Thursday 31 December 2009

C-FAX Radio Interview & Happy New Year

"It is better to remain silent and be thought a fool than to open one's mouth and remove all doubt." Abraham Lincoln quotation on BrainyQuote. Anyone who wants to find out for sure about me merely has to listen to a 15 min. interview I did today with Murray Langdon of C-FAX 1070 radio station in Victoria. It will air at 11:10am Victoria time today and be broadcast on the Internet here.

By the time it airs, I will be away to a good old Scottish Hogmanay soirée and be taking a "cup 'o kindness" à la Rabbie (NOT Robbie) Burns, so Happy New Year to all.

Thursday 24 December 2009

Merry Christmas and Remember to Share Your Wealth: here's how

Christmas is a time of giving, not just to friends and family, but also to strangers who can use our help. Helping strangers can be direct one to one or through the many fine charities out there.

As with most things today, there is a way to give online. In Canada, a charity portal has emerged - Itself a charity, it funnels funds to charities, electronically, when the charity has registered with CanadaHelps, or manually by cheque in the mail when it isn't. CanadaHelps takes its list of charities from those registered with the Canada Revenue Agency so at least one can be assured that the charity is real and eligible to produce a tax receipt, which CanadaHelps does instantaneously for all charities.

That doesn't mean every charity is equally worthy. That depends on one's preferences and, in my view, on the efficiency and effectiveness with which it carries out its stated goal. Some supposed charities chew up all their donations in overhead and administration. You still need to check them out before giving.

Which brings me to CanadaHelps itself. As a charity, is it worthwhile, effective and efficient or does it subtract rather than add value in helping the ultimate intended beneficiaries? CanadaHelps contacted me the other day touting their website and hoping I would do this post. I asked for and promptly received their audited financial statements. A positive sign, though I wish they would just post them on the website as well for everyone to see. The total expenses of CanadaHelps amounted to 4.8% of donations in the year ended June 2009, up from 4.2% in 2008. It seems mainly due to professional consulting fees rising faster than donations. Tha financial statements do not explain why that happened. One would hope that the online model would allow scale economies and donations to rise faster than costs.

The 3% fee that CanadaHelps charges compares reasonably with alternatives that a charity might have, like PayPal, which charges 2.9% + $0.30 per transaction to receive money. Most of the 3% (about 2.1% per the financial statement) gets absorbed directly by bank fees to make payments. VigetAdvance talks of other charity websites which charge 4.5-4.75% to accept donations. Of course, there is the old letter ($0.54 stamp + envelope) and personal cheque method.

Given that CanadaHelps also allows one to donate shares and thereby avoid paying capital gains on those donated shares, it looks like a good service, convenient for both individuals and charities alike. Whichever of Canada's 160,000 or so charities you choose, have a Merry Christmas all.

Tuesday 22 December 2009

CPPIB Makes a Good Buy in Scotland

It's nice to know that the next time I go shopping at what is the nicest mall in Scotland, I will be helping out my own future CPP pension, after the announcement today of CPPIB's purchase with a British partner of Silverburn mall on the edges of Glasgow. I wonder if I can get a discount based on my 0.000006% (1 out 17 million CPP contributors) ownership share. The investment looks like a good buy to me. Silverburn has the neatest indoor parking, using an innovative guide that I wish other malls would emulate. On the ceiling above each parking space, there is a red (occupied) or green (empty) automatic detector. It is easy to spot empty spaces a good distance away and makes finding a space a skoosh, as they say in Scotland. All Silverburn needs now is a Roots store, which I daresay would do very well as all the Scots I know love their stuff, and a Tim Hortons.

Monday 21 December 2009

Zarlink - the next high tech train wreck? Hopefully not!

MoneySense's The Top 22 Pensions in Danger in October rated 181 Canadian public companies on their pension underfunding and their likelihood of going under based on Z-Score (a reasonably reliable accounting ratio-based bankruptcy predictor - see Wikipedia article). High tech company Zarlink came out second worst on the Z-score at a really horrible -3.69 (positive numbers above 1.8 are safe according to the MoneySense rating, though the original z-score safe level is 2.6 or over) and 6th from bottom at 74% underfunding.

So is Zarlink set to become the next pension train wreck, following on the leadership, if one can call it that, of Nortel? Digging through Zarlink's financial statements suggests, thank goodness, no, it will not. It has set aside in restricted cash covering about 89% of the unfunded pension liability. Interestingly, this is not for Canadian employees but ones in Sweden. The Swedish obligation was funded with krona, not dollars, so though exchange rate shifts have driven up the liability in dollars (used by Zarlink in its accounting) the real obligation in krona hasn't changed much. Another unfunded pension liability, this one in Germany, has been dealt with by a contract with an insurance company to cover the liability. So the employees/pensioners over in Europe don't need to worry as much about their pensions. One caveat is how restricted the 'restricted' cash is. In the event of bankruptcy, is it really kept away from other creditors?

On the bankruptcy-avoidance side, Zarlink seems to have made some progress according to its second quarter financial statement by reducing operating expenses, accumulating rather than burning cash and eeking out small profits but there is no dramatic turn-around evident. It's still in a precarious position. Though I don't own any shares, as an Ottawa company I wish them success.

Thursday 10 December 2009

ETF Combinations for Tax Loss Selling while Maintaining Asset Classes

This is the time of year when most people think of doing tax loss selling in taxable accounts. Larry Macdonald in Using ETFs for Tax Harvesting: Hidden Alpha? on Seeking Alpha has reminded us that ETFs are a handy vehicle for doing that and last year I posted my suggestions for doing it properly. (In case you are wondering why tax loss selling is worthwhile, something that is rarely demonstrated, check out Tax Loss Selling Explained: What, Why and How on HowToInvestOnline).

For the passive index investor like me, the objective is to stay invested. In order to do that and not run afoul of CRA's superficial loss rule of not buying back the "identical" property within 30 days before or after a tax loss sale, one key test with respect to ETFs is to buy back an ETF that tracks a different index. 30 days later you can buy back the original ETF if that's what you want to hold for the long run. Each trade costs commission of course, so figure out whether the round trip is worth it as a percentage of the holding.

Here is a starter list of some of the main asset classes where multiple ETFs track a different index but are in the same asset class. The functional test of whether it is in the same asset class is correlation - the same up and down performance - which can be quickly eyeballed using Google Finance and graphing the ETFs in question (see my example chart of US total market ETFs below). To save time and space, I've just identified the ETFs by their stock symbol.

Canadian Equity
  • XIU - S&P TSX 60
  • XIC - S&P TSX Composite
  • ZCN - DJ Canada Titans 60
  • CRQ - FTSE RAFI Canada; fundamental indexing will cause returns to differ significantly from the above market cap weighted ETFs
US Equity - since the large caps represent about 3/4 of the US market, one might consider swapping total market for large cap or vice versa, especially if it just for the short term
1) Total Market
  • IWV - Russell 3000
  • VTI - MSCI US Broad Market
  • TMW - SPDR DJ Wilshire 5000
  • IYY - DJ US Total Market

Source: Google Finance

2) Large Cap
  • VV - MSCI US Prime Market 750
  • IVV - S&P 500
  • SPY - S&P 500
  • IWB - Russell 1000
  • ZUE - DJ US Large Cap, hedged to Canadian dollars - so returns will differ from above non-hedged ETFs; traded on TSX
US Bond Total Market
  • AGG - Lehman US Aggregate Bond
  • BND - Lehman US Aggregate Bond
  • GBF - Lehman Brothers U.S. Government/Credit (holds both govt & corp bonds)
Emerging Market Equity
1) Traded on US exchanges
  • VWO - MSCI Emerging Markets
  • EEM - MSCI Emerging Markets
  • PXH - FTSE RAFI Emerging Markets
  • ADRE - BONY 50 ADR
  • GMM - S&P Emerging BMI
2) Traded in Canada on TSX
  • ZEM - holds VWO plus other funds, enough to make a substantial difference
  • CWO - holds VWO but is 100% hedged
  • XEM - holds only VWO but is non-hedged; whether currency exposure difference with CWO counts enough for CRA I cannot tell (and they will, in their inimitable fashion, not tell, if you ask them) but the returns sure will differ
US Real Estate
  • RWR - DJ Wilshire REIT
  • ICF - Cohen and Steers Realty Majors
  • IYR - DJ US Real Estate
Global Equity
1) Traded in US
  • VEU - FTSE All-World ex-US
  • ACWX - MSCI All Country World ex-US
  • GWL - S&P/Citigroup BMI World ex-US
... Developed Country (i.e. ex Emerging Markets)
  • ADRD - BONY Developed Markets 100 ADR (large cap)
  • IOO - S&P Global 100 (large cap)
  • EEN - Robeco Developed International Equity
2) Traded in Canada
  • XIN - holds EFA only but hedged to Canadian dollar, so returns will differ from above two ETFs
  • CIE - FTSE RAFI Developed ex-US 1000; fundamental index - returns will differ from market cap funds
  • ZDM - DJ Developed Markets ex-North America ; hedged to Canadian dollar so returns will differ
For other (sub)asset classes not covered above, like commodities, small cap and value ETFs, a good place to look for ETFs and the index of each is It groups ETFs by categories which roughly correspond to asset classes and the index is shown in the summary for each ETF - e.g. see IOO.

There are some asset classes where I could not find any reasonable ETF combo alternatives - notably Canadian real estate and Canadian bonds. If anyone has any suggestions, please comment.

Wednesday 9 December 2009

A Good Idea - Liberals Propose Option for Individuals to Invest More in CPP

The Liberal party has proposed something that makes sense to me - an option for individuals to invest extra savings for their pension with the CPP. I could hardly disagree since I said more or less the same thing last year at the end of my review of the investing lessons of the CPPIB. Not only does the CPPIB seem to have been doing a fine job, it pursues worthwhile strategies no individual investor could hope to do on his/her own.

Tuesday 8 December 2009

IFA Calculator Demonstrates the Diversified Portfolio Superiority

Those who want to check the advantage of a diversified international portfolio may want to try out the superb IFA Index calculator over at Though addressed to US investors using US dollar data, the principles and the nature of the results for Canadians would be largely the same.

The folks at IFA have incorporated several unique and valuable features:
  • inflation (US data) button to see real returns
  • dividends included to get total returns not just the index value increase
  • long history back to 1928 extending right up to October 2009
  • time period selectable of any duration - find the best or worst case scenario that has happened in the past
  • regular (annual) deposits in dollars or percentage can be added, or
  • regular (annual) withdrawals in dollars or percentage too, making this especially useful for a retiree (if you use this option be sure to turn off the "adjust for inflation" in the returns section at step 4; otherwise you would be double counting inflation)
  • realistic portfolios with a wide range of asset classes and weights for any from the ultra-cautious 85% fixed income to the ultra-aggressive totally equity portfolio allocation or,
  • individual asset classes (21 altogether) like REITs, emerging markets, US and international small cap and value, with reconstructed historical data (these are synthetic and thus not fully realistic but IFA appears to have tried very hard to line them up properly)
  • annual rebalancing of every portfolio
  • tax calculation option for funds in a taxable account (US tax rates)
  • portfolio returns adjusted for the maximum annual fees of 0.9% that IFA charges its clients
It all adds up to being able to model the past in a very realistic manner unlike so many other calculators I have come across. This calculator is not world class, it is the best anywhere on the Net.

Portfolio Advantages:
One of the comparator asset classes is the S&P500 index (in step 1, scroll down the Indexfolio list to the bottom to get it). I used the worst ever 20 year rolling period of 1962 to 1981 (yup, it even beats 1929 to 1948 if you look at the handy 20-year chart from AllFinancialMatters blog on S&P500 Rolling Period Total Real Returns; call this the "financial death by inflation" period of modern history). The comparison of a conservative middle of the road portfolio - IFA's Index 45 - to the S&P500 shows the following:

1) Simple buy at the beginning and hold throughout
  • S&P500 - total return 15.56% or 0.73% per year compounded with standard deviation 14.72%
  • 45 portfolio - total return 68.34%, or 2.64% p.a. and 9.12% std dev
  • the portfolio got much higher return at much lower risk
2) Buy $1000 at start and invest $10 real per month ($120 annually) (i.e. rising with inflation)
  • S&P500 - total return 261.71% / 6.64% annualized and 14.57% std dev
  • 45 portfolio - total return 426.93% / 8.66% annualized and 8.88% std dev
  • the advantage of the portfolio is even greater than buy and hold
3) Retiree starts with $120,000 and withdraws $400 real per month (i.e. $4,800 per year = 4% of initial capital, which is the rule of thumb sustainable withdrawal rate)
  • S&P500 - same % return and std dev as for additions (it's just the mirror image); whew! the rule works as after the worst ever period, the S&P500 only investor has weathered the storm and the portfolio survived with a balance of $144,000 in December 1981and better times ahead, though he/she doesn't know it ... by 1991 the balance is up to $299,000
  • 45 portfolio - returns are higher here too and the end balance is $263,000; just for fun, I played with numbers to see how much could be taken out to end up with the same as the S&P500 - and the figure is around $6,300 per year, a whopping 37.5% more money for the retiree to spend! That is a 5.25% withdrawal rate. The money would have run out in April 1997, so a person could have spent 35 happy years in retirement.
IFA does tout that its funds and portfolios outperform on both risk and return what a DIY investor might be able to achieve using index ETFs or mutual funds like those of Vanguard so the actual numbers and potential withdrawal rates might not apply to an individual DIY investor. Nevertheless, the calculator provides a powerful argument for the value of holding a diversified portfolio.

Many thanks to IFA advisor Brad Von Grote who pointed out the calculator and spent a considerable time on the phone chatting with me. In case anyone wonders, IFA hasn't paid me to praise their calculator and I am not a client of theirs though I think a person could do far worse than sign up with them. I only wish they would create something similar for their Canadian audience.

Monday 7 December 2009

Ordinary People Still Getting Squashed by Crippled Mortgage Market in Canada and UK

Today's Globe and Mail article Never missed a mortgage payment and still facing foreclosure about the nasty fallout on innocent responsible homeowners reminds me of a situation just as bad, if not worse, in the UK. A family member who has had a mortgage with lender Nationwide for the past two years is being refused a new mortgage for an attempted trade-up to a larger property. Like the unfortunate Ms. Matthews in Canada, this person has never missed or been late on payment, nor missed any payments on loans of any sort.

Worse than the Canadian situation, the person has an impeccable credit rating and a highly secure job. The reason given for the refusal of a new bigger mortgage - the person has used on a few occasions the planned overdraft facility on a bank account, an overdraft which was promptly paid back. It's ironic and laughable that a convenience which the banks happily provide and promote (for all the fees they garner) has been used as the excuse for the refusal.

I don't know for sure but I suspect that Nationwide in reality probably doesn't have the money to lend in the global aftermath of funding scarcity described in the Globe article. Even before the crash Nationwide had begun severely restricting mortgage availability according to the March 2008 Times article Nationwide shuts door on mortgage hunters.

The immediate consequence is one less house in Scotland that will be sold. We've gone from credit gluttony to credit starvation.

Friday 4 December 2009

Expats - Where is Best to Live? Canada or Russia or Singapore? reported on a survey done by HSBC which discovered that Canada offers the expat the best lifestyle. Towards the bottom of the news item, there is mention of a second HSBC survey called Expat Economics 2009, which ranks countries for the best financial rewards for expats. Russia comes out on top there, quite a surprise, but is almost at the bottom of the list for lifestyle.

Which presents the obvious question, which offers the best overall combination?

HSBC Lifestyle Table

HSBC Economics Table

The country with the highest combined ranking is Singapore! It is number 4 in Lifestyle and 6 in Economics. Hong Kong is not too far behind.

Of course, which is best depends on what you are looking for. It seems a lot of retirees, who are not in the wealth accumulation phase of life, like Canada.

The UK ranks poorly in both tables. Expats have a hard time saving as living costs, especially housing, are too high. One wonders why so many people want to come to the UK.

The report says that the credit crunch and its aftermath have caused expats to, surprise(?), spend less and save more. More interesting is the finding that high income $200k+ earners put a much higher proportion of their savings and investments into shares, bonds, property, funds versus the heavy focus on bank savings by those earning less than $60k. One might say that at the time the survey was conducted - February to April 2009 - the big earners seemed to be taking advantage of buying opportunities. And how does one get to be rich / a high income earner - is it possibly by taking advantage of opportunities when they present themselves?

The other interesting indicator is that, as HSBC says, "wealth is moving east". Russian and Asia are the places to make big money as an expat. Europe and North America are falling behind.

One must note of course that HSBC admits that the survey was not scientifically conducted and may be inaccurate.

Thursday 3 December 2009

Putting Financial Education on the Right Track's superb review (dare I say definitive critique) of the failings of current investor education programs leaves one quite depressed. It seems the result of investor education is that the average person is worse off!

Education doesn't work? At all, ever? The notion that education does not work is rather contrary to a foundation of the modern world. Saying it does not work today should not mean it cannot work.

One basic problem appears to be that current investor education programs, in the interest of being "fair" and "balanced" and presenting all alternatives, ends up suggesting that active investing, whether directly through stock picking and market timing, or through buying high-cost funds, gives the investor as good an outcome as buying and holding passive, whole-of-market, low-fee, index funds. The facts unfortunately deny such a position.

The fact is that government and regulatory organizations, who probably know the truth, are the ones in charge of investor ed. How can they be expected to say that a massive part of a huge industry is doing it wrong? It doesn't look like they are the right people to be leading the effort.

One of the interesting links from InvestorInfo is to the Financial Education Institute of Canada, a private company that provides seminars to employees. The Institute gets paid by employers. It emphasizes its product neutrality and gets the correct answer (index ETFs). We need more of that. Employers are a good path for providing better education to individuals.

There's another fix that employers are in a great position to implement. The most important investment money for individuals is their retirement savings, which flows through defined benefit or defined contribution pension plans at their employer. Two of the big faults of individual investors - 1) picking the actively-managed, high-cost funds and, 2) not saving enough - can be vastly improved through changing the default options in plans. Instead of some active fund, when a new employee enters a plan, make the default the index ETF. Defaults have been found in the USA to have a huge influence on participants' plan choices (e.g. download The Future of Lifecycle Saving and Investing conference proceedings and search for the word "default").

For the "not saving" bit, add another option: provide a little checkbox to have some or all of a pay increase go automatically to increased deductions for pension. Apparently our faulty brains find it a lot easier to commit future money than present money to savings. Money we never see we don't miss. Such defaults address one of the big gaps in making investor education useful in practice, namely that success is not just about knowing facts (like the differential performance of active vs index funds). It is also crucially about countering and avoiding bad reactions and decisions to which we are all subject, as behavioural finance research has embarassingly revealed.

Tuesday 1 December 2009

Book Review: Investing the Templeton Way by Lauren Templeton and Scott Phillips

Reading a book about the investing methods of enormously successful legendary investor Sir John Templeton makes one simultaneously inspired and depressed. Inspired, because the exploits of any exceptional practitioner show that it is possible to succeed through skill, even in a field as notoriously difficult as the quite efficient investing markets. Depressed, because one realizes that such success requires a combination of hard unrelenting work and judgement in being able to separate essential from non-essential, noise from signal in the information over-load era where it is easy to get over-whelmed and confused.

This ability of Templeton to identify the correct piece of information struck me most in the account of his success in exploiting the tech bubble. Unlike many others who saw the tech bubble and tried to profit by short-selling, only to be squeezed out at big losses when, in that lovely phrase of Keynes, the market stayed irrational and kept going up longer than an investor could stay solvent, Templeton figured out the trigger that would finally cause the bubble to burst. At least as instructive is that he was 88 at the time - one of the book's lessons is that Templeton never stopped looking for bargains. I wonder if he lay on his deathbed in July 2008, thinking something like "shucks, there's a whole lot of easy money to be made very soon."

Investors looking for a detailed step-by-step investing manual filled with rules and checklists will be disappointed. This book is a high-level guide, more about the bargain mindset, the willingness to be different, to be ridiculed, to stick with a stock for years if necessary till its value is recognized, to be curious and questioning, digging through and beneath financial ratios.

However, it does include some of his rules of thumb:
  • look for countries with debt/GDP ratio of under 25% to avoid the risk that a country will have inflation and currency problems that will cause net investment losses
  • a rising/high level of takeovers in the market is an indicator of value - when competitors are taking each other out, they obviously feel they are getting a bargain
  • a high/rising level of IPOs suggest over-valuation as insiders decide to stick the public with the company at maximum price
  • sell a stock when there is an alternative available to buy that is 50% better price relative to intrinsic value
The book is filled with Templeton success stories. Yet is often said that one learns most from mistakes. I would have liked to see some discussion of his blunders and what was learned, or perhaps a longer review of one case, with its mis-leading data to be ignored and why it merited being ignored. Though it is certainly worthwhile and instructive as it is, the book ends up insufficiently analytical for my taste.

The text reads well and quickly. The smattering of charts and tables support the points being made without being overwhelming. It is a bit strange to find a few pages of Templeton family photos at the back, that probably being the doing of co-author Lauren Templeton, who is a niece (warning, there is a lot of reference to "Uncle John" in the text) and the owner of an investment firm. ... One wonders if niece Lauren is on the way to becoming ultra-successful and rich by Investing the Templeton Way.

Best quote: "... the most successful investors are defined by their actions in a bear market, not a bull market." i.e. they are buying by the truckload when everyone is terrified and the market is plummeting.

My rating: 3.5 out of 5

Many thanks to the publisher McGraw Hill for providing me with a review copy

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