Canadian Financial DIY

Swapping in the Invesco PowerShares Canadian Fundamental Equity ETF

2012-05-14T16:20:00.001Z

For the last few years, the iShares Canadian Fundamental Index Fund (TSX symbol: CRQ) has been my core Canadian equity holding. It is also the ETF used in the portfolio contest at the bottom of this blog, which pits the Fundamental indexing approach against the traditional cap-weighted index approach. Just as as I replaced some time ago the cap-weighted fund XIU with a lower cost equivalent ETF HXT, now it is time to replace CRQ with a new lower fee ETF.

The new CRQ-equivalent was launched with too-little (since I missed it at the time) fanfare in January (press release here) by the Canadian arm of Invesco PowerShares, which offers a number of similar RAFI funds in the USA, such as PRF, PRFZ, PDN, PXH and PXF. The new Canadian equity ETF is the PowerShares FTSE RAFI Canadian Fundamental Index ETF (TSX: PXC).

PXC's big attraction is an MER of only 0.45% vs 0.71% for CRQ. There will be a little extra cost for PXC's trading and annual rebalancing that will only be known in a year but it should in the area of CRQ's 0.6% since it follows the identical index and trading rules as CRQ. That 0.2% lower fee will be money in my pocket - $20 extra for every $10,000 invested each and every year, which will compound and add up over the long term.

As I started to look more closely at PXC to assess its potential for my portfolio, it became apparent that I am not the only one who has been in the dark. Trading volumes are minuscule. Some days there have been no trades at all and on many days there have been less than a hundred shares traded. That has caused some misleading pricing reporting for PXC on mainstream sites like Google Finance, TMX Money and Morningstar, which all use Toronto Stock Exchange public data.

The public data makes it look as though PXC is doing a very poor job tracking its index and its Net Asset Value (NAV, the value of the underlying portfolio holdings within PXC). Look at this Morningstar chart of PXC's closing price vs that of CRQ. The lines don't overlap at all though they should track almost perfectly given that the two ETFs track exactly the same index with its holdings and weightings.

PXC also seems to be far off having its market price reflect its NAV per this Morningstar chart.

Meanwhile CRQ has been tracking its NAV very closely.

Making the situation even more puzzling is data published on the Invesco website in this table.

If we look closely at the data for May 4th, a day in which there is a large spread between PXC's price and NAV, we see that Google, Morningstar and TMX all report a closing price of $20.01. Invesco's table reports the price as $19.43, purportedly based on TSE data. The NAV was $19.45. It took a phone call to Invesco to clear up the discrepancy. According to Invesco, the reason is that most of the trading for PXC has actually been taking place on alternative exchanges like Alpha and the price there, which Invesco has been reporting, much more closely matches the NAV since it is much more current.

The important thing for the investor is that the bid-ask live quote for PXC at any point will be close to NAV. In that regard, I have minimal fear of paying a big premium over NAV for PXC. Unfortunately there is no way of actually verifying that since in Canada, unlike the USA where it is apparently required by regulation, the intra-day live NAV value is not available on any website. Yesterday, when I spoke to Invesco rep Chris, he checked and relayed to me that while the NAV at that moment was $19.00 the market bid price was $19.00 (what the bidder was offering to buy shares at) and the ask was $19.03. That's a very reasonable spread premium of only 0.16% for an investor placing a market order to buy. So the ETF pricing mechanism that keeps ETF prices and NAVs very close is not failing for PXC. Invesco says that there are six market makers for PXC, with the primary one being National Bank.

In short, PXC checks out ok. The 0.2% lower annual expense is worth the switch. Claymore or new owner BlackRock/iShares should have pre-emptively lowered CRQ's too-high fees. I am replacing CRQ with PXC in my test portfolio as well as my own holdings.

Disappointing News on Banking Ombudsman

2012-04-30T16:48:00.002Z

Today, the Financial Post features an article about federal Finance Minister Jim Flaherty saying that he "will not force the country’s banks to resolve client disputes through the Ombudsman for Banking Services and Investments (OBSI) and is set to unveil new rules and regulations that will allow financial institutions to hire their own mediators to sort out disputes with clients."

Royal Bank and TD have used private mediation services for the last few years since opting out of OBSI. The world may not be falling dramatically apart because of this but it is and will be worse as made clear in the comparison table of OBSI vs TD and Royal's private mediator ADR Chambers, published today as it happens by Fair Canada. Harm by small individual abuses is harm nevertheless. Blessing and encouraging the expansion of private dispute resolution will further tilt the scales in favour of the banks over consumers. As the hoary expression goes, "he who pays the piper calls the tune".

UFile Giveaway Winners

2012-04-22T09:16:00.001Z

The draw has been done. Congratulations to these three winners of the giveaway: IG, Aidan and Be'en. Please contact me via the "email me" link in the right hand sidebar and I will send you the code to enter to use UFile for free.

WaterFurnace Renewable Energy(WFI): 2011 YE Dilemma

2012-04-18T07:38:00.005Z

Last month WFI published its annual report of 2011 results. For investors, the report along with the conference call (available on CNW), the annual information form (AIF) and the information circular paint a positive picture on some fronts offset by negatives on others and overall stagnation.

Competition from Natural Gas
When I made my original assessment of WFI 18 months ago, I concluded that the main constraint on the company's renewed growth was US housing starts and that when the US housing market recovered, sales and earnings growth would begin again. Not so certain, it now appears. The success of fracking and the resulting now plentiful natural gas supplies causing low gas prices are providing another big restraint on potential home geothermal heat pump installations. Consumers do the math and conclude that natural gas is cheaper, as the annual information form concedes: " ... very low natural gas prices will put competitive pressure on geothermal heat pumps if availability and low gas prices persist." That's probably why WFI said in the conference call that the residential market was down 9% in 2011.

That something else besides housing starts is affecting WFI's residential sales is seen in the fact that US starts did rise steadily through 2011, a condition about which management said the following in the Q1 report: "Housing starts are forecasted to be 600,000 by the end of 2011, despite the overhang of foreclosures and tighter bank lending practices. The residential replacement market will continue to be the single greatest opportunity for geothermal heat pump installations for the next several years. As residential new construction revives, then this will present a significant upside opportunity for the business." Housing starts reached 700,000 in December yet WFI experienced falling residential sales. The latest AIF still doesn't include natural gas prices amongst risk factors.

The discussion of the economics in the Wikipedia geothermal heat pump article tells us that the economies of scale on capital costs benefit commercial large buildings much more than residential, making systems more cost effective for commercial buildings, which is most likely why WFI's sales in that segment continue to grow.

WFI management says it is also looking more to international markets for growth - in the UK, China and South Korea - and also in the commercial sector. Maybe, but possible success is in the future and not evident now. The Hyper Engineering acquisition of 2011 in Australia is having no discernible effect except that shares issued for the purchase helped dilute earnings per share by 1 cent to $1.14.

Not-so-good Numbers in Financial Statements
Several 2011 numbers aren't good for investors, though not disastrously so.
1) Executive and employee compensation was way up - What justifies executive compensation rising 31% and employee salaries and benefits 13% (while employee headcount dropped from over 300 to 287) in 2011 given that company earnings and sales stagnated and the stock price dropped dramatically? The $1.7 million or so excess increase over what a 3% inflation rise would have been represents $0.14 cents less in earnings per share. Has the Board (whose rise in fees was only 2.6%) been paying attention? It is a dilemma to invest in a virtuous green company only to have management and employees grab an increasing share of the profits.
2) Warranty claim provisions rising faster than sales - Note 12 in the financial statements records another whopping increase (27%) in provisions for warranty claims, a big chunk of which is due to an increase in claim rates, as opposed to more units under warranty from higher sales. How this jives with an assumption stated earlier in the annual report that unit failure rates will remain the same as in the past is not explained ( I sent the company an email asking for an explanation and have not received a reply). Warranties have become a significant part of balance sheet liabilities and of cash flows (as a non-cash item added back). In the future if the reserves are correct or too low, when warranties are honoured/paid out, the warranty cash flow will reverse and become a drag on cash flow. There will be much less leeway to keep up dividends. If the reserves have been too high, earnings will get juiced by one-time upward adjustments. It is getting harder to understand how profitable WFI actually is.

In short, WFI has become much less attractive than before with its current sales geography and product mix, perhaps not to the point of selling, but management needs to deliver on expansion to new regions of the world and/or through new products.

UFile Tax Software Giveaway

2012-04-16T09:08:00.008Z

Here's an opportunity for all the last minute tax filers to use UFile, one of the packages I rated highly recommended in my annual review last week. UFile has been one of the best packages ever since I started doing assessments several years ago.

Dr Tax, the makers of UFile, have supplied me with three codes for the online web version of UFile to give away to blog readers. With the code you can prepare your taxes for free, a value of $15.95 for an individual return, or $24.95 for a family (spouse and dependents).

This is how the giveaway works:

To enter submit a comment on this post below - though you don't have to, I'd be interested in your comments on tax prep software; use a unique name (Anonymous won't suffice!) so I can distinguish people
One entry per person please
Entries close Friday, April 20th midnight EST
I'll do a random draw of three (3) names from amongst the entries after the deadline
Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the UFile software (your email will not be used for any other purpose than to contact you as a winner)

Best of luck and remember to file by the deadline of April 30th. UFile, like the other NETFILE certified packages, lets you do it online quickly and conveniently.

Review and Ratings of Canadian Online Tax Software: 2011 Taxes Edition

2012-04-12T16:26:00.023Z

Tax time again! For the 6th year running, these are my ratings and assessments of the best and the worst of the online tax preparation programs available to Canadian taxpayers for 2011 tax returns. As before, I've gone through all the packages certified by the Canada Revenue Agency for electronic submission of a return through NETFILE. The same ratings method has been used but the results are a bit different. Some packages are better, some just the same as last year, one is sadly worse and there's one new entrant.

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

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? As I said last year, it is unfortunately still the case that this is the most uncertain 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, as they woefully admit in the disclaimer on the webpage with the list of packages, 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.
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.
Help (10 points) - How much access to explanations about tax rules is provided and how well placed is it? One of my on-going pet peeve test items 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. Failure to send in a T1135 can be very painful.
Responsiveness (5 points) - How fast is the online application at saving data and refreshing the screen? slow = frustration! Some of the programs are a lot more reliably responsive, an important factor if you are in the final throes of meeting the April 30th deadline.
Accuracy (10 points) - 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 two years ago, 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 different amounts, anywhere from a few dollars to a few thousand dollars apart. In the cases where I had thousands less to pay this was the result of incorrect eligibility for deductions that the programs did not prevent. It is only because I used them all that I got to learn what should be the correct result. Some are much better than others at preventing incorrect input but it is always worth the time to use a couple of the programs to enter your data and compare the results. They all allow you to see the bottom line in much detail, if not actually to print or submit the completed return. The very best package (TaxChopper) at using deductions and credits for an individual and/or shared amongst family members is almost like having a 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 was about $250 on a total refund of around $6000 for the fictional test family. Optimization can be very worthwhile.

Rankings:

Highly Recommended
#1 TaxChopper - 40 points - a repeat winner
"A tax expert system – Delivers on the biggest refund / lowest tax to pay promise. Best value for money."

#2 UFile - 38 points
"Polished, easy to use and handles all but the more sophisticated tax reduction optimizations"

Recommended
#3 H&R Block - 35 points
"Technically, it's UFile but it has a few less desirable privacy features"

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

#5 EasyCTAX - 30 points
"Biggest improvement since last year's “beta version”. Now a credible product."

#6 AceTax - 29 points
"Just fine for those who need minimal help and are familiar with tax forms"

#7 (tie) WebTax4U - 26 points
"For those who know where things go and are familiar with tax forms"

#7 (tie) EachTax - 26 points
"Looks like the forms; for those who know what forms to use. Much improved responsiveness."

#9 Taxnic - 24 points
"OK package if you know what forms to fill and credits to claim. What CRA would give us if they created a NetFile package – no error checking or optimization, just the forms and correct transfer of amounts from box to box and form to form."

Merely OK
#10 MBOTax - 20 points
"It's like working with the paper forms except amounts get transferred automatically and arithmetic is done correctly."

#11 eTaxCanada - 19 points
"New interface a step backwards. Works ok if you know what you are doing and which forms to use"

Not Recommended
#12 - FileTaxOnline - 13 points
"Not recommended – too many weaknesses, some fatal"

#13 5DollarTax - 3 points
"Crude, half-finished effort, not worth using."

#14 FASTnEASYTax - not rated
New this year. Doesn't support rental or self-employment income, or returns for Quebec, Yukon, Nunvaut, NWT

Sobering Views of Future US Stock Returns

2012-03-26T08:31:00.003Z

Those thinking "phew! thank goodness stock markets have returned to normal and happy days are with us again" may want to read John Hussman's A False Sense of Security on the Hussman Funds website and James Montier's What Goes Up Must Come Down on AdvisorAnalyst.com. Both articles just published in March 2012 make a compelling argument that US stocks are richly valued since corporate earnings are artificially (government stimulus) and unusually high, distorting the P/E ratio and prospective returns.

Hussman's bottom line: "... we project total returns for the S&P 500 of just over 4% annually over the coming decade"

Montier's: forecast annual real total return for the S&P 500 over the next seven years of only 0.4% (see Exhibit 2 in his article)

That is woefully weak compared to the long term historical annual average of 6.2% for US stock returns documented in Dimson, Staunton, and Marsh's Credit Suisse Global Investment Returns Yearbook 2012.

Fundamental vs Cap-Weight Portfolio: Still Neck and Neck after 20 Months

2012-03-20T11:35:00.003Z

No Clear Winner Yet - Last time I reported on the contest in August 2011, the cap-weight portfolio had jumped into an inconclusive lead. The contest between portfolios made up of either fundamentally-weighted or cap-weighted ETFs continues without a clear winner. The portfolios, shown in detail in the Google Docs spreadsheet at the bottom of this blog page, have been updated with all distributions up to and including February 2012. The $85 separating the two portfolios' values is a miniscule 0.07% difference. Three of the fundamental ETFs are in the lead against their cap-weight rivals while four of the cap-weighted ETFs are ahead, but by lesser amounts.

Every Asset Class is Up - Our contest start date of June 2010 must have been a good time to get into the market since every ETF is above its initial start value. The portfolio as a whole has gained 16%, a very satisfactory result for less than two years in the market.

No Rebalancing Yet Required - None of the ETFs has deviated beyond the limit (more than 25% away from its target allocation e.g. a 4% holding can go up to 5% or down to 3% before our rule kicks in) we set for forced rebalancing. That has been the case since the start. Both portfolios are quite maintenance-free. There is cash building up however, and come the June anniversary date, it will be time to invest that cash into the ETFs that lag their target the most.

Lack of Automatic Reinvestment Warps the Comparisons - One of the difficulties with making head to head fundamental vs cap-weight comparisons between ETFs within an asset class is that the cash distributions do not get reinvested within the ETF. The market hype of the ETF providers use total return calculations which assume that the distributions do get reinvested when received. Our growing cash pile includes an important part of the ETFs' returns but the cash doesn't show in the current market value of the ETF shares that we use to do the Red vs Green who-is-ahead comparison. Since the ETFs do not distribute the same amount of cash, the total returns can be a fair amount out of whack with the Red vs Green indicator on my spreadsheet e.g. PXF distributed USD$404.82 in 2011 while its counterpart VEU paid out USD$644.80; VEU is much further ahead at the moment than the $124 showing in the spreadsheet. The truest comparison of my test is at the total portfolio level.

The best direct head to head matchup is between Canadian equity ETFs CRQ and HXT since in those cases, the dividends do get reinvested. In HXT's case, the construction of the ETF itself as a total return swap ensures that HXT's value reflects reinvested distributions. In CRQ's case, Claymore's free DRIP program buys new shares for the investor so all but a few dollars each quarter gets reinvested. Right now CRQ, despite its much higher MER, is winning the race by 2.6%.

Luck or skill? Ray Dalio of Bridgewater

2012-03-07T10:18:00.006Z

Do investors like Warren Buffett succeed through luck or skill? The statistical argument is that such success cannot be distinguished from luck so therefore we cannot believe in skill. Yet ... when we encounter successful people in more tangible pursuits like sports or music, we don't say they are just lucky.

The other day I came across Principles, the exposition of what uber-rich investor Ray Dalio believes and lives by. Dalio is the founder of Bridgewater Associates, the world's biggest hedge fund according to Wikipedia. (Interestingly, Bridgewater manages some of our pension money as one of the Canada Pension Plan Investment Board's private investment partners). Principles isn't flowery imaginative writing - just plain, matter-of-fact, direct statement - but what it says rings true. It also isn't about investing principles he follows - that may come later he says. Though meant primarily as a management bible and indoctrination tool for new employees at Bridgewater, there is much value for self-reflection on what it takes to be successful e.g. "everyone has weaknesses. The main difference between unsuccessful and
successful people is that unsuccessful people don’t find and address them, and successful people do".

Dalio evidently (e.g. see John Cassidy's Mastering the Machine in the New Yorker of last July) lives by his principles with a ruthless and implacable discipline. It's the same as in any other human endeavour. To become highly successful, let alone the best, requires enormous unstinting effort.

Interesting is his take on ability since most people including me believe that talent must be there too. His reply is "... if you are motivated, you can succeed even if you don’t have the abilities (i.e., talents and skills) because you can get the help from others". In investing terms, that could mean using an advisor but then Dalio's principle 187 kicks in - "Have good controls so that you are not exposed to the dishonesty of others and trust is never an issue. A higher percentage of the population than you might imagine will cheat if given an opportunity, and most people who are given the choice of being “fair” with you and taking more for themselves will choose taking more for themselves." Or it could mean a person should take the passive index ETF route where talent and ability aren't required at all.

Dalio unintentionally provides support for the argument that there really is investing ability. First, as he says in principle 31,"People who have repeatedly and successfully accomplished the thing in question and have great explanations when probed are most believable. Those with one of those two qualities are somewhat believable; people with neither are least believable". The phenomenal success of Bridgewater is a hefty track record and this book is a pretty good explanation.

Second, in footnote 38 on page 21 he says "Luck—both good and bad—is a reality. But it is not a reason for an excuse. In life, we have a large number of choices, and luck can play a dominant role in the outcomes of our choices. But if you have a large enough sample size—if you have large number of decisions (if you are playing a lot of poker hands, for example)—over time, luck will cancel out and skill will have a dominant role in determining outcomes. A superior decision-maker will produce superior outcomes". Investing is very much an activity where there really is luck or true uncertainty at play so one cannot expect always to be correct, no matter how much data one collects and analyzes. Now, it is true that the world's biggest hedge fund may have got there merely by gathering assets and snowing all those giant pension funds about actual investment performance but there is some direct performance evidence cited in Wikipedia.

As the ancient Greek Aeschylus said "Call no man happy till he is dead". Dalio's investing prowess is only as far away as the next market shift that he has not anticipated which runs contrary to his investments. He does claim not to be too concentrated and is aware of the danger per principle 197 "make sure that the probability of the unacceptable (i.e., the risk of ruin) is nil ... knowing what you don’t know is at least as valuable as knowing" and principle 195 "Constantly worry about what you are missing. Even if you acknowledge you are a “dumb shit” and are following the principles and are designing around your weaknesses, understand that you still might be missing things". The New Yorker article also says he deliberately does not make any concentrated bets to avoid the possibility of being wiped out.

A blowup by Bridgewater / Dalio would no doubt make the skeptics happy, strangely including blogger Pension Pulse. I prefer to think investing is like sports - champions do exist because they are better than everyone else at the time but they all have their day.

TurboTax Giveaway Winners

2012-03-05T10:11:00.003Z

The draw announced last week for the three packages of online web-based tax preparation software courtesy of TurboTax has been done and the winners are:

Skip
JonE
Pandaincanada

Congratulations!! To claim your prize please contact me via email using the "email me" link under Have a question or an idea for a blog post in the column on the right hand side of the blog. I will send you the code that is good for any online version of TurboTax. The code is entered at the end of your data entry when you are ready to file and the payment step comes up. Your email address will not be used for anything else.

Thanks to all for participating and may your 2011 tax preparation be painless and quick. Again, thank you to the folks at TurboTax.

Book Review: 52 Ways to Wreck Your Retirement ... and How to Rescue It by Tina Di Vito

2012-02-27T16:47:00.008Z

Looking for an easy to read and digest introduction for the ordinary "Joe" with the basics of how to make a success of retirement? If so, this book by Tina Di Vito, who is the head of the BMO Retirement Institute, is aimed at you.

Written in an informal style with a smattering of numbers and almost no tables, graphs and calculations, the book speaks to the reader in the manner of a chat at the kitchen table by a knowledgeable friend. Each of the fifty-two chapters covers one or two ideas in about five pages, with single sentence "to do" points at the end of each. It is easy and pleasurable reading.

It is thus no surprise that the content provides a good understanding of the nature of problems and their solutions but for the most part, does not give enough knowledge for the reader to go off and fix things him/herself. It is not a book for the DIY person. Rather it is a book that prepares the reader to be a smarter consumer when going to seek the advice of a professional advisor.

To make the bottom line message of the book "go get professional advice" is fine. But I wanted more detailed and trenchant coverage than we get in the chapter (51) on the topic of who to get advice from. The reader is given a list of twelve types of accredited advisors with each designation's title, initials, website link and description. That's a good start but the descriptions are too overlapping and vague to allow someone to know which to choose for what problem and how or whether to assemble a team.

It was also disappointing not to read more cautions about advisor compensation and the potential for conflicts of interest between what is good for the advisor and what is good for the client. The existence of commission, fee-based and fee-only compensation models is not explained, nor the dangers lurking for clients whose advisors do not act first and only on their behalf. That is as surely a way to wreck one's retirement as any other in the 52.

Similarly, the author could have been more forceful in emphasizing that retirees should pay close attention to the costs and fees for various products mentioned. Whether it is mutual / ETF funds, insurance, principal protected notes, segregated funds, flavours of annuities and retirement income products, costs matter a lot in deciding whether any are worth buying at all. The idea may fit the problem but the fees/costs may be too high.

Favorite Bits:

see yourself old and save more for retirement ... a research study is cited wherein people who were shown an image of themselves digitally altered into old age saved at more than twice the rate ... since I do not have such software, I'll just have to make do with looking at my parents instead!
people buying stuff with a credit card instead of cash are willing to spend 50% to 200% more for an item
retirees feel a loss five times more than a similar gain; that sensitivity, aka aversion, to losses compares to the usual 2:1 ratio cited for the average person; I looked up the original study at AARP here and discovered that in fact many retirees scale at 10:1 or more.

Rating: Not the complete story but worthwhile, 3.5 out of 5 stars.

Thanks to the publisher Wiley, where the complete table of contents can be viewed, for providing me with a review copy. It is also available there for purchase in Adobe's Digital Editions (software is free download) eBook format, which is how I've read it on my laptop.

TurboTax Online Web Software Giveaway

2012-02-24T16:22:00.007Z

The Canada Revenue Agency online tax submission service is open for business and the receipts we need to prepare a tax return are being mailed out these days (see a timetable for this tax year here). The tax software vendors are ready too.

Thanks to Intuit, the makers of TurboTax, I am giving away three codes for any online web version of TurboTax. That's right, prepare your taxes for free, a value of $17.99 for the Standard version, or $32.99 for the Premier version (adds investments and rental income) or up to $44.99 for the Home and Business version (contract worker or self-employed) .

Here are the details of the giveaway:

To enter submit a comment on this post below - though you don't have to, I'd be interested in your comments on tax prep software since I am again working on my annual review of all the CRA Netfile certified packages (last year's review here); use a unique name (Anonymous won't suffice!) so I can distinguish people
One entry per person please
Entries close Friday, March 2nd midnight EST
I'll do a random draw of three (3) names from amongst the entries after the deadline
Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the TurboTax software (your email will not be used for any other purpose than to contact you as a winner)

Good luck, everyone!

Judge Lays Out Limitations of OBSI

2012-02-22T10:01:00.004Z

A judge would be considered by most an expert in justice and an impartial observer of the conditions that lead to justice. It is thus worth noting the recent comments of Judge Bryan Shaughnessy of the Ontario Superior Court regarding the Ombudsman for Banking Services and Investments (OBSI). Though his comments are made only in relation to whether the OBSI would be a suitable body for resolving a class action in the case before him, I think his list applies in general to OBSI as a means for investors to get justice.

Here are the defects and limitations Judge Shaughnessy lays out:

the OBSI invites participation by firms but cannot compel cooperation
the OBSI can make a recommendation but it cannot compel a firm to make the payment recommended
the only remedy for non cooperation by the firm and/or not following the recommendation is the "rather anaemic remedy" of publishing the name of the firm and details of the refusal
the enforcement procedure is not binding on the firm; this amounts to "... a denial of access to justice" for investors
the OBSI can only handle complaints for amounts up to $350,000 unless the parties agree
claims for punitive damages are not an explicit option under OBSI; I would guess this is what the Judge is thinking about when he says later that behaviour modification "... does not appear to be the objective or mandate of the OBSI process".
"The appearance of impartiality and independence of the OBSI is to some extent in play. ... [since] the ombudsman's recommendation is not binding on the Participating Firm or the Complainant. A truly impartial and independent body would have control over its process."
the OBSI dispute process is sparsely defined
there is no hearing process for complainants to introduce evidence or make submissions and there is little or no chance for investor participation
the OBSI is not bound by rules of evidence
the procedure by which recommendations are arrived at does not lead to a record of how the OBSI's recommendation is calculated

So there we have it, a checklist for reforming and strengthening OBSI.

Don't get me wrong. OBSI, even with its deficiencies, has been doing valuable work for investors. It does, however, need a counter to the industry offensive to shun it, no doubt spurred by too many cases where OBSI has taken the investor's side. As the saying goes, the best defense is a good offense. Let's reform OBSI and make it a body with sharp teeth and power. Go to it politicians.

Thanks to Ken Kivenko of CanadianFundWatch.com for the heads-up on this court case (the details of which seem to show some odious, abusive practices involving mutual funds, financial "advisors" and inappropriate leveraging advice). Ken's website also has a very practical (and sobering) investor guide to dealing with the OBSI. The pdf judgment from which I extracted the Judge's ideas is linked to on this page of the website of Thomson Rogers, one of the law firms in the case.

CEO Pay: Seven Canadian Companies with their Heads Screwed on Right

2012-02-20T17:08:00.019Z

My last post about the insane escalation of pay for CEOs over the last few decades finished with a teaser. It promised a list of companies where some sense of sanity seems to prevail against the tide, where the rewards for CEOs can be more justified, a) in relation to wages of average earners (e.g. 40 times a $40k wage, or CEO pay maxing out at $1.6 million) and b) in comparison to what the shareholders obtain in returns.

So here we go. Below is a table of my star companies, entered in the Globe's WatchList to show some performance data. Note how all the companies have positive five year total stock returns - shareholders have made money in every case and in most cases have made a lot of money. Just as low cost funds give good investor returns, so do low-CEO-cost companies! They are all generating earnings and in all but one case, sport a healthy return on equity.

1) Ritchie Brothers Auctioneers - CEO Peter Blake earned $796,000 in 2005 going up to $1.1 million in 2010, a increase of about 1.4x. That salary is among the lowest on the TSX yet the company isn't the smallest by any means. Total shareholder returns from 2005 to 2010 can be seen in the graph and table below from the company's Management Information Circular for 2011 available from SEDAR. Ritchie has outdone the TSX by a big margin.

2) Keyera Corp - CEO James Bertram enjoyed pay of $1.4 million in 2010, up 1.3x from 2005. Meanwhile shareholder return climbed by an even higher multiple of 2.0x. This company pays a healthy and growing dividend. It has cranked out consistently rising profits since 2006 and the latest quarters continue the trend. Pretty darn good, to put it mildly.

3) First Majestic Silver - CEO Keith Neumeyer's $1.4 million pay packet in 2010 represents a 7.0x rise over 2005 pay. Mind you, at the end of 2010 he was also sitting on $6 million or so of value in uncashed in-the-money options. Shareholders still enjoyed a 7.2x return during the same 2005-2010 period.

4) Fairfax Financial - CEO Prem Watsa chooses not to be paid like other CEOs since he is also the company founder and controlling shareholder. Therefore I've replaced Watsa's pay with the next highest exec's, COO Bradley Martin - $1.2 million in 2010. He got $841k in 2005. That's up 1.5x. The 2005-2010 shareholder total return, shown in the graph below, outstripped that handily, up 3.2x. There's a decent and rising dividend too. Recent quarterly earnings have been hit hard but at least we know the CEO is suffering along with the rest of shareholders. As the Management Information Circular puts it: "Mr. Watsa’s compensation arrangements reflect his belief that as a controlling shareholder involved in the management of the company, his compensation should be closely linked to all shareholders; this close link is achieved by his “compensation”, beyond a fixed salary, coming only from his share ownership." Hear, hear.

5) Pembina Pipeline Corp - CEO Robert Michaleski pulled in $2.6 million in 2010, up 2.4x over the 2005 figure. Shareholders got more or less the same increase. Pembina pays a healthy dividend, which has been rising at a reasonable rate too. The pay level is starting to get high but includes no options. Instead it is about half in shares so the CEO's fortunes should continue to evolve more or less in line with those of shareholders.

6) Silver Wheaton Corp - CEO Peter Barnes's pay of $3.3 million was up 2.0x from 2008 to 2010 while shareholder returns were 4.9x. At the end of 2010, Barnes also held in-the-money options worth over $19 million and had exercised options during 2010 for a gain of $7.4 million. This company is not typical of other more mature companies as it was only launched in 2004, Barnes being one of the founders. During 2005 there was no actual salary paid to the CEO as management was compensated through a contract with another company, which is why I've compared only from 2008 onwards. Silver Wheaton has a lot more the allure of a situation where entrepreneurial founders have perhaps earned greater gains by creating true value ... or perhaps they have been lucky so far since the business model depends hugely on a high and/or rising price of silver.

7) SXC Health Solutions - CEO Mark Thierer made $3.7 million in 2010, a rise of 3.3x over 2005. Meanwhile shareowners in the same period made a far greater return of 8.2x. That's generally what investors would like to see! However, it's hard not to notice the extremely high P/E of 43, suggesting that shareholder returns are exposed to a possible drastic fall. For example, if the stock price fell by half to a high but more normal P/E just over 20, the shareholder return of 8.2/2 = 4.1 would still be as good as the CEO's. Seems fair enough. (The company has never paid dividends, so all the return is share price appreciation.) SXC has grown by leaps and bounds since its IPO in late 2005. Revenues rose from a mere $79 million in 2006 to $1936 million in 2010, with the biggest jump occurring in 2008 with a very large acquisition. Profits have been consistently rising though nowhere close to the same pace as revenue.

It is encouraging to see that at least a few companies have their CEO head screwed on right. The above companies are not the only ones so blessed, though others that fit into the mould are not numerous.

Addendum: a few more companies where CEO pay meets my criteria (2010 pay in brackets): Reitmans Canada ($1.5M), Aecon Group Inc ($1.5M), Inmet Mining ($1.6M), Russel Metals ($1.6M), ShawCor Lt ($2.2M), Laurentian Bank ($2.2M)

CEO Pay: Houston (Toronto, London), we have a problem

2012-01-30T17:26:00.026Z

People may have noticed the rich pay for CEOs in 2010 reported in Canada's CEO Elite 100 and dismissed it as the usual envious chatter emanating from a left-leaning policy institute. From my perspective as an investor with holdings in all these companies, direct or indirect (we pretty well all do through our pension savings, ETFs, mutual funds etc) I think they have a point.

An epidemic of overpaid CEOs
The plain fact is that CEOs earn too much. All the pay-for-performance, maybe-they-earned-it arguments fall by the wayside when one realizes that CEO pay has been rising much faster than employee wages in those companies. The pre-amble to the CEO report says the average CEO collected 189 times the average Canadian wage in 2010, up from 105 times in 1998. Have we entered a golden age of company profits and investor returns? Have CEOs been responsible for all good things in industry such that they merit the lion's share of any gains?

A long-developing epidemic across industries and major countries
It's not just the current whipping boys in the banks and the financial industry either. The phenomenon cuts across all industries. It's not just Canada either. The same meteoric CEO pay increase has been happening in the USA (e.g. see this recent academic paper by Jerry Kim, Bruce Kogut and Jae-Suk Yang on SSRN which refers to many studies on the topic, or Meritocracy vs Plutocracy on The Big Picture blog) and in the UK (see Pay and Performance: creating a fairer share of rewards) where it is such an issue that Prime Minister Cameron is promising to legislate shareholder votes on CEO pay that bind the corporation.

The research papers document that the epidemic began around 1980 and really took off during the Internet boom. The Kim et all paper maintains that though the Internet stock price bubble popped, it did not pop on pay. Instead the bubble caused a lasting upward shift in the norm for CEO pay expectations.

Update March 27 - Two other papers reinforce the idea that a problem exists by showing a longer historical perspective and pinning down wages as the main culprit. Note how the top income earners are getting a bigger share since around 1980 in TOP INCOMES IN THE UNITED STATES AND CANADA OVER THE TWENTIETH CENTURY by Emmanuel Saez:

Note also how wages is the main driver of this trend in this chart:

The Rise of Canada's Richest 1% by Armine Yalnizyan of the Canadian Centre for Policy Alternatives has this chart that shows the trend continuing unabated up to 2007. Table 2 in the paper also confirms that wages are the main component of top earner incomes.

CEOs acting like children and playing leapfrog
Every parent will recognize the basic mechanism by which CEO pay goes up. If one child gets something then the other expects the same thing. Peer comparison is the most important factor by far in establishing the pay level for a CEO. Despite all the complicated schemes (read the details for any public company in its annual Management Information Circular which is available on Sedar - click on Search Database then Search for Public Company documents - for every Canadian TSX listed company), they all boil down to more or less what similar companies pay. Apart from the academic studies that confirm the fact, the telling and remarkable result of these complex compensation plans is that somehow, year after year, whatever company financial results or stock performance, CEO pay almost always rises, often in huge upward leaps, and almost never goes down.

A paper by Thomas DiPrete, Greg Eirich and Matthew Pittinsky says that the few CEOs who manage to leapfrog each year to the upper end of the pay scale pulls every else along in a chain reaction. A governance failure in one firm propagates through all companies.

CEO Myths - motivation, retention and talent
It is astounding that CEO performance motivation is constantly invoked as a primary justification for high pay and big bonuses. Hey, I went to business school too where I learned that Maslow and Herzberg long ago determined that pay is not a performance motivator. At best it is a potential dis-satisfier.

There is evidence from Harvard Law School that high CEO pay harms a company - "Corporate Pay Slice [CPS = CEO's percent take out of the top five execs] is negatively associated with firm value" - in CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer.

Another oft-cited reason is that should the big pay not be granted, the CEO will leave and perhaps the Board will resign too. Fine, let's call their bluff, let 'em resign. In the UK, Easyjet founder and major shareholder Sir Stelios Haji-Ioannou denounced fatcat bonuses proposed by the Board, noting that the Board and executives could be easily replaced. One of the things you quickly learn in the corporate world is that life goes on without you, you can quickly be replaced and forgotten.

There are plenty of competent people around. The plain fact is that almost all of the so-called corporate superstars are nothing of the sort. Most are managers, keeping things going that others have created with improvements at the margin. Very few make orders of magnitude positive difference. Many destroy a lot more value than they create.

How many real business superstars are there? Think of the difference between the ultimate results of true superstar Steve Jobs and former Apple CEO John Sculley (isn't it interesting that Sculley was the highest paid executive in Silicon Valley in 1987). A corporation is a team and the CEO may have an important role as the captain but without the rest of the players, he or she won't succeed. The CEO Forum has a good discussion of the matter in Is talent overrated? (the answer is yes it is).

CEOs get their real reward from the feeling of power, of being the top guy. Pay only matters to the extent that it is close enough to peers.

Set the ball rolling in the other direction.
A few days ago, Royal Bank of Scotland CEO Stephen Hester turned down a bonus of £963,000 (it is interesting in itself how many news reports talked of a £1 million figure, as if the difference is inconsequential; I daresay most taxpayers would be overjoyed to receive that £37,000 in small change, which was treated as a rounding error) just after the RBS Board Chairman Philip Hampton had himself decided to forego his £1.4 million bonus. The fact that the RBS came to be majority owned by the British taxpayer during the credit crunch gave politicians the leverage to cause the bonus refusal.

But hey! Now we have a new peer reference point for Canadian banks to apply the peer reference method so cherished by compensation schemes! Hester's salary is £1.2 million, or about $1.9 million. The CEO of Canada's own Royal Bank, Gordon Nixon, pulled down $11.8 million in 2010 according to the CEO Elite report. Hmm, that looks to be about $9.9 million too much. Since RBS is actually more than twice the size of RBC - £1522 billion (CAD$2395 billion) in 2010 assets vs $718 billion - Nixon should get about half what Hester gets, shouldn't he? Yet, even including the refused bonus Nixon made almost four times as much as Hester.

Another peer benchmark possibility, since most of these CEOs are not much more than bureaucrats - indeed it is debatable whether a CEO's job is tougher than a senior civil servant who has to contend with public politics not just the corporate variety - would be to benchmark CEO pay against the civil service. The feds pay a maximum of $360,600 in the top GCQ-10 scale and $513,000 at the top of the crown corp scale.

What's comparable anyway? "Long time ago, a CEO explained to me the only difference between big business and small business was the number of 0s after the number" from FrontOfficeBox.

Compromise CEO pay proposal
Let's set the maximum ratio of total CEO compensation to a firm's median employee pay at 40 times (e.g. if median employee is paid $40,000, CEO gets at max $1.6 million) which was more or less the situation around 1980 when things started down the wrong path. Let Boards figure out whatever arcane method they wish to arrive at that result. 40x is very generous, as the CEO earns in one year what it takes the employee 40 years, almost a whole working career, to earn.

Putting fatso CEOs on a money diet
Many of the mainstream proposed solutions to reign in CEO pay involve improving corporate governance. These include: limiting poison pills, eliminating golden parachutes, stopping so-called shareholder rights plans that entrench management, enhancing board independence etc. But governance has been improving in the last decade at least, while CEO pay has continued to rise disproportionately, so it's doubtful that will have a big effect.

Perhaps "say-on-pay", especially if it is mandated by legislation, would have some effect. Since Canadian governments have said not a peep even about advisory say-on-pay, I'm not holding my breath.

The most effective mechanisms would affect what I think is the root cause of this long-lived bad trend. A culture change is required. Corporate Board and executive thinking needs to change.

Hit 'em in the ego where it matters. Praise the good guys for reasonable pay, dump on the greedy, make reasonable pay a morality issue, practise social ostracism - something like the drinking and driving campaigns that transformed attitudes and behaviour. A good example of that kind of expression of disapproval is the stripping of the knighthood granted to the man whose actions as RBS' boss almost sank the bank, Fred Goodwin. Apparently he cannot find a new job. Good, Goodwin's kind of "talent" isn't really needed by the world of business. The hysterical reaction of the British business community indicates the arrow of scorn has hit its mark.

Canada could stop awarding honours like the recent the Order of Canada to people such as Calvin Stiller, notorious as founder of the horrible money sinkhole investment fund, the labour-sponsored Canadian Medical Discoveries Fund. To add insult to the financial injury to investors, the Order cites his "his leadership as a medical entrepreneur"! Check out the Morningstar price chart for CMDF, see what people on Financial Webring think of it, a sentiment with which I totally agree since I lost 80% on my own investment in CMDF). Perhaps Stiller is an outstanding doctor but a successful entrepreneur he ain't.

Canadian CEOs bloated from eating too much shareholder lunch
On my other blog recently, I posted my choice of the worst CEO pay offenders, like Marc Tellier of Yellow Media and Frank Stronach of Magna International.

To keep the proper positive outlook for the future, next post will cover some of the few Canadian companies that I think are closest to being on the right pay track.

Risk-Efficient Indices - Evidence from Live Results

2012-01-27T15:58:00.009Z

One of the biggest problems with any financial research is that patterns and strategies that worked in the past may not work in the future. The folks at the EDHEC Research Institute who created supposedly "new, improved" Risk-Efficient Indices about which I wrote a year ago, have now come out with data in the Live Results article that tests their theory. It uses actual results from the last two years, data that comes from the time after the new index method was worked out and thus could not merely be suited to the method simply because it was part of the data set used to create it.

The "new, improved" indices are put up against the traditional cap-weighted index method which is taken as the benchmark or representation for all major markets like the S&P 500, the TSX 60 or Composite, the FTSE 100 and which underpins all the biggest ETFs around. EDHEC also compares results of other alternative indexing methods (which die-hard cap-weight believers refuse to call indices at all) like Equal-weighting, RAFI Fundamental and Minimum volatility. Here's one of the EDHEC charts for the US market.

1) The good ole cap-weight S&P 500 loses to every other method, not only in terms of raw return but also in various measures to adjust for risk (Sharpe ratio, Sortino ratio, Information ratio, Treynor ratio), just as it did in the model-building time period.
2) The FTSE EDHEC Risk-Efficient Index wins by the most and by a huge amount over the S&P 500.
3) Minimum Volatility is a close second, perhaps even first, given the risk adjustment ratios. Perhaps the new ETFs launched on this basis, which I wrote about in my other blog in Low Volatility ETFs - Promising Safety and Reward, are worthwhile.
4) The Risk-Efficient out-performance is repeated separately in the UK, Eurobloc, Japan and Developed Asia ex Japan. RAFI fares indifferently (oh-oh, for my portfolio!). The other two couldn't be tested.
5) The Risk-Efficient performance is primarily NOT due to exposure to small cap and value factors. It comes from better stock weighting.
6) "... provide some evidence that the performance advantages of efficient indices largely stem from the improved diversification."

So far, I've only been able to find one actual live fund that applies the new Risk Efficient index method, the Parworld Track FTSE EDHEC-Risk Efficient Eurobloc traded in Luxembourg. Expect more to come from the ETF industry.

Is this a real improvement over cap-weighting, or an artifact of data that doesn't go far enough back (only to 1959 for the S&P 500)? Of course, by the time there is enough data to satisfy everyone, we will all be dead.

World Economy Trends from McKinsey: Long Slow Recovery in Progress

2012-01-24T16:35:00.008Z

Consulting firm McKinsey Global Institute's Debt and deleveraging: Uneven progress on the path to growth tells us that the recovery from the global credit crisis, three years later, has only just begun and will still take many years to complete. That's the bad news. The good news is that this is in line with past similar crises.

Canada used to be so much better off than the USA in terms of total debt but now things are fairly equal as Canadians have added debt while Americans have shed it. Amongst major economies, the USA is going fastest in the right direction according to McKinsey. Breaking the debt down by sector, another chart (Exhibit E4) shows that Canadian financial institutions have considerably more debt proportionally than those in the USA.

Exhibit A4, copied below from the long version of the report, shows that counting unfunded US government pension and health benefits for retirees pushes the US debt burden up to 140% of GDP. That still leaves it no worse in total than countries like Spain and France. The two countries by far in the worst overall debt shape, both of which have not even started deleveraging, are Japan and the UK, yet their borrowing costs are not at crisis levels. Huh?

Takeaways for investors: 1) Canadians should not be smug and should not count out the USA (you don't get to be number 1 for no reason); 2) Expect 3-4 years more of uneven weak economic times before things get much better though the "getting worse" phase seems to be finished; 3) Opportunities will arise for companies in infrastructure and public sector projects since governments won't be able to add more debt to build them; 4) Consumer demand won't be strong.

Penalties on Securities Lawbreakers - a Fine Mess

2012-01-23T11:48:00.008Z

Last week the Ontario Securities Commission revealed its poor record of collecting fines it imposed on those it found guilty of violating securities laws since 2005 - collecting only about half of total amounts owed, almost all of which came from negotiated settlements (with mainly major financial companies who always pay up) and virtually none of which came from contested hearings, where the most egregious fraudsters get sanctioned.

Though I suppose we should be a little grateful that the OSC is even revealing its performance - a new departure and a good step - and that improvement seems to be the OSC's goal, a brief analysis of the numbers in the Globe and Mail by law reporter Jeff Gray shows that the effort is a long way from anything that could be considered acceptable performance.

The Globe quotes the OSC director of enforcement on how tough the collection job is. Out in Alberta the ASC gives the same "we're doing all we can" explanation / excuse about its dismal record of not collecting fines.

Well, that's not good enough. They say they want to improve. Perhaps they could start with The Collection Gap's lengthy examination of the collection issue in the USA, where they have the same poor performance problem. The multitude of reasons advanced (including those of OSC and ASC) to explain woeful collection of fines, like individual incentives, institutional incentives, regulatory capture and insufficient resources, are reviewed and evaluated. The authors conclude that the fine collection impediments are mainly within the control of the agencies, not beyond their control (as the OSC seems to claim). Though the report is about the USA, the situation sounds a lot like Canada. (Thanks to Ken Kivenko of CanadianFundWatch.com for the link to this document.)

For more tips on how to collect, they might want to consult Canada's "Collections R Us" aka Canada Revenue Agency. CRA's tax debt (taxes not paid on time) was only about 5.5% of total collections back in 2005 when the Auditor General last looked.

If there were a national securities regulator, whose terms of reference included a stronger mandate, incentives and mechanisms for enforcement and collection than provincial regulators evidently now have, greater cooperation with the CRA might also be possible. The CRA should be very interested. After all, income from investment fraud and illegal gains are subject to income tax too as noted at IncomeTaxCanada by Jim Maroney.

Bloggers for Charity Guest Post: Walking to End Women’s Cancer

2012-01-17T12:54:00.006Z

It's the Bloggers for Charity guest post day! Blog readers will recall, and will certainly notice if they read other Canadian financial blogs, that today is the day for the publication of the guest posts for bidders with the winning donation to a charity of their choice. Kudos again to blogger Mark Goodfield of the Blunt Bean Counter for coming up with the idea and getting it organised. The winning bidder here came up with $200 and here is her post.

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Why do I walk in the Walk to End Women’s Cancer?

By Jamie Woodyatt

The Weekend to End Women’s Cancers (http://to12.endcancer.ca/site/PageServer?pagename=to12_homepage) walk, this year taking place September 8-9, 2012, came to Toronto 10 years ago with a goal to raise funds for research and treatments for women facing Breast Cancer. The funds are distributed locally so that it benefits the women where the “walks” take place. In Toronto the funds go to Princess Margaret Hospital. Participating in the event is a true commitment; each walker must generate a minimum of $2,000 in donations for the privilege of walking 60km over 2 days. The bonds formed during the ‘walk’ between walkers, volunteers, survivors, team mates, crew, is amazing as thousands of people join together for their individual reasons for a common goal TO WIN THE WAR AGAINST WOMEN’S CANCERS – NOW!!!.

Some of my inspiration… My aunt is very socially aware and has many causes that she raises funds for and she has walked in the 60km Princess Margaret 8 times. She also took on the 60 km walk in each Canadian city that holds a 60km walk in 2009 (that would be 7 cities). That means that she has walked over 800 km to raise funds and awareness. She also sponsors and participates in the Make a Wish ( http://www.makeawish.ca/)golf tournament each summer. She throws a Christmas bash each year for her friends, family and work associates where guests bring gifts/donations to Nelly’s (http://www.nellies.org/) a charity that offers shelter to women and children leaving violence. She walks for her Mom who lost her battle with breast cancer before I was born and she walks as a survivor as she battled breast cancer herself. She is definitely an inspiration and a role-model which pushes me to be a better person.

In 2010 both my Grandfather and my Mom were diagnosed with cancer. I felt blind-sided I needed to do something, so I joined my Aunt's team and walked for the first time in September 2010. It was incredible; the people you meet and the families who contribute. The support is unbelievable; I HAD to walk again the following year.

My Aunt no longer does the walk herself so she has “passed the torch” so to speak. So In 2011 I started both days walking alone; I met fantastic people along the way and made new friends on both days. On 'day one' I met a walker who had lost his younger sister to cancer the year before; she was only 7 years old. On ‘day two’ I met a woman my age that hadn’t lost anyone to cancer but believed in the cause. I was inspired by her most of all, her intentions were entirely self-less and it was her 3rd year to make the commitment!! Since I had walked the previous year too I know from experience its no ‘walk in the park’… although we do walk through some of the most beautiful parks in Toronto!

I would like to give a special Thank You to the people that continually support the walkers; Their families, those that make donations, the volunteers, the crews, the bikers that stop traffic and keep us safe, the people that honk and boost morale, the people that hand out beer and champagne (definitely helps!), the older lady that made home-made pizza and treats (delicious, I wish you were my grandma!), the guys that set up the mist tents outside their houses (AMAZING! Nothing is more refreshing during a hot walk than a mist BLAST), All the little girls who hand out pink lemonade (SO CUTE!) And the list goes on…. You guys make the walk fun and add so much to the roller coaster of emotion we feel!

I walk so there WILL be a cure in my lifetime. I can’t imagine a world without my Aunt or my Mom. With my family’s history I am at risk too. I am a single Mother and the love of my life is Nathan my wonderful rough and tumble 3 year old that I would do anything for. I not only walk for my survivors but for the next generation too.

I am proud to say I will be walking another 60K this year. With over 120 million dollars raised, The Princess Margaret Weekend to End Women Cancers is making a difference, and is a cause I am proud to be a part of. Aside from my son’s birth, it is the most exhilarating experience of my life and will continue to walk for years to come!

If you wish to help me this year I have attached my link - http://www.endcancer.ca/site/TR/Events/Toronto2012?px=3408993&pg=personal&fr_id=1463. I hope that everyone that reads this realizes that giving your time and effort to a greater good is a heady experience and I recommend it highly; nothing makes you feel better than helping.

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To which I, your regular blogger here, would add this. This guest post could not be more appropriate for my blog. It's perhaps fate, or maybe just a reflection of the prevalence of breast cancer (talk to anyone you know, it is pretty sure that a close friend or family member has had the disease), that this post concerns the disease that stole away my first wife eleven and a half years ago. Support this cause, support Jamie. The link above to donate works great, as I can say from having used it myself. Good luck, Jamie!!

BlackRock Purchase of Claymore ETFs - Do the Smart Thing Please!

2012-01-11T23:09:00.010Z

Today's announcement that BlackRock will acquire Canadian ETF provider Claymore could be a good thing for BlackRock and for ETF investors, if some smart, and not dumb changes, ensue.

Claymore charges quite high MERs - about 0.5 % too high - for its ETFs in comparison to those of BMO Financial, iShares and Vanguard. The takeover is a great opportunity for BlackRock, which already owns iShares in Canada, to lower the Claymore MERs and bring them in line. This will attract more investors and not cannibalize its iShares ETFS. In the USA, similar fundamental RAFI-based ETFs (e.g. Invesco Powershares US broad market equity fund trading under symbol PRF) have expense ratios about 0.3% lower than Claymore's, though even that is too high.

Why would BlackRock not lose by lowering fees? Claymore's ETFs are considered to be actively managed (though I do not agree with this characterization, that's the dominant public perception), more an alternative to actively managed mutual funds than to traditional passive market-cap weighted index ETFs. Let BlackRock take on the mutual fund industry with a much more compelling price proposition. After all, Claymore's ETFs already have most of the attractive features of mutual funds - auto & free DRIP and Systematic Withdrawal, Pre-authorized chequing purchases.

The dumb strategy would be to leave Claymore as is, with continued stagnation, or to raise fees, a recipe for investor flight. Claymore's ETFs are being left in the dust. For instance, the flagship Canadian equity fund Canadian Fundamental Index ETF (CRQ) has only $218 million in assets despite being started 3 years before BMO's Dow Jones Canada Titans 60 Index ETF (ZCN), which has $604 million in assets.

Book Review: Uncontrolled Risk by Mark T. Williams

2012-01-10T10:12:00.011Z

"Occupy" protesters would benefit from reading this book. Instead of the mindless directionless opposition to everything capitalistic they would know a lot better who and what to blame for the narrowly averted collapse of the world's financial system in 2008. Better, they would know the kinds of reforms and controls that need to be implemented to make the system operate with more stability to avoid a future recurrence.

In fact, every shareholder and voter needs to know this stuff too. After all, when things go wrong with the financial system, we all get a rather severe smack as a result. The scary fact of the matter is that the conditions that allowed the crisis to build up, the way the system works, have not substantially changed.

Williams informs us by telling the story of the rise and fall of investment banker Lehman Brothers. The story method is very effective in showing how the situation built up over decades as the people, the company, the industry, the regulatory bodies, the political scene all evolved to the 2008 climax of Lehman's collapse and the ensuing beginnings of financial Armageddon. Along the way the author introduces and explains in terms the layman can understand what might be called the technical stuff, the financial products and structures like CDO, MBS, CDS that ended up being the bombs that blew things apart.

We learn that it wasn't just the "greedy bankers" at fault. Things are not that simple in the real world. Williams takes a whole 25 page chapter to list the bad guys and institutions and summarize to what degree they did wrong, everyone from Dick Fuld, Lehman CEO and other key Lehman players, Boards of Directors, the US Congress and several Committees, the Federal Reserve, the SEC, the media, academics, accounting firms, credit rating agencies, lobbyists, the FASB, US Treasury Secretary and former Goldman Sachs CEO Hank Paulson and last but not least consumers who binged on debt and housing.

Apparently, the bankers (and others) weren't simply greedy, they were also stupid and did not truly understand the risks being taken. Prior incidents that should have been learning and warning signs, like survival and recovery from the 1998 LTCM fiasco, instead made people over-confident. Risk models used by industry that work well most of the time failed utterly in times of extreme stress when they would be most useful.

Williams sticks to the facts in the book but it would have been fascinating to get more into the psychology of the players to see what was the mix of flaws and vices. The 2008 crisis could provide valuable insight into how the thinking of institutions and societies go wrong.

The last chapter contains Williams' ten point plan for changes to reduce chances of a new financial systemic risk event. Some can easily form the basis of policy lobbying and legislation - things like mandating higher capital levels, imposing leverage constraints, creating a systemic risk regulator. Others can lie with investors - things like requiring greater executive accountability, improving Board oversight, creating smarter compensation schemes. (In the case of this latter set of changes, I am left wondering how this jives with passive index investing where investors are distant, ignorant and often uninterested in the individual companies like Lehman where dominant managers held sway and escaped control with destructive results. It's another reason I like the idea of pension savings being managed by a body like CPPIB with the motivation, resources and power to kick butt in corporate governance.)

The book and its story unfortunately contents itself, except very peripherally, with happenings in the United States. The reader therefore does not get to see how the worldwide systemic contagion occurred, or how events and conditions elsewhere exacerbated the problem.

Favorite Quotes and Notes:

"... the U.S. government has failed to find the perfect balance between excessive regulation - viewed as stifling to bank profitability and economic growth - and lax regulation and oversight - viewed as a recipe for financial and economic instability" - which I find to be a far more balanced and rational worldview than the strident "capitalist system is rotten" view of some people
"Companies that take no risk go out of business just as easily as those that take too much risk."
in 2006, Lehman's Chief Risk Officer Madelyn Antoncic received an industry award for best risk manager of the the year; a year later Fuld/Lehman removed her from the job and demoted her; i.e. the elaborate risk management structure at Lehman was just a facade to fool credit rating agencies into giving Lehman a lower cost of borrowing/capital to increase profits.
Value at Risk (VaR) the commonly used industry measure of risk is described by a Lehman shortseller in a quotation as "an airbag that works all the time, except when you have a car accident"
the boyhood home of Fed Reserve chairman Ben Bernanke, since then sold on to several others, was subject to a sub-prime mortgage loan foreclosure - how symbolic!
"Post-credit crisis, executives from TARP-taking banks continue to express public support for re-regulation of the financial markets while their paid lobbyists attempt to defeat or weaken any new regulations."
Canada is cited by Williams as a model to emulate, praising the consistently strict oversight and regulation here

For the individual investor, the important lesson is first, that the financial system and consequently investment markets, are still very exposed and subject to severe shocks and second, that risk assessment and management are essential never-ending tasks.We need to be ever aware and wary of what is going on. Since some risks are not controllable or often not knowable by the individual, the idea of diversification, spreading investments, gains reinforcement.

A quick 220-page read, it is well foot-noted and indexed. The writing flows smoothly too. Don't be surprised if you come out of reading it a bit angry and less confident in the capabilities of business and political leaders.

My rating: Though missing the greed vs stupidity assessment and the international linkages, it is excellent on what it does present - 4 out of 5 stars. Definitely worth reading.

Thanks to publisher McGraw-Hill for providing a review copy. The book comes in Adobe's eBook format (see McGraw-Hill site)as well as paper.

Bloggers for Charity Results

2011-12-24T02:41:00.003Z

The results are in for the Bloggers for Charity contest organized by The Blunt Bean Counter. Other blogs have received some fantastic bids, especially Canadian Capitalist and WhereDoesAllMyMoneyGo. Here at CanadianFinancialDIY a bidder who wishes to remain anonymous is donating $100 to a favorite charity. The person's guest post, which is to be about the charity, will be appearing the same day as all the bloggers' guest posts, January 17th.

Well done to Bean Counter Mark Goodfield for putting together this very successful initiative.

What to do about Losing mental acuity or outright incapacity

2011-12-12T17:23:00.006Z

A reality of getting older is declining mental ability. As with the body, so with the brain. It may be more obvious with the body but small gradual or sudden drastic falling away in our ability to make financial decisions will occur. It may be due to disease or natural ageing but it happens. We need to anticipate that and plan for it.

Among the kinds of decline: short-term memory recall, a long slow progression that starts from around age 40 (see graph here in Flickr); language facility; mathematical and analytic capabilities. The result is that good financial decision-making falls off with age, even amongst those who have known and applied good financial principles for a long time.

Whether the onset is gradual or sudden, mental decline gets to be a bigger and bigger issue as one gets older. The rising prevalence of dementia and increasing life expectancy ensure that it will become ever more common for retirees to reach a point of being incapable, both legally and practically, of managing their own financial affairs.

The problem is that when such incapacity strikes, chances are we won't even be aware of it. Worse, even if we are aware, at the point when we have been medically certified as mentally incapable, we lose the legal power to do all sorts of critical things.

What a mentally incapable person legally cannot do:

• make a new will, add a codicil to an existing will or revoke an existing will
• prepare a power of attorney
• put a bank account into joint names with children
• change the beneficiary of his/her RRSP/RRIF or an insurance policy
• carry out estate planning, such as reducing probate costs
• give investment instructions to his/her financial advisor.

What to do about mental decline and incapacity:

Mental exercise ... “use it or lose it” – The Seattle study (http://www.memory-key.com/problems/aging/seattle-study) followed a large group of people throughout their lives and discovered that amongst other factors a complex and intellectually stimulating environment and efforts to maintain a high level of perceptual processing speed seem to help reduce cognitive decline. The study suggested that cognitive decline observed in community-dwelling older people was mostly the result of disuse and could be reduced through training. Along with such activities as reading books, guessing at the answers of TV game shows, taking courses and doing a part-time job (paid or not), consider that continuing to manage your investment portfolio can be good mental stimulation, a challenging game that never ends.
Physical exercise - “a sound mind in a healthy body” - Though the original Latin expression was more a prayer than a prescription, keeping fit can help stave off mental deterioration.
Simplified portfolio and financial affairs – The simpler and more automatic are your affairs, the easier and less error prone they will be to manage, whether it is you yourself doing the job or someone else.
Power of Attorney – It is a dangerous misconception that a spouse or an adult child can automatically step in when incapacity happens. A sensible step is therefore to put in place, in advance of anything happening, a Power of Attorney (POA) that authorizes another person to take financial action on one's behalf. The POA authority may be narrow or complete, with the exception that the delegate, known as the Attorney, can never make a will on the person's behalf. The authority can include banking, signing cheques, paying bills, borrowing money, hiring contractors, selling or buying real estate, stocks, bonds, consumer goods etc.

Qualities of the Attorney - There are some obvious qualities the person(s) selected to exercise the POA power should have:

the time and willingness to fulfill the responsibilities (BMO says the average time a person fulfills a CPOA role is four years - if you are well advanced in age, it probably isn't the best idea to name someone the same age as you, like your spouse)
someone in whom you have complete trust (the CPOA has wide ranging power and possible abuse of the power is a major consideration; sadly, even one's own children can sometimes be less than reliable)
enough financial knowledge, along with diligence and organization, to handle your affairs, or the astuteness to recognize the need for professional help (tax, accounting, legal etc)

POA Permutations - Many variations are possible in a POA to suit individual circumstances, including: when the POA starts (immediately, or upon incapacity) or stops (it ends automatically upon death but make sure it doesn't stop unexpectedly since special language needs to be in the POA to keep an immediate active when you do become incapacitated, since that event normally voids it), limits to the authority being granted, whether it is one or several people as Attorney, and whether they must act jointly or may do so separately, aka severally; and whether the Attorney must account to some third party regularly. Be careful about whether it is a continuing / enduring POA since one without that feature activated before incapacity would cease to be valid upon incapacity.

Consider using a lawyer or notary to prepare the POA – Consider how complex your finances and family situation are. The more complex, the more it makes sense to use a professional to set up the POA and avoid the nasty surprise that a home-made POA is not valid. Without a valid POA, someone will have to face the cost, time and trouble later on to go to court to apply for a POA. If there is no one around to step forward, the provincial government's Office of the Public Guardian and Trustee steps in as a last resort to manage the affairs of the incapacitated. Would it matter that a government official probably won't understand what you want done? If so, picking your own Attorney and creating a POA is the route to follow.

Watch out for – 1) Banks are apparently wont to ask people to sign their own POA forms, which might conflict with or invalidate a general POA. Try to insist on them accepting your own general POA or get words inserted that it does not alter other POAs. 2) Each province has its own variations and those slight differences might be critical. Get one for the province where you live, changing it when you move. If you spend time in the US and have US assets, a Canadian POA may not be accepted. You would need to consult a lawyer in the US state concerned.

Doing the Attorney job is work - Some may imagine that being appointed under a POA is an easy job but it is serious business, more onerous even than managing one's own affairs. There is a fiduciary duty, which obliges the Attorney to act in the person's best interest. The Attorney must avoid conflicts of interest, must keep records, must consult with the person when possible, must keep the other's assets separate from their own. As a result, an Attorney often gets paid. In Ontario, the permitted amount is 3% of monies received and paid out and 0.6% of average annual value of assets administered, though it is possible to state in the POA that the Attorney will not get paid (keeping in mind the Attorney is not obliged to accept the job either and is allowed to resign later on). It is also a good idea to name one or more substitute individuals as backup in case the first Attorney is unavailable for whatever reason.

Joint ownership and and Living Trusts as alternatives – It is possible to transfer property to joint ownership or to a trust, but those solutions have their own issues. Amongst the issues: deemed disposition rules can occasion capital gains taxes; risks of abuse by the joint owner, or dispute among siblings if only one is named joint owner (was it a gift, an advance on inheritance or merely a means to allow administration on your behalf? etc); exposure of the joint assets to the joint owner's creditors, spouse or estate; when the asset is real estate, joint ownership requires consent of the joint owner for sale, which will be problematic if you have become incapacitated, plus the provincial Public Guardian may decide to get involved; costs of tust administration if professionals are hired. Professional expert advice may help a lot to unravel the best option.

Resources:

BMO Retirement Institute – videos and paper Financial Decision-making: Who Will Manage Your Money When You Can't? on mental incapacity from medical and legal viewpoints, points to consider in creating a Power of Attorney.

Sandra E. Foster, You Can't Take It With You – Common Sense Estate Planning for Canadians, 5^th edition, John Wiley & Sons, 2007

Douglas Gray and John Budd, The Canadian Guide to Will and Estate Plannning, 3rd edition, McGraw-Hill Ryerson, 2002

Ontario Power of Attorney kit – pdf link from the Ministry of Attorney General

British Columbia Enduring Power of Attorney Form pdf link; Nidus Personal Planning Resource Center and Registry – centralized registry for POAs in BC with many FAQs

Alberta, Manitoba, New Brunswick, Nova Scotia, Yukon, Newfoundland and Labrador – info links but standard forms not available

Saskatchewan Enduring Power of Attorney and Common Questions at Ministry of Justice and Attorney General

Quebec – pdf link My Mandate in Case of Incapacity instruction booklet and forms at Curateur Public du Québec; prior to incapacity - Power of Attorney sample text with rules explained at Ministry of Justice

Nunavut (formerly North West Territories) – pdf backgrounder and forms

Humongous Provincial Tax Credits for Student Graduates

2011-12-10T15:11:00.003Z

Know any recent graduates who can use special income tax breaks worth up to $25,000?

Publisher CCH's tax newsletter for December describes these significant tax incentives for student graduates in Tax incentives for Post-secondary graduates. The article gives more detail, and links to each province's program, but here are some key points:

applies to any college or university graduate
takes form of tax credit or rebate of provincial income tax, so you must live in the province
are Not tied to graduates who are originally from that province or who attended school there (not necessarily even in Canada), i.e. they are designed to entice recent graduates to live and work in a province ... call it the "brain scoop by tax" strategy
pay out over several years
for year 2000 graduates onwards, varying by province
Only in Saskatchewan (up to $20,000), Manitoba ($25k max), New Brunswick ($20k max), Nova Scotia ($15k max), Quebec ($8k max)
claim is not necessarily made (e.g. not in N.B.) through the normal income tax return; it varies by province, so graduates need to check, and perhaps apply separately, to be sure to get it. It's a good check item to add to my review list, for provinces like N.S., where the claim is made on the tax return, when I do my annual online tax software ratings.

Thanks to CCH for the lovely pre-Christmas gift of valuable information.

Book Review: No Hype, second edition by Gail Bebee

2011-11-30T10:56:00.010Z

Almost four years ago, I reviewed the first edition of Bebee's No Hype book and gave it a high (by my standards) rating. The just-released second edition contains essential updates and excellent refinement of specific portfolio suggestions, which is probably what readers want most. The most notable addition is a new section on TFSAs, though there are also many revisions to organization names, website links, addresses etc that make the book practically useful for investors today.

There has also been reordering of material, such as moving the discussion of annuities into the retirement chapter alongside RRSP sections, addition of many more links and references to online resources, such as a list of useful blogs, (including my own I gratefully acknowledge!). Most of the links are available on her website www.gailbebee.com under Resources.

The Asset Allocation and Portfolio Building material has the most interesting updates.

real return bonds added as a component of the fixed income asset class; they now get included as part of all suggested portfolios
revisions (mostly downward) to guidance on what rate of return to expect, based on historical averages, as well as addition of figures for several very useful asset classes - Canadian vs US bonds, Canadian vs US vs Emerging Market stocks, real estate; all this allows better estimation of what various portfolios will yield and will be very useful as more and more investors are taking to the idea of diversifying beyond Canada
completely ETF sample portfolios specified right down to percentage sub-divisions within asset classes e.g. 35% equities in the Large Income Focused portfolio broken down to 20% iShares S&P TSX 60 Index (XIU) and 15% Claymore Global Monthly Adv Dividend (CYH)
all-in-one single mutual funds or ETFs that suffice as a good-enough ultra-simple portfolio solution
one non-update is that the individual stocks suggested for the equities allocation in larger portfolios have pretty well remained the same; Bebee's picks from four years ago still seem to be holding strong!

Caveats: There are a few niggling typos and minor errors such as: the Balanced Portfolio in Fig. 25.2 that only adds up to 95% (it looks like the 5% Foreign Bonds that was in the 2008 edition got deleted; Fig. 10.1 confirms this supposition); some of the ETF tickers do not match the fund name e.g. in the Income Focused Portfolio the iShares S&P TSX 60 Index ETF has the XIC ticker when it should be XIU. I could not find, as the preface promises, expanded material, though there are updates in chapter 8, on how to resolve problems with financial service providers - was I looking in the wrong place?

To make this book even more convenient for the investor, maybe the next edition could combine the advice on what goes in RRSP vs TFSA along with sample portfolios e.g. take one of the more elaborate portfolios, like the ETF Growth Portfolio, which has 11 separate holdings, and lay out what should go where. For example, I just did this post - ETF Asset Allocation Across RRSP, TFSA and Taxable Accounts - about this topic on my other blog.

This book has established itself as a fine beginner's guide to investing that successfully bridges the challenge of a "good-enough" compromise between the practical simplicity that people will actually read and use and the ideal complete perfection of a thousand page brick that almost nobody would read or be able to apply.

Gail Bebee's website takes orders for the book directly, though it's also available from Chapters.ca.

My rating creeps up from its first edition four to 4.5 out of 5.

Disclosure: Gail Bebee provided me with a draft of the second edition (and a copy of the published version too - thanks Gail!) and I submitted comments and suggestions to her, some of which have been incorporated into it.