Socially Responsible Investing: Tim Hortons is Out!?

Take a look at the holdings of the iShares Jantzi Social Index® Fund (symbol: XEN) and you will not find that Canadian icon of ordinary life, Tim Hortons (THI). What gives, why doesn't Timmies make the grade that iShares describes this way: "The Index is comprised of securities of Canadian issuers selected by Jantzi based on criteria for identifying companies that reflect a higher standard of environmental and social performance."?

The question is pertinent because Tim Hortons does appear in the standard TSX Index of the 60 largest Canadian companies. In the iShares S&P/TSX 60 Index Fund (XIU) that invests in the TSX 60 index, THI is in 47th spot.

When I compared the holdings of XIU and XEN, no less than 25 companies in XIU comprising about 30% of its total market cap did not make the cut in XEN. Other puzzling deletions compared to XIU - Manulife (why them while Sun Life is in?), George Weston (groceries, how bad can that be?). Unfortunately, as I wrote in yesterday's post, beyond the general statement of the principles it follows, Jantzi does not reveal any details about why specific companies are included or excluded (actually, Jantzi does not even reveal the list of companies in its index, it is only because the ETF publishes its holdings that we can even see that much).

Interestingly, XEN's replacements for those 25 companies (it also holds 60 companies like XIU) were all really small, accounting in total for only 4% of the total market cap of XEN. In other words, XEN in reality just puts a lot more weight on the biggest companies, mainly the banks (e.g. Royal Bank goes from 8.3% of XIU to 11.6% of XEN). Another stat - XEN's top 10 holdings = 62% of the holdings, XIU = 46%. XEN is a significantly more concentrated portfolio than XIU, which is a riskier investing strategy. Also, XEN's MER is 0.5% while XIU's is 0.17%.

Is Tim Horton's really not a socially responsible investment and why not? Is it that their coffee comes from exploitative producers, the litter that emanates from outlets, the food that harms people, employment practices etc? Should we in good conscience not invest and maybe just drive by to the next competitor outlet? Or was it just that Jantzi needed to make space in its index for trendy companies like Zarlink, Jean Coutu and Harry Winston Diamonds? The criteria for inclusion and exclusion of particular companies amongst those who create indexes or funds that follow socially responsible investing principles really needs to be more visible.

Socially Responsible Funds: Forcing Investors to Buy Blind

Recently, one of my kids suggested I look into Socially Responsible Investing. She doesn't want to invest in companies like Copper Mesa, which is apparently doing bad things in Guatemala to the environment and the local population near their mine.

A popular way to invest in companies that toe the SRI line is to buy one of the many mutual funds (e.g. Social Investment Organization's 2010 Guide to SRI Mutual Funds) which promise to adhere to such principles. Do you think you could actually find out whether Copper Mesa is amongst the holdings of any particular fund? Unfortunately, no. Funds seem to only publish their top ten or twenty-five holdings. An exception is the only ETF in the field in Canada, the iShares Jantzi Social Index Fund (symbol: XEN), which has a constantly updated complete list of its holdings. They are not especially noble in that since all ETFs are similarly transparent. At least one can see there is no Copper Mesa within.

Beyond the generality of statements like the following, a fund prospectus isn't a lot more explicit or detailed about its own method of stock selection.

"Positive and negative screening, such as tobacco, alcohol, environmental performance, human rights violations, community involvement and employee relations. Screening involves the application of pre-determined social or environmental values to investment selection. The aim is to screen out particular companies or sectors based on values choices, or to positively select companies considered “best of sector.”

Does Jantzi Sustainalytics, the well-established leader in SRI indexing, do any better in revealing what companies its indexes contain or the exact inclusion/exclusion criteria? Not that I could find.

To my mind, simply sticking the SRI label on a fund and asking individual investors to believe in the product is not sufficient. Most SRI investors I would guess feel strongly about specific issues or companies they wish to promote or avoid, so they need to be able to figure out if the fund is ok that way. Unlike politicians who are never to blame for anything, companies are never perfect. Indeed, as fact sheet #2 on Social Investment Organization admits, "Social investors know there are no perfect companies." SRI investors must pick their spots and be able to act on their preferences.

Copper Mesa is probably in no fund's holdings, SRI or not, given its dodgy corporate machinations and financial condition (see this post on StockHouse and the TSX delisting announcement). After all, it is investing (I doubt any SRI fund screens out companies for making too much profit, an inference I make based on the prominent presence of Canadian banks amongst top Canadian SRI fund equity holdings).

However, bigger, successful companies like Barrick Gold may be more problematic. It has attracted criticism at MiningWatch Canada. Since Barrick is a large company we are fortunately able to find Barrick among the top 25 holdings of the Acuity Social Values Canadian Equity Fund (see latest March 2010 Quarterly Portfolio Disclosure). Investors should be able to see all the holdings to decide for themselves whether the fund is acceptable or not with Barrick in it.

The SRI sector, especially given its avowed aim, needs to apply its own principles to itself and adhere to a higher standard of transparency and disclosure.

Tale of Guaranteed Seg Fund Payout Epitomizes How Bad They Are

Toronto Star columnist James Daw's Dentist finally collects tech-stock profits story on a dentist who during the tech bubble bought one of those Principal Protected Note funds that guarantee your money back in ten years if you lock in profits after a rise epitomizes what is wrong with those products.

Despite using the lock-in feature, Daw reports that dentist Millar:

"Someone who invested $100,000 when Millar did would have seen market losses and stiff annual fees erode the fund value to only $48,500 as of a few weeks ago.

But Transamerica would have paid $123,000, the value of the fund at the last guarantee reset. That's was only an average annual return of about 2.1 per cent, just enough to have kept up with rising consumer prices."

I don't know why Millar is so happy. Even with Millar's smart lock in timing, he only made 2.1%. There is a tech ETF, the Tech Select Sector SPDR (XLK) whose annualized total return from inception in December 1998 (i.e. the mid stage of the bubble) to March 2010 was negative but only minus 1.6%. The Daw article doesn't say exactly when Millar bought (I'm guessing it was earlier and at a lower tech market price), but the fees ate up most of the protection for Millar.

Review and Ratings of Canadian Online Tax Software: 2009 Taxes Edition

Preparing a Canadian income tax return online through a web browser for subsequent filing electronically via the Canada Revenue Agency's NetFile program has been a real boon for the convenience and for the speed of the refund. Though there are also NetFile-capable tax prep packages that can be downloaded onto a home computer, this review focuses on the web packages only.

It has been a time-consuming job trying out every one of the twelve web tax preparation packages certified for NetFile by the Canada Revenue Agency. Entering the same tax data over and over has been a revealing and at times frustrating task.

Ratings Method: total score out of 45 max points on 5 factors

1. Privacy and security (10 points) - How well does the online tax prep company protect your data and your privacy? What do they promise and what evidence is there of their capability to deliver? Unfortunately, this is the weakest area of the ratings - my numbers could be fairly wide of the mark - since it is hard to get much tangible proof of the reality vs the promises made, even compared to the minimal promises as are publicly made on the websites. Only one company (Acetax) actually claims to have been audited by an external party. CRA does not do anything, so far as I am aware, to check up on the companies and how they handle our data, which I think is shocking and unacceptable, given that a lot of people likely believe that NetFile certification somehow gives assurance of security protection.
2. Flow, readability and layout (10 points) - How does the appearance and the flow of the program guide the taxpayer through all the steps, ensuring that everything is entered correctly in the right places? Is it easy to go back and forth, to review results and check one's work or make changes? The programs vary enormously on this factor, from simple on-screen versions of the paper forms, which merely do the arithmetic correctly and transfer amounts (or are supposed to!) between forms, to sophisticated interview processes akin to interaction with an accountant, asking questions to uncover all income and deductions and credits.
3. Help (10 points) - How much access to explanations about tax rules is provided and how well placed is it? One of my pet peeve test items this year is the infamous T1135 Foreign Income Verification Statement which a taxpayer with foreign property over $100,000 in cost must fill in, sign and send in to CRA. Does the program tell you, ideally at the point when you have to tick that box, that it is not required for foreign holdings within registered accounts like RRSPs? Some do not say so and others do not say that the T1135, if required, cannot be done online and that it must be submitted by mail on paper.
4. Responsiveness (5 points) - How fast is the online application at saving data and refreshing the screen? slow = frustration! Well done to QuickTax for a major improvement in upping its speed to acceptable levels this year.
   
5. Accuracy (10 points) - new rating factor this year! How good a job does the program do at calculating your taxes and helping you legally pay the least amount? For those who think that NetFile certification means the programs will all come up with the same answer (as I believed myself before starting to look at all these packages a few years ago), it is time to recognize the reality. As I commented last year, CRA's certification only means the program is correctly including all the revenues. the programs differ enormously in their ability to automatically detect and claim all deductions and credits to which you are entitled. As a result, in my own case with all the packages my total income on line 150 was identical but balance owing on line 485 showed five different amounts, one of which was a few thousand dollars different (impossibly wrong) and the others anywhere from a few dollars to a few hundred dollars apart. The very best package (TaxChopper) at using deductions and credits for an individual and/or shared amongst family members is like having an skilled accountant doing your taxes - it is essentially an expert system for income tax. Three examples tested the packages' ability to optimize using age amounts and pension splitting, tuition and education transfers, foreign tax credits with inter-provincial residence thrown in for the trickiest rule. In no case did any other package beat TaxChopper - it always found deductions, transfers and credits to use and end up with the lowest taxes to pay. The difference on a potential $4700 tax bill was about $500. Optimization can be very worthwhile.
   

Rankings:

Highly Recommended
#1 UFile and TaxChopper - tied with 38 points.
Both are outstanding programs but excel at different things.

UFile - "Polished, easy to use and handles all but the more sophisticated tax reduction optimizations".

TaxChopper - "An expert system for income tax – Delivers on the biggest refund / lowest tax to pay promise"


Recommended
#3 H&R Block - 34 points "Technically, it's UFile but it has a few undesirable privacy features of its own"

#4 QuickTax - 33 points "Guidance every step of the way with plenty of questions, reminders and some useful suggestions for future tax planning"

#5 Acetax - 32 points "For those who need minimal help and are familiar with tax forms"


Merely OK
#6 WebTax4U and Taxnic.ca - tied with 26 points
WebTax4U "For those who know where things go and are familiar with tax forms"

Taxnic.ca "OK package if you know what forms to fill and credits to claim."

#8 EachTax - 22 points "Looks like the forms. Not much more than a spreadsheet with colours."

#9 MBOTax and eTaxCanada - tied with 21 points
MBOTax "It's like working with the paper forms except amounts get transferred automatically and arithmetic is done correctly."

eTaxCanada "Still looks like a beta version – Too many rough edges, not intuitive and some key omissions and errors"


Not Recommended
#11 FileTaxOnline - 16 points - "Not recommended – too many weaknesses, some fatal"

#12 5dollartax -2 points - "Crude, half-finished effort, not worth using."


I would highly recommend taking the trouble to enter your data into at least two of the top packages to see if the results match. You do not even need to pay the fee before seeing the end result and enough detail to figure out where one likely differs from the other, which could be due to your input error or to package optimization differences. Once you've fixed the errors, you can see which package gets you the most back.

Wikipedia's tax software page has a list of prices, freebies and limitations (e.g. ones not offering Québec provincial returns) for the various packages in a single table.

UFile Online Web Tax Software Giveaway

Got all those receipts and tax slips together yet? Ready to start entering the data? Even if you have already filed, you may want to check your answers since some packages optimize credits and deductions better than others and legitimately calculate less tax to pay. You can always file an adjusted return to get money back from the CRA.

UFile has generously donated to this blog five access codes to use with the online version of its tax preparation software, which can be used to either file electronically through NetFile or to print out a paper return for mailing in. Last year, UFile was my top pick amongst all the online packages. This year's update will be out very soon, so keep reading to see who gets top marks this year.

To enter the giveaway leave a comment on this blog post under a unique name - so I can tell people apart - by midnight eastern time this coming Sunday, April 11th. I will then do a random draw announcing the five winners on the blog, who will be asked to contact me by email (winners' email will be used only for the purpose of this giveaway, nor will it be given to UFile, the CRA or anyone else). I will email back the access code that will enable free use for a whole family's returns, a $24.95 value!

Investing in Malt Whisky II - Unique Risk

A few years ago, I posted about the potential for making money investing in rare single malt whisky. I neglected to mention one of the risks particular to this asset class. This recent YouTube video demonstrates that not even HRH the Queen and Prince William are immune from such risks!! ;-)