommendations that appear regularly on investment blogs from DIY advisor wannabee’s:<br />
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1- <strong>Only Idiots invest in Fixed Income</strong>: This one is an idiotic comment that even some mediocre professional advisors spout! With the professional advisor it is understandable because they make more money selling stocks than bonds. With the DIY guys it is because they are navel gazers! They often have no concept of risk or downside protection, little understanding of investment horizons, and believe anybody who disagrees with them is a moron. Not surprising many also claim to be young and thus have little money and plenty of time! By the same theory you should invest in lottery tickets since you have years to invest which greatly increase your odds of success.....right?<br />
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• <strong>1a- Contra the DIY</strong>: Equity investing is high risk. The returns on equities are typically higher over the long term but with no certainty that the returns will be superior on any given day, month or year. The larger market corrections can take over three years to recover and equity markets can move sideways for decades at a time. In fact some money managers believe we are in a seventeen year sideways market as I write. In looking at a top investment firm’s numbers for the past 5 years, I see a fixed income fund with average 5 year returns of 6% and with no negative returns in the 5 year period. The same firm’s equity portfolio was a top performer over the past 5 years and has a return of 6.3%. Net of fees (2% on equity and 0.9% on fixed income) and the fixed income portfolio has higher returns, lower volatility and lower fees. So what if the person was indexing their DIY portfolio? The benchmark returns were 3.7% for the equity fund and 4.9% for the fixed income fund.<br />
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2-<strong> Dividend Funds are the perfect strategy for everybody</strong>: The blog world is filled with folks who push the concept of 100% dividend stocks. They suggest that only the bright geniuses like themselves are aware that “dividends pay you to hold the stock in good markets or bad” and that historically, the “consistent dividend growth is the secret to better investment returns”. In fact dividends can pay more than GICs so sell your low interest GICs and buy dividend stocks and you will grow rich!<br />
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<strong>2a – Contra the DIY</strong>: Dividends are indeed a good thing! They are not however the primary investment goal of all clients. Most dividend companies are in older mature and thus lower growth industries. If you are in equities for growth then you may find non-dividend paying energy or tech stocks more appropriate than the dividend approach. The blue chip dividend stocks are often very highly priced with similarly high price earnings ratios. When dividends outstrip GICs it should come as no surprise that the additional return is compensation for increased risk. The other nasty part of a dividend strategy is when a firm suddenly decreases the dividend and the stock drops like a rock. It can take a lot of years of 3.2% dividends to make up for a 35% price drop! (think Manulife for a recent real life lesson)<br />
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<strong>3- Don’t Invest in Foreign Markets Because of a- currency risk, b- currency conversion fees, c- Canadian markets will outperform! </strong>: The Canadian market is a top performing market. European markets are weak sisters that never make a good return and Japan is a wasteland! The smart money invests in Canada because we have natural resources that can only become more valuable over time. We also have gold that will save us when the world ends as we know it. The stock markets all move together so it does not pay to diversify by geography. The loonie is king and foreign holdings increase currency risk too much.<br />
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<strong>3a –Contra the DIY</strong>: In fact diversification has very little to do with long term currency risk and long term investors do not suffer a lot of losses on currency fees (which are still annoying and to be minimized). The diversification into foreign countries is done for two reasons. Foreign countries often have less than perfect market correlation which means if we drop 30% and Europe drops 25% in a bad market, we would benefit by holding some Europe equities on average. Historically the major markets do not hold the top spot for more than a few years before a nation drops back and is replaced by a new market that is heating up. You cannot reasonably predict the world wide shifts so benefit from holding a little of many markets. You do not expect peak performance from every market every year.<br />
The second reason to diversify geographically is to diversify across sectors. Canada is a small market with little health or high tech companies to be had. Foreign firms often provide better exposure to business sectors the Canadian market cannot offer.<br />
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<strong><span style="color: red;">4- Follow My Lead Because I Made 30% Returns For Every Year in The Last 7 Years!</span></strong><br />
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I buy only a- dividend, b- small cap, c-gold and diamonds, d- options, e- outer Mongolia futures, and I have beaten the pros for years. Everybody else is stupid and I am a genius and am willing to share my brilliant approach with you! Honest! Check my blog! Honest! Ask my brother-in-law! Honest!<br />
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<strong>4a Contra the DIY</strong>: Unfortunately, I am only exaggerating a little bit! There are several thousand very bright and well educated investment experts with almost unlimited support from top analysts. They did not miss your magic formula for success! You are not a genius unless you do it, have it audited by professionals, and can repeat it over and over. You may be lucky, you may have incorrectly measured results or you may be full of crap! It’s hard to tell from this side of the screen, but I am very confident you are not a genius! Honest! Really! Seriously!<br />
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The DIY world is a great place with a lot of bright folks who are interested in investing! But be aware, not every comment is created equal and a little assumed knowledge can indeed be very dangerous. The key to success in the DIY world is very simple: Do Your Own Research! Blogs can be fun and informative but they are not tested or validated. The top forums or blogs will most often make it very clear they are expressing “opinions”, not expert opinions, and just somebody’s opinions. They also make it clear they are not licensed security advisors and you should not buy or sell on their opinions, but rather may want to research what they are commenting on.<br />
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Your sceptical of advice friend.....SOIS Mike!Mike Macdonaldhttp://www.blogger.com/profile/13530904393665436991noreply@blogger.com3