Sunday 21 December 2008

If I'm So Smart, Why Am I Not Rich?

Today I came across an amusing little tool for bloggers called the Blog Readability Test. It supposedly tests the level of education required to read a blog. Being ever skeptical, I plugged in a few other blog addresses to see if everyone gets a high rating (as you can too if you click on the logo at the bottom right side column below) and found one Canadian blog that comes out at the junior high level.

I am a bit chuffed but at the same time disappointed to discover that this blog rates at the "genius" level. Everyone, me included, likes to be called smart but I think I may defeating my own objective to explain simply and clearly what I discover on my exploration of personal finances and investing. The best teachers and writers make the complicated seem simple by the skill of presentation. Obviously I have a long ways to go. It is notable that professional journalist blogs of Jonathan Chevreau of the Wealthy Boomer and Larry MacDonald of Canadian Business both rate at the college undergrad reading level.

The other thing it reminded me is that being smart is no assurance of getting rich, even if you try to apply all your intelligence. (A lot of very smart people in the financial industry have been rapidly becoming un-rich in the last year or so)

The converse is true as well, I believe you don't need to be smart to become rich investing. One such way to do it without smarts is luck, of course, but the small number of lottery winners probably approximates how many lucky investors there are.

Over-thinking and over-analyzing can be bad. The TV quiz show Who Wants To Be a Millionaire once featured university prof contestants who didn't do any better than the average person on the show, most of whom I daresay do not have the same level of education. One memorable literature prof talked himself right out of the correct answer which he knew by introducing low probability doubts and counter arguments. The world doesn't give perfect and complete information and opportunities don't often stay around for long. The most successful investors seem to have the right combination of decisiveness and courage combined with judgment that focuses on the variables relevant to a situation. Those qualities are not a function of education or book-learning intelligence, though they are thereby enhanced.

Another key quality that I believe helps anyone, smart or dumb, attain wealth is effort and attention. Author Malcolm Gladwell in his new book Outliers apparently says 10,000 hours is the amount of effort required to reach genius level in a field. However, with investing merely being expert is not enough as the game is never over and those who rest on their laurels may find them disappearing.

Wednesday 17 December 2008

Book Review: And The Money Kept Rolling in (And Out) by Paul Blustein

A brilliant book in every way - as exciting as a movie thriller, as intricate as a detective story with multiple intertwined plot lines, as gut-wrenching and sad as a human tragedy that could have been avoided, as fair and detailed as a commission of enquiry into a man-made disaster - this book about Argentina's financial and economic collapse in 2001-2002 is a must-read for anyone interested in the current financial and economic crisis. Though written in 2005 before the crisis started, Blustein takes a few pages to talk about relevance to the USA and states outright: "It could happen here. Americans who give Argentina's story fair consideration and conclude otherwise are deluding themselves." ... or maybe, it's already happening here?

The technical reasons for Argentina's accumulation of a crushing debt load on which it eventually defaulted with dire consequences are fairly straightforward. In his words, "They spent more than they should have, taxed less than they should have and borrowed more than they should have..." while living within the dollar-peso convertibility currency system that required much stricter fiscal discipline.

The individual and collective (both organizational and societal) human reasons that created and exacerbated the technical reasons are the really fascinating elements and this is where Blustein excels at digging them out and presenting them in a gripping story. Self-interest, groupthink, willful blindness, self-deceit, avariciousness, stupidity, panic reactions, vanity, political expediency, official misinformation and spinning, ideology, gamesmanship, it is all there in various people and organizations. The author doesn't pull punches in his criticisms but there aren't many who escape blameless. The IMF, Wall Street investment banks, the US government, the Argentine government, even to some degree the Argentine people, share the burden of responsibility.

The book is not an "anti-" diatribe, whether it be anti-globalization, anti-IMF, anti-privatization, anti-Americanism, anti-capital, anti-bailout or even anti-debt (though it clearly shows that too much debt is a recipe for disaster). He says, "Policies such as open trade, privatization, and deregulation were not responsible for the events that brought Argentina to such a pitiful state."

For those who wonder why our governments are currently so anxiously propping up banks and trying to get credit flowing again, "... The nation's banking system was ceasing to perform its vital role as a provider of credit and dispenser of payments, the result being an accelerated contraction in all sorts of economic activity" and "... the shortage of funds spread through the economy like a debilitating virus". The latter is especially in play at the moment. For example, part of the reason for the 45% drop in GM's sales is lack of credit to buyers wanting to buy vehicles even if they are perfectly qualified good credit risks. And look where GM is today. A company with problems suddenly is a company in crisis with insurmountable problems. Same goes for home buyers, if trying to get a mortgage isn't possible, few can buy, prices decline etc.

The helicoptor departure scene in the prologue, where an IMF banker flies out of the country having informed the President of Argentina that the IMF will no longer provide support, abandoning Argentina to inevitable default and collapse, makes a striking image worthy of a movie. Hollywood, where are you?

My rating: Five out of five stars.

Tuesday 16 December 2008

An Exceptional (note Canadian understatement) Year in the Stock Market

Economist Greg Mankiw posted a histogram chart of the S&P 500's returns this year compared to every year since 1825 that dramatically conveys how unusual it has been so far. The only year as bad as 2008 is 1931, the depths of the great depression. Of course, the year isn't over yet but how much stock market recovery can we hope for as the downward slide of the economy continues apace?

Sunday 14 December 2008

Origins of the Financial/Economic Crisis - One Chart!

A nice compact flow chart explaining the current mess the world finds itself in can be accessed at Jeff Frankel's Weblog in the post Origins of the Economic Crisis - In One Chart!

Friday 12 December 2008

Real Return Bonds Correlation and Current Prices

Reader Jordan posed a very good question in the comments of the previous post: " Does a real return bond have the same level of negative correlation to the stock market like short term bonds?" The answer in the research appears to be an emphatic No, they aren't like short term bonds in correlation to equities. The answer is even better!

Real return bonds are uncorrelated to both equities and other bonds. They are different enough to function as a separate asset class, which is exactly what the investor who uses asset allocation to manage his/her portfolio seeks.

ByloSelhi has an excellent page on RRBs; his links include a number of papers that have looked into this very topic. Bylo provides snippets of key conclusions to skim. For instance, the 2004 Kothari & Shanken paper says, "... We found that the real (inflation-adjusted) returns on indexed bonds are less volatile than the returns on otherwise similar conventional bonds. Moreover, the correlation with stock returns is much lower for the indexed bonds. An examination of asset allocation among stocks, indexed bonds, conventional Treasuries, and a riskless asset suggests that substantial weight should be given to indexed bonds in an efficient portfolio."

Here's an eyeball version of non-correlation in this chart from Google Finance showing the iShares real return fund XRB plotted against the TSX, the iShares short-term bond fund XSB and the whole market bond fund XBB. It's only short-term (3 years or so) but one can see the lines don't follow each other closely.
The recent decline in price reflects the recent increase in yield to around the 2.5% level - see's current rates in the Real Return tab at the bottom of the page.

Buying an RRB with the intention of holding to maturity means that such price swings become irrelevant - the yield you get is that at which you bought - come hell (inflation) or high water (deflation).

With the yield difference between the regular Canada bond of 2025 maturity and the Canada 2026 RRB being only 3.79% - 2.64% = 1.2%, or the implied rate of inflation during that time, the RRB looks to be a good buy to me right now.

Wednesday 10 December 2008

Fees and Deals on TFSAs at Banks and Discount Brokerages

The TFSA starts January 1st, 2009 and it's time to pick one. But as usual, though the tax rules are the same for all the way each bank and broker implements and charges fees can vary. Rob Carrick warned about fees and provided some numbers in this Globe article. CanadianCapitalist summarized the range of options for TFSAs in this post.

Being the type of guy who always wants to compare options and find the best deal I have taken Rob's work a little further and done some browsing and phoning to make up a little spreadsheet that shows what I have found. Given the sorry state of information flow within large financial institutions to both customer service reps (a blogger does not have access to the insiders with the exact knowledge or authority so one gets the "real customer experience" in trying to dig up information) and websites, some of this info may not be correct.

The Best Deal in my opinion is .... Outlook Financial's 5% 5-year cashable GIC. When I phoned earlier today the rep assured me that one can lock in the rate today even though the money can only go into the account as of the legal start day of January 2nd. The astute will observe that Outlook has an ad on my website so you can be sceptical about my motives for recommending them but I invite you to try finding a higher GIC rate. Go to Money Rates for GICs do the sort from high to low and Outlook's is the highest in Canada bar none. The only slight downside is that the guarantee for payment of principal and interest comes not from CDIC but from the Credit Union Deposit Guarantee Corporation of Manitoba. If the CDIC safety net is a requirement for you, then National Bank's 4.1% 19 month GIC looks attractive, as does Bank of Montreal's 4.3% 3-year promotional offer.

The bottom line for the discount brokers is that there is little to distinguish them with respect to TFSA alone. My own broker BMOIL is the only real outlier with a fee of $25 per withdrawal. The big drawback for all the brokers is the presence of hefty $125-135 fees for transferring an account to another institution. Among the things to consider:
Some brokers are not even offering TFSA accounts, like QTrade rated #1 in the Globe ranking or E*Trade (that's why they aren't on my spreadsheet). CIBC Investor Edge's offering is coming "March-April" 2009 while ScotiaMcLeod Direct will only have application forms ready (and confirmation of fees) on Dec.22nd.

Whatever you do, go open a TFSA as soon as possible, especially before the unholy alliance of Libs/NDP/Bloq gets into power and starts reversing the "errors" of the Conservatives. Who knows how long the TFSA might last.

Credential Direct's Great Guide to Using The TFSA

The best explanation I have yet come across for how to use the new TFSA is Credential Direct's brochure. In 12 big print pages, complete with yellow smiley faces, it clearly and simply explains when to put money into a TFSA or an RRSP/RRIF, and at what ages and stages of life - start of career to home buying to education to after retirement - to use each.

Tuesday 9 December 2008

Five Personal Finance and Investing Books for Christmas

Wondering what to buy for Christmas for someone who is, or should be, interested in personal finances and investing? Here are some choices I've enjoyed reading and highly recommend.

  1. No Hype: the Straight Goods on Investing Your Money by Gail Bebee - the place to start if all you know is GICs or mutual funds; explains all types of investments and accounts with a practical, readable style
  2. The New Investment Frontier III by Howard J. Atkinson with Donna Green - the ins and outs of the increasingly popular exchange traded funds for Canadians
  3. All About Asset Allocation by Richard A. Ferri - how asset classes like stocks, bonds and real estate can be put together to produce more stable and higher return investment portfolios
  4. Insurance Logic by Moshe Milevsky - leads one through the issues to decide how, why and when to use insurance effectively, whether it is to protect property, life, health, automobiles, travel, or to minimize taxes
  5. What Kind of Investor Are You? by Richard Deaves - helps you decide whether to stick with an advisor or strike out as a DIY investor and if the latter, how to do it successfully, by looking at principles and pitfalls in psychology, diversification and risk tolerance, market returns along with products like mutual funds and index funds

Friday 5 December 2008

Finance 101 Course Online & Free by Robert Schiller of Yale University

Wow! A top-notch university lecture series on fundamental topics of modern finance by Robert Schiller, professor at Yale University and amongst other things, author of the best-selling book Irrational Exuberance and co-creator of the Case-Schiller Housing index in the USA. The course description is this:
"The course strives to offer understanding of the theory of finance and its relation to the history, strengths and imperfections of such institutions as banking, insurance, securities, futures, and other derivatives markets, and the future of these institutions over the next century." There are several guest lectures by famous people connected with investing: David Swensen, Carl Icahn, Stephen Schwarzman and Andrew Redleaf.

The 26 lessons include downloadable videos or audios of the lectures given in the Spring of 2008, with transcripts in html, pdfs of slides used. Caution - the video files are large - I downloaded a medium-quality video of one lecture on behavioural finance and it was 197Mb. It runs 65 minutes. If you are really up for it, afterwards test your knowledge with the exams and then check against the answers. Based on that one module, the material is explained in very accessible language.

I don't think they give you a degree from Yale for it but it doesn't cost anything either.

Useful Tax Reading for Canadians Abroad - When a Non-Resident Can Benefit from Filing

Came across Electing to File a Canadian Tax Return as a Non-Resident of Canada for Tax Purposes by Wayne Bewick of Trowbridge Professional Corporation in the Fall 2008 issue of Canadians Resident Abroad. Non-resident spouses with RRSPS and retirees may be able to get appreciable tax savings.

Wednesday 3 December 2008

Book Review: More Than You Know by Michael J. Mauboussin

This book is like a series of investing idea hors d'oeuvres - many tasty morsels but not a satisfying or balanced meal, more for the pleasure than for practical investing sustenance. The book consists of thirty-eight un-connected chapters of 5 to 7 pages. Each presents a separate idea relevant to investing based on a parallel from another area of human knowledge, the unconventional places of the book's sub-title "Finding Financial Wisdom in Unconventional Places".

The problem is that the practical application of the idea is left hanging. For instance chapter 12 discusses rationality and emotion and shows that, contrary to what many may believe, emotion is actually beneficial and necessary to successful decision making. That's interesting but then comes the lame conclusion - "Yet successful investing requires a clear sense of probabilities and payoffs. Investors who are aware of affects are likely to make better decisions over time." So now I've read the book and am aware, does that mean I'm going to do a better job investing? I doubt it. I hoped for more since the author is not just a professor at Columbia Business School by the chief investment strategist at Legg Mason Capital Management.

To some degree, this book suffers from the "look how clever I am" syndrome, uncovering all these principles in arcane and non-obvious places. Perhaps this is not surprising since the author writes on page 2: "The experts who knew a little about a lot - the diverse thinkers - did better than the experts who knew one big thing." He is deliberately making himself more diverse. Still, it reminds me of a very smart friend who once was told by his very sensible wife, "oh, piss-off, N____, stop being such a smart-ass".

For those who are willing to take being teased, there is considerable delight and invitation to further thought and investigation (like any good prof all sources are cited and there is lots of further homework, er, reading).

  • "... because there's such a focus on outcome vs process, most institutional investors have time horizons that are substantially shorter than what an investment strategy requires to pay off." (p.57)
  • "... the talking heads on television satisfy a human need for an expert, without providing the value of an expert." (p.70)
  • "markets can still be rational when investors are individually irrational." (p.95)
  • "I find that thoughtful discussions about a firm's or and industry's medium- to long-term competitive outlook are extremely rare." (p.115) and maybe this is related to the first quote above?
  • and a quote of a quote - "better-known forecasters - those more likely to be fêted by the media - were less calibrated than their lower-profile colleagues." (Phil Tetlock's study of media contact and poor predictions discussed on page 45) ... I believe some bloggers better than the mainstream media

After reading this book, one tends to feel that one knows less than before - that there is a whole lot more to know. It's not easy or comforting but maybe that's a good thing.

My rating: 8 out of 10.

Tuesday 2 December 2008

Comparison of Canadian Growth Portfolio ETFs from Claymore and iShares: XGR vs CBN, Which is Better?

A few days ago I posted about iShares new Portfolio ETF funds, stating my opinion that the XGR iShares Growth Core Builder Fund is reasonably good. There is existing competition for this fund in the one-stop shopping growth fund space in the form another ETF from Claymore, the CBN Balanced Growth CorePortfolio ETF.

I decided to have a look inside, do a comparison, see which is better and whether either is a great product that you and I should rush to buy now.

The Scorecard - my bottom line opinion summarized for those who want it all now

The winner by a narrow margin is XGR with 70 points out of 100, while CBN has 64. Call me a tough marker but that's a passing grade for both, not a fund-of-the-year score. Unlike most schools, in the right-most column, I dare to say exactly for what I would have given a perfect 10 (and I would be interested to hear other opinions too!).

Some Details
CBN's expense ratio is the sum of its own 0.25% plus that of the funds inside, which I calculated as 0.55% using the proportions of the component holdings. It is interesting that Claymore actually uses four funds of its competitor iShares (IGT, XRE, XRB and XCB) to make up 15% of the portfolio fund. The MER statement is the one critical thing I noticed (is there more?) that is NOT up to date in the Prospectus page 65 and for which I penalized CBN. Unlike the web site summary page on CBN, the Prospectus still says the MER is 0.7% for everything including the Claymore subsidiary funds; this is what was changed on Nov.18.

Diversification is broader and better in the XGR contents when one looks at the constituent funds. For instance, XIC is the total TSX 300 fund within XGR while the CBN equivalent content is CRQ which only contains 69 companies (more or less parallel to XIU, which I consider to be a large cap fund, not the broad total market). The same situation exists with XGR's holding of EEM a broad emerging markets ETF while CBN contains CBQ, which is confined to BRIC countries (Brazil, Russia, India, China).

In addition, the equity market funds used by CBN follow the fundamental indexing approach for their weighting, as opposed to market-cap weighting of iShares' funds. Fundamental indexing used various accounting measures to select and overweight companies considered to be better value and it is an investment strategy that I slot (though it doesn't apply the limited price to book definition proven by the research) into a Value asset class and not a whole of market holding that the true passive investor seeks.

The too-large Bid/Ask spread and Premium/Discount to NAV are surely mostly the result of these two ETFs both being quite small (both are less than $10 million in assets) and thinly traded. If the funds got a lot bigger that disadvantage of both would decline but in the meantime it's not good for the investor.

XGR's vague investment policy statement, which as I said in my previous post, implies an active management approach that is likely not the way they will actually manage the fund. Still one must take note of what is written, caveat emptor.

With about half its holdings in fixed income XGR is more like a balanced fund than a growth fund. With 80% equity, CBN is just a little above the usual maximum of 75%- it is in the aggressive growth zone.

Monday 1 December 2008

TSX Prediction Survey Results Are In - Is The Crowd Wise?

Thank you to those 22 intrepid souls who dared to predict where the bottom of the current stock market slump might end up.

A three-word summary of the survey opinion is "watch out below!". Though we are substantially above the low of 7724 set when I started the survey - at least as of right now the TSX Composite is around 8640 - pessimism, or is it hard-nosed realism, reigns. The median and the average of votes was that the TSX will fall to 6000 before we reach the base of the abyss. That's more than 30% down from now.

This post's title refers to the popular book by James Surowiecki, The Wisdom of Crowds, in which he gives numerous examples where taking the average of estimates from independent, diverse sources can give better predictions than those of experts. Part of the problem with the market these days however is a seeming lack of independence because everyone is tainted by a common negativity. Is our survey "crowd" wise or are we just a mob carried away by our own pessimism to a form of group-think?

We'll find out for sure within the next few years, at which point, if the survey prediction proves correct, I'll write another post claiming credit for how wise the readers of this blog are! ;-)

I'm not about to short the TSX, though. I'll just stick with my asset allocation and wait it out because in five to ten years the market will have recovered. That's my prediction.

Monday 24 November 2008

iShares Canada's New Portfolio ETFs - How Do They Stack Up?

Wealthy Boomer's Jonathan Chevreau recently reported that iShares Canada has launched four new ETFs made up of a collection of iShares ETFs in different sectors and asset classes. The intent is apparently to provide one- or two-stop shopping in building a diversified portfolio with ETFs.

The four new funds are:
  • XCR iShares Conservative Core Portfolio Builder Fund which is quite conservative with a high proportion of fixed income at around 70% and investments on the safe end throughout
  • XGR iShares Growth Core Portfolio Builder Fund which looks like a balanced fund with a split of about half and half between fixed income and equities
  • XGC iShares Global Completion Portfolio Builder Fund which has a curious mixture of non-Canadian equities and some ultra-conservative fixed income along with some volatile fixed income
  • XAL iShares Alternatives Completion Portfolio Builder Fund which has some ultra-conservative assets along with a majority of highly volatile assets
Bottom Line:
  • The only one that I would contemplate buying as a complete stand-alone portfolio is XGR. With a few tweaks in its composition and a reduction in MER to 0.4% or less, it would go from being merely ok to being a great product.
  • XCR is too heavy on the fixed income and is too concentrated in Canada which makes up about two-thirds of the fund.
  • XGC and XAL don't combine well with either XCR or XGR; a combination would be no better than XGC by itself as this chart of the composition of the basic new funds and possible combinations shows

The Details:
Here is what I think are the good and the bad points and some that could go either way, depending on your circumstances:

Diversification & Asset Classes
- this is the outstanding feature of the new funds due to the wide sub-division among many asset classes, especially in the case of XGR, which has no less than 21 different ETFs. There is large cap equity, small cap, foreign equity, some foreign exchange exposure, government and corporate fixed income, real return bonds, real estate, and even commodities. Such diversity will bring about a high degree of stability to the portfolio. Some may view allocations as small as 1% to an asset class (like SCZ Global Small Cap Equity) as a disadvantage because even big changes to that 1% won't have much impact on the portfolio's value. But that is precisely the point, spreading the total investment portfolio around to minimize risk. An investor with a small portfolio, say $20,000, could not practically envisage building their own portfolio from ETFs where a 1% holding = $200 when the brokerage cost might be $25 or $30.

XGR's Asset Allocation

XCR's Asset Allocation

Some quibbles -
- there is no Equity Value fund at all in the portfolio, despite the research-proven performance boost from this type of holding.
- instead of the IVV S&P500 fund, which is just a large cap fund, it would likely have been better to use something approximating the whole of the US market like IYY or IWV
- I see little benefit from the complication of four different Canadian fixed income funds (XSB, XCG, XGB, XLB) which just replicate the whole of market when iShares has one whole of market fund XBB; I've seen nothing that indicates a lack of correlation amongst the different fixed income sectors represented by the four funds that would provide a diversification benefit to justify the extra funds. In addition, three of the four funds have higher MERs (see chart below) that could have helped BGI lower the overall MER of the portfolio fund.
- similarly, I fail to see why the US fixed income fund is LQD, the corporate sub-sector fund, instead of iShares excellent total bond market fund AGG
- the last fixed income element that I find unsatisfactory is the use of the US real return fund TIP instead of simply using a lot more XRB, the Canadian real return fund. Though I don't have charts to prove it, I would be very surprised if the correlation of XRB and TIP were not close to 1 - i.e. perfectly correlated - and therefore there would no diversification benefit from holding the two different real return funds. On top of that, to limit foreign exchange exposure on TIP, the XCR and XGR managers do foreign exchange hedging on TIP, which adds cost.

Portfolio Policy - Active or Passive?
The iShares fund fact sheets leave the definite impression that these funds might be actively managed when it says on page 1 of the prospectus:
"Barclays Canada will use an asset allocation strategy, as further described below, and may change the iShares ETFs, other issuers and/or derivatives in which an iShares Fund invests, and the percentage of an iShares Fund’s investment in such iShares ETFs, other issuers and/or derivatives at any time and from time to time." It's the waffle words "may change" that concern any investor looking for a constant asset allocation policy for a portfolio of passive index tracking funds, which is what is inside the new funds. For such a portfolio construction and such a relatively low MER, I could not believe that Barclays would actually try to outperform by active management and changing funds or allocation percentages to any appreciable degree. How could they make exorbitant profits that way? They'd have to employ a bunch of highly paid people pretending to know better than the market when to overload on XIU, TIP or whatever.

So I phoned up and the customer service personnel for the hoi polloi like me and you (i.e. those lowly folks who might not really know what is going on at Barclays in the fund management end of things, so their answer may be wrong) did assure me that the asset allocation was meant to stay relatively constant and that quarterly rebalancing would bring the percentages back into line. As to why the prospectus doesn't say that, their explanation was that such wording is required for flexibility. It just sounds like the lawyers did their usual thing and made the prospectus impervious to future lawsuits ... and clarity suffers. That's just stupid marketing and communication by Barclays IMHO.

The challenge for an individual investor,even someone with a portfolio as large as $1 million, is that rebalancing a whole bunch of funds in a multi-asset class portfolio, can be expensive and complicated. As amounts increase, it is likely multiple accounts - RRSP, LIRA, RRIF, regular and soon TFSA - will add to the complexity. With smaller total portfolio amounts, the cost of rebalancing would be horrendous for someone who tried to replicate all these asset classes. If a 1% holding of $200 increased by 50% to $300, would it be worth a double (one sell, one buy) $10/25/30 brokerage commission to rebalance that $100? Barclays is offering something worthwhile.

Quibble: The advertized quarterly rebalancing is un-necessarily frequent. The research I've seen and previously posted about says once a year at most provides better returns.

Foreign Exchange Hedging
The use of many foreign holdings, which provides useful diversification, also introduces the risk of shifts in foreign currencies. XGR has about half its portfolio in non-Canadian fund investments and XCR about a third. Foreign currency exposure is itself a form of diversification benefit but without hedging, the portfolio effect can be overwhelming so most portfolio design includes hedging part of that amount. Both XGR and XCR hedge about half their foreign content, partly through using funds that are themselves already hedged, like XSP and XIN, but also through separate hedging operations. This proportion is in line with what I've read about how much hedging Canadians investors should do. The extra hedging is another value-add for the purchaser of the new funds since it would be complicated and more expensive to do on one's own.

Those investors who build their own portfolio and want some hedging have to limit the number of funds and asset classes they use, e.g. when using TD e-Series funds or iShares' ETFs.

Management Expense Ratio (MER)
Is the 0.6% MER for XCR and XGR too high? To find out, I first reconstituted the MER of XCR using the proportional sum of the individual component ETFs - it comes out to about 0.303%. Then I calculated what an investor could pay using best/cheapest in class funds for each asset class in XCR and XGR, which mainly means using Vanguard funds. You or I can make our own versions of XCR for 0.245% and XGR for 0.253%. In contrast, the 0.6% doesn't look great ... except we have to include the value/cost of rebalancing and hedging both in direct dollars and time/hassle/effort. Rebalancing costs vary by number of trades and size of portfolio. For $100,000 portfolio with 10 buy/sell trades a year at $10 each totalling $100, the MER equivalent is 0.1%. For a smaller portfolio the MER burden would be higher. Hedging cost is harder to figure directly but as a guide iShares' unhedged EFA has 0.35% MER while the hedged XIN has a 0.49% MER, a 0.14% difference. Using that, the MER value of hedging plus rebalancing could be 0.1+0.14=0.24%. I figure the MER of XCR and XGR are a bit too high - somewhere in the area of 0.4% would be more attractive because I have a bigger portfolio and I do less rebalancing.

XGR's MER Analysis

XCR's MER Analysis

Account Types and Taxes
One problem for which I cannot see a solution is that come the issuance of tax slips after year-end, these new iShares funds will distribute all types of income - interest, dividends and capital gains - for registered or non-registered accounts willy-nilly. If all you have is registered accounts then this doesn't matter. But if your portfolio spans both registered and unregistered accounts it is an important issue. It will not be possible to optimize for taxes by keeping all the interest income from bonds in registered accounts while directing less-taxed dividends and capital gains to the non-reg taxable account. This is perhaps the biggest drawback for me personally. By buying individual funds, I can put XRB with its interest income in my RRSP and cap gains-producing XIC in the taxable account.

Having only one fund to buy that is denominated in Canadian dollars, though it contains holdings from US exchanges in US dollars means that it is possible to avoid having to pay the currency exchange fees in registered accounts for those brokers who do not allow cash to be kept in US dollars. That is a benefit on initial purchase and when rebalancing.

Others who have reviewed and commented on the new funds:

Friday 21 November 2008

A New Survey on the Future of the Stock Market

Every passing day seems to bring another gigantic drop in the Toronto Stock Exchange (along with every other stock market around the globe). A few weeks ago I thought things had reached bottom with the end of the panic selling in the terror phase. Now it seems we are in the despair phase.

Will the decline ever end? Was yesterday's 766 point 9% drop in the TSX the bottom? How much lower will it go? If you have an opinion click on the survey in the right column.

My own best guess is a bottom around 7500 or 50% off the peak, based on what other credit crises have done in the past. What's yours?

Thursday 20 November 2008

Hooray! Throne Speech Proposes National Securities Regulator

The news that the Government of Canada has proposed in the Throne Speech, as reported by the Financial Post, to establish a national securities regulator is indeed welcome. It should simplify the ordinary investor's life through a single set of rules across Canada and improve the capability to police companies. ... Oops it seems that Québec won't want to be part of it, to which I say, "chers compatriotes, soyez réaliste, la crise financière démontrent on ne plus clairement que les investissements ne reconnaissent pas les frontières. Participez à la construction d'une agence qui peut améliorer notre sort commun. Le temps d'être clochard est révolu depuis longtemps."

The financial crisis shows that what we actually need is some regulation on a world scale and a single Canadian regulator is a step in that direction as a voice for Canada.

Tuesday 18 November 2008

How to Improve Chances of Picking Mutual Fund Winners

Mutual funds are a prime vehicle for many people to save and invest in pursuit of financial goals. However, not just any mutual fund will do as some mutual funds are winners and some are losers. In fact, most mutual funds generate lower returns than market benchmarks, as has been extensively documented for many countries (e.g. for Canada, see the readable book What Kind of Investor Are You? by Richard Deaves, a professor of Finance at McMaster University).

The problem is that doing what sounds sensible and what most investors do - picking past winners, the funds that have performed best up to now - does not work! The disclaimer warning that "past performance may not be repeated" can be restated as "past performance is not likely to be repeated". Performance persistence is weak at best, with a slight majority of funds that outperformed continuing to do so and for only one year (Deaves, p.107). Interestingly, poor performance lasts a bit longer and the effect is a bit stronger, so one lesson is to be more impatient with losers.

The main objective however, is to find the winners. The method is not foolproof but the best selection criteria is to pick the funds with the lowest costs. Costs in the form of management fees, sales charges, administrative charges, trading expenses, legal fees and auditing expenses reduce returns and that affects what you as an investor receive net. The costs are not large as an annual percentage, which is probably why many people don't notice them much, but they do add up over years.

How to Find the Low Cost Funds:
  • Step 1 Go to a mutual fund resource website like GlobeFund, Morningstar Canada or FundLibrary, or use the tool in your broker website. Find the fund filter tool, select the asset class and search and sort by the Management Expense Ratio (MER) from low to high
  • Step 2 Pick out a handful with the lowest MERs. Be wary of any funds where the search result shows 0% MER; that's just not possible and is a data collection error - e.g. in the sample search result below, the BonaVista Global Balanced A Fund actually charges a 1.25% annual management fee. Cross-checking data reduces chances of deciding based on such errors. Focus on those with no Sales charges aka Loads; Front end charges reduce your initial investment while Deferred sales charges penalize you if you withdraw funds within a few years of initial purchase.
  • Step 3 Go to the Mutual Fund company's website and find the latest Management Report on Fund Performance for the fund. Alternatively go to, the website of the Canadian Securities Administrators where all the companies must file such reports. Within the report do a search for the word "turnover"; nearby should be the Trading Expense Ratio, which tells you how much the fund is spending on buying and selling commissions. (see example of Templeton Canadian Small-Cap Equity Fund below) Trading costs often approach or exceed the MER of a fund and can be a significant drag on performance.
  • Step 4 Add up Trading and Management Expenses. The lower the total expenses the better the future performance of the fund is likely to be.
More Reading:
US Securities and Exchange Commission Look at More Than a Fund's Past Performance
Fundscope's The True Cost of Funds
Common Sense on Mutual Funds by John C. Bogle at Chapters
Mutual Fund Fee Impact Calculator at Ontario Securities Commission website

Thursday 13 November 2008

Book Review: Economic Transformations by Richard Lipsey, Kenneth Carlaw & Clifford Bekar

In this time of economic hardship and financial market woes, it is heartening to read a book from which one can take a positive message. Though it was not written to be so, the content of this academic brick of 595 pages gives me much confidence that the long term bodes well for our material success.

Why so? In short, because our prosperity rests on factors with considerable strength, resilience and flexibility. Their durability is born of decades, even centuries of development and though they can never be assured to continue forever, they have power of momentum. It will take a lot of screwing up for the machine to fail entirely.

This book examines the sources of the West's economic prosperity through historical and model (both textual and mathematical) analysis of General Purpose Technologies, those developments whose strength and pervasiveness transform and energize the economy and society. Examples include writing, iron and steel, the waterwheel, the three-masted sailing ship, electricity, railways, the airplane, mass production and the factory system, the computer, the Internet, lean production and biotechnology. They identify (p.132) twenty-four such technologies in the course of history and one - nanotechnology - which they expect will prove to be so this century. An accelerating flow of such GPTs promises future growth. This does not mean it all will go steadily and easily upward with no hickups along the way. However, in the very long historical perspective of this book, our current recessionary climate is not even a blip.

One of the interesting and possibly controversial conclusions of this book (see pages 426-431) is that indefinitely sustained economic growth is entirely possible due to the effects of GPTs.
"... if there are limits to future growth, they are far less likely come from limits to innovative activity than from other sources, such as failures of human will, human institutions, or human inaction." (p.428)
The authors are academic economists, with no evident ax to grind and indeed, they take pains to review contrary views and explain why they think they are wrong, or partly right. The book contains a lot of academic economic-speak and some sections are mathematical. Evidently targeted at fellow academics most of it is still highly readable for the layman.

Among the major issues examined in the book and the authors' answers :
  • is growth sustainable? - as above, yes, unless we screw it up
  • why did prosperity historically happen in the West, specifically in Britain, and not elsewhere like in Islam or China? - because they failed to develop mechanistic science, which in turn was due to impediments or reversals in those societies from religion, institutions, laws, education systems, habits of thought and attitudes of free enquiry
  • can technology and growth winners be predicted? - no, the situation is too complex because of the effects of inter-relationships amongst differing political, social, economic and institutional factors and of human decisions on outcomes; each situation is unique, what they call the "arrow of time"; much of technological innovation is truly uncertain "... in which it is impossible to either to delineate all the possible outcomes or to match the probabilities to the outcomes..." and not merely risky, in which the possible outcomes and a probability distribution can be attached to each. The implication for individual investors are that we truly cannot ever predict which companies or countries will succeed and by how much. Moreover, there are only a few big winners who take a vastly disproportionate share of the spoils ( I think of Microsoft) and a lot of losers. This process of having winners and losers is necessary to sort out the good from the bad.
The discussion of population and its relation to economic growth in the appendix to chapter nine is delightful and shocking. From Roman times to the present, family size, birth and marriage rates have been intimately inter-connected with economic growth as people decided how many children to have to optimize their well-being. People knew how to control family size, both to increase and and decrease it, they acted upon that knowledge and attitudes and laws accommodated themselves to the reality of what people did. Today we use such gentle solutions as the birth control pill but in the past some practices to accomplish the same thing were routinely done and were seen to be perfectly ok:
  • one birth control method in the Ancient world was a "pessary made from crocodile dung" (p.335)
  • "Sexual practices that did not result in conception, such as as oral, anal, and homosexual intercourse, were also common throughout the ancient world." (p.336)
  • in Medieval times, "Although the Christian Church opposed infanticide as a method of controlling family size, 'if the the excuse of poverty was given, the penance was not very heavy'. Russell argues that the choice of infanticide was conditioned on economics: ... unlike today, the 'right to life' was not as important as the right to a good life."
  • infanticide was routinely practised in ancient Rome, in Japan, in Medieval times
  • when having more children was desired, "Couples seeking to enter marriage sought to get pregnant as a precondition of the marriage." (p.339)
The tell-it-like-it-is analysis continues throughout and there are many thought-provoking details to ponder. For example, on pages 422-423 they discuss one effect of the new technologies of the ICT (information and communications technology) revolution as being a widening of income disparity, the difference between the haves and the have-nots. If you doubt the reality, check out this great You Tube video at Economist's View The Coming Collapse of the Middle Class by Elizabeth Warren, a Harvard University professor. In addition to creating a big social problem, the phenomenon is believed by some to be constraining the recovery of US stock markets - see this Nov.14th article in the Globe and Mail by Fabrice Taylor.

The general value of this book is that one understands the world a bit better and the specific value for investing and personal finances is to know better the trends and forces at work which can potentially be turned into profitable investing.

The first and most powerful lesson is that one should stay the course and not abandon the stock market. There is so much powerful momentum from GPTs that recovery, though it may take several years, will almost surely occur. The ICT and Internet have a long way to go before their wealth creating effects peter out.

Second, owning a position in broad-based market funds is a smart way of avoiding the truly uncertain and thus near-impossibly difficult task of picking the rare winners. Even if nanotechnology takes off as the next GPT, trying to pick the one or two or three winners amongst all the inevitably numerous losers will be more a matter of luck than skill, even if one buys a diversified ETF such as PowerShares Lux Nanotech ETF (symbol PXN). Motley Fool writer Jack Uldrich pegged it correctly in this 2006 review of PXN when he says "Nanotechnology, however, isn't your typical field. It is a common mistake to think of it as an industry. It isn't. Nanotechnology is more of a general-purpose technology, like electricity or the Internet. Because of this, I have always encouraged investors to think of nanotech's potential less from the perspective of what it is and more from the perspective of what it will allow existing businesses to do."

Perhaps superfluous to mention for an academic book, there is a lengthy (14 page) bibliography with many further books and articles to entice follow-up reading.

Economic Transformations is worth every penny of its price of £24.99 in paperback from Oxford University Press (the Chapters hardcover version is $169.95!). Five out of five stars.

For an economist's review of the book, see this one by Joel Mokyr.

In this ITIF video, Lipsey discusses the implications of the book's ideas for the US economy and US public policy. The download slides summarize key ideas from the book using ICT as a case study.

The main author, Richard Lipsey has his own web page here. It has a number of downloadable working papers; there are several on ICT.

Mutual Fund Underperformance - A Sadly Consistent Story

Standard and Poor's has just released the latest quarterly SPIVA report that tracks the performance (see the list of all reports here), or I should say, the under-performance of Canada's mutual funds.

The results are perhaps not surprising to those familiar with mutual funds but they are shocking nevertheless. Consider the chart below, constructed from SPIVA reports from 2005 to the most recent. Note the following:
  1. A tiny proportion, hovering around 10%, of actively managed Canadian equity mutual funds manage to outperform the relevant index the TSX composite over a rolling three-year period (I picked three years since that is around the average holding period for mutual fund investors - if I had picked five years, the results would be even worse)
  2. The amount of under-performance is enormous, about 4% per year - see the red line on the graph.
  3. These poor results are consistent through all of 2005 to 2008 including times of strong upward movement and more recent big declines (though we have yet to see October's results)

Tuesday 11 November 2008

ETFs vs Mutual Funds: the Big Switch or Different Investment Philosophies?

Wealthy Boomer Jonathan Chevreau told us that in September and October mutual fund investors in Canada withdrew huge amounts from their mutual funds while ETFs were simultaneously experiencing large net purchases, notably of iShares broad-based S&P TSX60 Canadian Market Index (symbol XIU).

The iShares Canada press release touting these results also mentions the same thing happening in the USA: "As of July, the United States saw ETF inflows at US$41 billion as compared to US mutual fund outflows of US$47
billion.", citing its source as Investment Company Institute, August 2008.

It is interesting to speculate whether this is actual switching from mutual funds to ETFs in a kind of deathbed conversion or if it is simply symptomatic of two groups of investors with different mindsets and reactions to the market woes, i.e. the mutual fund sellers think the market decline is the end of the world while the ETF buyers see it as a buying opportunity for the long term. I vote for the latter interpretation.

Friday 7 November 2008

Credit Crunch? Depends How You Look At It

An interesting direct mail advertising offer popped into our mailbox a few days ago. Provident Personal Credit is actively offering cash loans from £500 to £500. Huh? Everything one reads these days about credit is that no one can get a loan, even the most creditworthy. But Provident is gung ho seeking clients, even if "you have been turned down before, you have a poor credit history, you're not working at the moment"!

How can they do this successfully? As their flyer says, "We'll base your loan on your circumstances and how much you can afford to repay." The parent company Provident Financial's Interim Management Statement of October 22nd gives further clues to a tightly run operation:
"... all loans are underwritten face-to-face in the home, which provides a sharp assessment of each customer's character and current circumstances. Home credit loans are for small sums repayable over a short period of typically a year and agents visit each customer on a weekly basis to collect the repayments, thereby continually updating their view of customers' circumstances. Not only are customers and their circumstances well understood, but since agents are paid commissions based upon collections rather than on the credit issued, there is no incentive to extend credit that the customer is unable to afford."

There is none of the sub-prime mortgage loan nonsense of agents paid for originating loans that were then sold off in parcels to other banks far away who had no clue of loan quality or contact with the debtors.

And the results bear out the accuracy of management's words. The July 30th, 2008 Interim Results showed a 34% increase in Profits before tax and a 28% rise in earnings per share, with loans and customers also growing. The company is hiring too as these ads on show, another sign of continued growth. No credit crunch here it seems.

Management's forecast is quite positive: "... Our conservative approach to lending, combined with the group's strong balance sheet and funding profile, means the group is well placed to continue to generate high quality customer and profits growth."

The share price (PFG on London Stock Exchange) is down only 3.8% over 1 year, a darn sight better than the minus 33.5% for the FTSE All-Share. Thanks to Google Finance for the graph below.

What's the catch? Depends on your viewpoint perhaps but the 183.2% typical APR interest rate exceeds the bounds of reasonableness. The rate is plainly and prominently visible on the ad and on the website home page, so no one can complain they don't know what they are signing up for. And considering that clients are often those who cannot qualify for, and do not have, loans elsewhere, maybe there is some value to those who borrow from Provident. Still, 183.2%!!!

The downside for borrowers is the familiar debt trap, where people get in and cannot get out, as this one tale from a Provident customer demonstrates with an interesting response from a Provident agent. Crunched by credit indeed.

TD Visa Makes No Promise to Refund Zoom Tickets

When discount air carrier Zoom Airlines went out of business August 28th, some credit card companies like MasterCard and American Express were quick to issue public statements that they would refund amounts for tickets bought with their credit card. The Canadian Transportation Agency post of Oct.24th also lists some travel operators who made promises to refund.

Visa issued no such statement but I assumed that Visa would merely follow suit. It appears now that Visa's policy is different. Having applied in writing to TD Visa with all the necessary documentation within days of Zoom's demise, I have received a partial refund in mid-October. In a phone call with TD Visa's disputes department the other day to ask about the remainder, I was told by a certain "Andrea" (why does no one at these customer service lines ever have a last name?) that Visa does not promise to refund me, it only undertakes to request a refund from Zoom's bank on my behalf as a secured creditor. That has two consequences: if the collateral assets are insufficient, there won't be a full refund and; it will take a lot longer to get the money back since Visa waits till it receives funds from the bankruptcy, which can take a long time. For a card that presents itself as a premium travel card, that pretty pathetic on TD Visa's part. Beware folks, as is too often the case, the fine print and the company's behaviour don't live up to the marketing hype. It's time to look for another credit card.

In the UK, there is a useful discussion on MoneySavingExpert of experiences with various credit and debit card providers in making Zoom refunds.

Tuesday 4 November 2008

Signs that the Market Panic is Over

In the month of October 2008 financial markets struck real terror into just about everyone. The panic phase now appears to be over, replaced by mere worry about the severity and length of the recession. Here are some signs of the change in mindset:
  • stock markets seem to have stopped huge 10+% day to day to day swings upwards and downwards
  • perfect correlation of markets has stopped, where everything is either green/up or red/down, in other words investors are beginning to look at the differential prospects of stocks ... the holdings in my portfolio with various asset classes has a comforting mix of ups and downs - diversification is beginning to work again
All is not sweetness and light, however. Rich investors like George Soros, Jim Rogers, Peter Schiff and Marc Faber who predicted the crash are busy cashing in as the credit deleveraging process they predicted continues painfully to unfold.

Monday 3 November 2008

Financial Education in Kind at LTS Scotland

Learning and Teaching Scotland is the organization whose aim is to prepare young people for life in the modern world through the creation of programs and teaching material for schools, including those that develop financial capability.

Here is lesson 1. Dangers of online impersonation and scams. Instead of, the correct URL for LTS Scotland, type in Note the extra "s". You are brought to an ad page which offers online degree programs. I especially love the one at the bottom of the screenshot below for Ashwood University where you can obtain a PhD in only 7 days with "no studying required", a delicously ironic case in point of the need for programs in financial education.

Sunday 2 November 2008

Dial 311 for Liquidity (In)Security

Investors worry about insufficient liquidity of their investments. Airports worry about too much liquidity. Anyone who travels by air has encountered and probably been frustrated by the liquid carry-on restrictions introduced in 2006. 3-1-1 is the catchy name that sounds like a phone number but is actually the carry-on limit for air passengers as devised in the USA and implemented worldwide. The 3 stands for the maximum of 3 ounces of liquid (or anything that is remotely like liquid). That is 3 ounces except in countries using the metric system where it is 100 ml or 3.4 ounces. Do metric bombs need more explosive to work?

The 1-1 part of the formula refers to 1 zip lock bag and 1 carry-on case/handbag etc.

For those who like to understand and delve a bit deeper into the liquids issue and airport security in general, check out the official US government website of the agency in charge the Transportation Security Administration. The TSA also runs its official blog called Evolution of Security, which is rather more interesting since it allows people to take potshots at their policies. It seems that is just a ploy to find the weak points in their systems, which is actually a smart thing to do. The TSA calls this facilitating an on-going dialogue.

Renowned security specialist Bruce Schneier publishes his comments on his excellent blog (see the Oct.29, 2008 post titled TSA news with links to a hilarious Atlantic Monthly article describing his all-too-easy circumvention of airport security rules). Scheier's blog is also good for issues of identity theft.

A bit of good news is that the TSA plans to start relaxing liquid restrictions in the fall of 2009 when it begins deploying technology that can distinguish water from explosives.

BTW, is there some secret agreement or pact of honour between western governments and terrorists that only airports and airlines should be targets of attacks? Any crowded shopping district street or mall contains far more people than does any airplane.

Saturday 1 November 2008

Junk Mail, Telephone Advertising Calls and Privacy in the UK

Worthy of note:
IT Security Expert published an excellent article Why UK Privacy is Dead on the dangers of identity theft and the lack of privacy in the UK, whose risks are unintentionally heightened by such lists as the online electoral register. He includes links and telephone numbers for getting oneself removed from the lists of direct mail advertisers aka unsolicited junk mail and similar phone calls. Both take requests for removal online or by phone.
To get removed from the visible online electoral register at, one must apparently download a form and mail it in. The page where the form download link is located reveals that credit checking firms conducting credit checks can access the register and check your details even if you have opted out.

While unwanted mail and phone calls are annoying and time wasting, the criminal use of personal details to effect fraud through social engineering is far more damaging when it happens. The Electoral list, BT Phone Book and online job search websites can all be leveraged by fraudsters. One must consider the benefits and the risks of providing one's data or allowing it to remain public. Unfortunately, as IT security Expert notes, the default is that an individual's data is published and available unless it suits the commercial or organizational interest of the body that has collected the data.

Thursday 30 October 2008

My Suggestions to the Ontario Securities Commission on Retail Investor Issues

Last Thursday I noted that the Ontario Securities Commission, the financial securities regulator in Ontario, had established the Joint Standing Committee on Retail Investor Issues and is in the process of collecting public input. Being chronically opinionated, I must take a shot at this.

To the Joint Standing Committee on Retail Investor Issues,

Here are some actions that I believe would benefit retail investors:
  1. Increase participation and seek wider input - with only 12 people on the conference call recently, that can hardly be representative; to uncover more suggestions and ideas, reach out to the online world and solicit input from discussion forums like the Financial Webring and Canadian Business and many bloggers from mainstream media folks like Ellen Roseman, Larry MacDonald, Jonathan Chevreau and Rob Carrick, to public-spirited professionals like Preet Banerjee, Norm Rothery, James Hymas, to joe public fanatics like Canadian Capitalist,Four Pillars, Michael James, Barel Carsan, Middle Class Millionaire, Million Dollar Journey, Investing Intelligently. See the links in the sidebar of my blog CanadianFinancialDIY. I am certain you will get well-informed, though perhaps pointed comments.
  2. Abolish the OSC and other provincial regulatory bodies and create a single national regulator. This regulator should have greater resources and ability to investigate and enforce laws on the gamut of abuses that harm individual investors. Laws and regulations are of little use unless they are enforced.
  3. Give priority to improving the regulation of advisors/ sales reps over the products themselves. Most retail investors do not have the time, inclination or skills to manage their own investing and this is becoming less so as the number and complexity of financial products increase. Investors want and need the convenience that already exists through the selling process of various providers but they also need someone trustworthy. Make the disclosure by advisor / sales person to the client of the compensation fees and payments mandatory in percentage and dollar terms.
  4. Make the provision of financial advice a profession with regulatory requirements for certification ( a combination of knowledge and experience), licensing registration and ethics standards that are actually enforced. Recognize that investing advice is merely a subset of overall personal financial planning and cannot be isolated from it. For example, sometimes money is better spent on insurance than mutual funds, or invested in one's own human capital or an annuity etc. The investing process must start and end with a person or family's holistic, integrated neds so that investing decisions are made in the proper context. The website, which you at the OSC sponsor, implicitly recognizes this by providing information on such diverse not-strictly investing topics as managing debt, buying a house and insurance.
  5. Oblige mutual fund companies to improve their disclosure by:
  • revealing all the costs associated with a fund, including trading costs borne by the fund, i.e provide total expense ratio not just management expense ratio, since this can be a significant drag on net performance; the new Framework 81-406 Point of Sale Disclosure for Mutual Funds and Segregated Funds is extremely disappointing in excluding trading costs since they are significant and are said to vary considerably amongst funds; total costs are an important predictor of future fund performance. See this article in Fundscope.
  • providing illustrations of the effects of the charges and fees on fund performance through standardized terms from the investor's perspective so that the investor can compare across funds and companies
  • publishing turnover ratios of funds
I would suggest that the OSC examine the UK system of regulating advisors and fact disclosure to investors. Many of the above ideas are already implemented in the UK under the Financial Services Authority, which is the single national regulator for investment and financial advice to retail investors.

Tuesday 28 October 2008

Recession to Last 2 to 3 Years? ... or More?

Robert Peston of the BBC blogs that a Bank of England report on the financial crisis tells how a similar banking credit crisis and contraction in Norway, Sweden and Japan lasted two to three years. Is that how long the recession will last? Or Perhaps even longer if there is a lag after lending and business investment and consumer spending start again? Incidentally, there are always lots of comments on his frequent posts and many of those comments add an interesting perspective. London is, or was(?) and major financial center so many insiders seem to want to get the dirt out and they comment away.

Global Financial Crisis: How Long? How Deep? over at Vox EU shows that crises such as the one currently underway have had the following effects on average:
  • credit crunch - average two and a half years with about 20% decline in real credit
  • housing bust - average four and a half years with 30% decline in real prices
  • stock market crash - average two and a half years with 50% real decline in equities
Worse news, recessions associated with the above are much more severe, with economic output declining up to 1% and lasting over four years. As the authors say, "The main take-away of the past episodes is that some tough times are ahead for the global economy before matters get better." Their short article is based on a just-released 80 page study by the International Monetary Fund Systemic Banking Crises: a New Database by Luc Laeven and Fabian Valencia.

GlobeAdvisor reports that the CPPIB is on the prowl to acquire real estate properties at bargain prices in the US and the UK and it apparently anticipates the bargains will be there for about two years, i.e. that's how long they believe the slump could last.

Thursday 23 October 2008

Tell the Ontario Securities Commission What You Want Them To Do

The investing world doesn't seem to know it but the securities regulator in Ontario, the Ontario Securities Commission is collecting public input about retail investor issues. The OSC set up a body at the end of August 2008 called the Joint Standing Committee on Retail Investor Issues. Its terms of reference (only two pages!) are here. The JSC's first initiative was to conduct a survey on product suitability - see the questions on this page.

They need your help because they don't seem too skilled at getting out there and finding the run-of-the-mill retail investor. I had stumbled across their web page in September and sent them my two cents worth. They subsequently organized a teleconference to which I was invited along with, I presume, those other folks who had responded. There was a vast crowd on the call, all of twelve people (!) giving their views. Half or more were insiders or industry professionals. Somewhat sad and inadequate participation for such an important subject, I dare say. No one had really been informed that they were expected to give their views so it was quite off-the-cuff. As a result, there was a lot of rambling in the two hours. Sigh...

Here's a smattering of comments I heard (I make no attempt to be representative or comprehensive):
  • products need to have full disclosure of risks and costs before sale
  • advisors lack training and need a far higher level of education, practical training and experience
  • advisors are more motivated by sales commissions and fees than the client's best interests e.g. many advisors won't recommend ETFs
  • advisors may mislead by themselves not understanding the products they sell
  • some advisors put client money into investments that are highly inappropriate, both from the view of risk and client understanding, i.e. they ignore their fiduciary duty
  • the ABCP fiasco is an example of the failure of regulatory bodies to prevent the offer of a bad product and subsequent mis-selling by the industry
  • this OSC committee itself is in danger of bias and influence by part of the very industry it seeks to improve, e.g. through the fact that Mutual Funds Dealers Association is a member
While one can complain about poor regulation and a bad consultative process, just sitting back and bitching under one's breath does not and will not solve problems. It was written almost 400 years ago and is still true today: "If the mountain will not come to Mahomet, Mahomet must go to the mountain". Let them know what you want or think needs to be corrected. Send an email to by their deadline of Friday, October 31st.

A good place to start might be the new disclosure requirements for mutual funds, which blogger Michael James finds to be less than perfect. Btw, thanks to Preet Banerjee over at WhereDoesAllMyMoneyGo for bringing this subject to my attention.

I'm preparing my own comments for an email and will post them on this blog.

Why Raising the Guarantee on Bank Deposits in Canada Is NOT a Good Idea Right Now

The CBC report Flaherty Expected to Announce More Help for Banks says he will raise the $100,000 guarantee on bank deposits, an action "aimed at helping Canadian banks weather the storm during the global financial crisis...". It turns out he announced that the federal government will guarantee inter-bank loans not increase deposits according to a more up to date report on CTV called Ottawa Takes Action to Boost Inter-bank Borrowing.

Whew! Thank goodness he did not raise the deposit guarantee. Imagine the consequences if he had.

People would ask themselves, "What exactly is going on that banks or depositors now need such protection? Are the previous assurances that Canadian banks are just fine not true anymore?"

Here's what further effect I think such an announcement would have:
  • people conclude that there must be a need for such protection, i.e. that banks are actually much weaker than they had been told, thus creating or exacerbating the very condition that the new guarantee seeks to placate; bank stocks would get hit, weakening the banks in reality
  • to the extent that people actually trust the guarantee, they have a greater incentive to see cash as the safe haven; they can now safely take more money out of the stock market and put it in a bank! After all, how many Canadians have more than $100,000 in cash that needs protecting? Certainly not ordinary working Canadians, it's people with substantial investment portfolios who are now in a state of severe stress as they watch the markets melting down day by day. The urge to sell out of the market and put it in cash in a bank increases, thus further weakening the market.
The time to up the guarantee is when something actually happens. Otherwise it risks becoming a self-fulfilling prophecy. Sometimes doing nothing is better than action.

Wednesday 22 October 2008

Why I Have Reduced my Allocation in US Investments

Last Friday October 17th, I made some major changes to my portfolio allocations:
  • total US investments reduced from 19% to 4%
  • European equities, much of it in fact consisting of the UK, also reduced from 19% to 17%.
  • Canada upped from 44% to 55%
  • Far East raised from 5% to 6%
  • Developing countries raised from 4% to 5%
  • Global increased from 9% to 13% through addition of the Vanguard Global Index Fund VEU
The reason in a nutshell - the aftermath of the debt crisis, which raises the risk of US investments, both for market results and for currency.

How so? Starting with the anecdotal but startling nevertheless - the clock tracking the US national debt in New York city has run out of digits the debt has ballooned so much. All the various bailout measures to shore up banks may have stabilized the system but the debt has not gone away and is now on the books of the US government/taxpayer. The negative consequences are likely to be severe and long term.

More substantial evidence:
Contrary mainstream views do exist:
  • National Bank's Oct.17 Economic Weekly newsletter says the impact of the $700 billion rescue package on US government debt is inconsequential.
Of course, there's a song to go with the theme, Crash Dance by Versus (I recommend all their brilliant satirical parody songs). The same group has another great song The Dollar and Its Diving that express my fears that the USD while strong now, may not be so for long.

On the other hand, the increasing allocation to Canada, despite the consequent lessening of diversification, is to reduce the extreme USD currency risk and market risk. In contrast, Canada's debt levels are low enough and stable. No banks are going under. Times may be tough during the worldwide recession but survival is sure and Canada's eventual prosperity I feel confident in.

European countries and the UK in particular, may warrant a further reduction. Generally I have read that debt levels are high in the UK and the government's borrowing is at record levels - see BBC's UK Borrowing Hits a 60-year High - so there is increased risk there too. The big question is whether it has become unsustainable as in the case of the USA, a conclusion I have not reached yet.

Update October 25th ... A GlobeAdvisor article says the USD may suffer a crisis. It's nice to find supporting opinion but am I deluding myself? Need to find contrary views...

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