Wednesday 30 November 2011

Book Review: No Hype, second edition by Gail Bebee

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

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

The Asset Allocation and Portfolio Building material has the most interesting updates.
  • real return bonds added as a component of the fixed income asset class; they now get included as part of all suggested portfolios
  • revisions (mostly downward) to guidance on what rate of return to expect, based on historical averages, as well as addition of figures for several very useful asset classes - Canadian vs US bonds, Canadian vs US vs Emerging Market stocks, real estate; all this allows better estimation of what various portfolios will yield and will be very useful as more and more investors are taking to the idea of diversifying beyond Canada
  • completely ETF sample portfolios specified right down to percentage sub-divisions within asset classes e.g. 35% equities in the Large Income Focused portfolio broken down to 20% iShares S&P TSX 60 Index (XIU) and 15% Claymore Global Monthly Adv Dividend (CYH)
  • all-in-one single mutual funds or ETFs that suffice as a good-enough ultra-simple portfolio solution
  • one non-update is that the individual stocks suggested for the equities allocation in larger portfolios have pretty well remained the same; Bebee's picks from four years ago still seem to be holding strong!
Caveats: There are a few niggling typos and minor errors such as: the Balanced Portfolio in Fig. 25.2 that only adds up to 95% (it looks like the 5% Foreign Bonds that was in the 2008 edition got deleted; Fig. 10.1 confirms this supposition); some of the ETF tickers do not match the fund name e.g. in the Income Focused Portfolio the iShares S&P TSX 60 Index ETF has the XIC ticker when it should be XIU. I could not find, as the preface promises, expanded material, though there are updates in chapter 8, on how to resolve problems with financial service providers - was I looking in the wrong place?

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

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

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

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

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

Monday 28 November 2011

"Something Will Work Out" Retirement Planning

Benefits Canada reports in Retirement income adequacy still a problem for pension plan members some scary results of a survey of pension plan members by pension consultants Towers Watson. That people "just aren't getting it" and not even using such retirement tools as employers make available and just hoping and trusting that "something will work out" for retirement doesn't augur well for the future. The article also notes the continuing shift from Defined Benefit pension plans to Defined Contribution retirement savings plans, which places more onus on the individual to both save enough and to invest wisely. Towers Watson goes on from these to talk of other warning signs. Is all this likely to work out well?

Meanwhile, the progress (recently tabled federal legislation) on the federal government retirement solution for the private sector, the DC-type Pooled Retirement Pension Plan, is revealing some interesting features of the PRPPs. The banks and insurance companies are apparently objecting to established pension plans like OMERS trying to get in on the action claiming that OMERS has unfair advantages on costs and regulation. Hmm, so now we see an admission that PRPPs run by banks cannot and will not do as good a job (costs, planning assistance etc) as traditional DB pension plans run by purpose-built organizations for public servants. Is there something wrong here?

Tuesday 22 November 2011

Bloggers for Charity

Blunt Bean Counter has set off an interesting challenge to raise money for charity. He has challenged bloggers to auction off the opportunity for a winning bidder to write a guest post on their blog. Here goes, count me in.

Here are the rules:

1. I am auctioning off the opportunity to write a guest post here on CanadianFinancialDIY.

2. Bid in confidence to my email account - click on the "Email me" link in the right-hand column.

3. The auction will close on December 16, 2011. I will notify the winning bidder by email ( I will use your email for nothing else than this contest).

4. The winning bidder will be required to send me a copy of a donation receipt, dated between December 17th and December 31st (personal information can be blacked-out) to confirm the donation has been made e.g. using a scanned copy by email will do. Pick any registered charity (no, Greece or Italy are not yet charities) you want. It's easy to donate online, as I wrote about here. This donation will be tax deductible to the winning bidder when the donation is made to a registered charity.

5. For unanimity amongst bloggers, January 17, 2012 be the date all the Blogger for a Day posts are posted.

6. The winner can write a post on any topic (subject to censorship for stuff that is illegal, violent, profane, defamatory, links to naughty or nasty websites etc ... no, smartalec, that doesn't mean you cannot write about the financial industry), although in the spirit of the contest, it would be great if the winning bidder wrote about a charity or charitable experience, e.g. the best and the worst donation you ever made, but that is not a requirement. The guest post cannot be a marketing piece. However, at the bottom of their post, the guest blogger can provide their name, name of their company and a brief description of their company and its products. Alternatively, the guest blogger can remain anonymous.

7. This is an extra rule so that there are seven in all, a much luckier number than six.

Monday 21 November 2011

Pooled Retirement Pension Plan Draft Legislation Revealed - Will PRPP Help?

Last Thursday November 17th, the Federal government announced and tabled draft legislation (Bill C-25) for creating Pooled Registered Pension Plans.

Will this help the target group - people who have no company pension and are not voluntarily saving through RRSPs or TFSAs? The answer is a mild "yes" in absolute terms and a resounding "no" in relative terms.

Yes, it does help somewhat.
  • Anything is better than nothing - The most critical problem is that those people right now are not saving for retirement, so any program that gets them to save will help. Despite the provisions of the PRPP legislation that do not require companies to opt in and that allow individuals to opt out, the default auto-enrollment rule (par.39(1)), the default investment option rule (par. 23(3)) and a default contribution rate (par.45(1)) will be quite effective in getting more people to save. "Nudge" works.
  • Cost and fees have a fair chance to be less than for mutual fund RRSPs - Why might there be a grain of truth to the confident assertion by Minister Menzies who told the Globe and Mail, subsequent to receiving financial industry assurances, that management fees will be "substantially less" than they are for RRSPs? 1) Money will be locked into the PRPP unlike the RRSP. You may be able to switch between funds but the fact that the investment management company knows the money will not be withdrawn means less need for cash balances and less urgency for short-term return-chasing by funds that undermine returns. 2) Marketing costs, which are embedded into management fees could well be less since the target market for the financial industry is not the individual consumer but small and medium-size companies. That should mean no glitzy TV ads. There will be no trailer fees to salespeople (aka financial advisors); in fact, the draft bill specifically bans kickbacks by fund companies to employer sponsors (par.33). 3) The regulatory structure should help to control the most egregious overcharging. Good 'ole politics might even have a bearing since the Governor in Council, i.e. the government, gives itself the power to decide what "low cost" fees means (par.76 (1) (j)).
No, the PRPP will NOT help, it may even do harm.
  • NoHype Investing author Gail Bebee emailed me her comments, which I think are spot on, so I'll simply reproduce them with my highlighting):

    "1. Employers are not required to offer this, or any other, employer-sponsored pension plan.

    2. Employees will be able to opt out at will.

    3. The financial industry, the same folks who charge Canadians some of the highest mutual fund fees in the world, will be managing the pension funds and will have a major say on the fees charged to do so.

    4. More government bureaucracy will be set up to regulate this new program.

    5. RRSPs already offer a similar retirement savings option. The issue is that not enough Canadians participate."

  • Wealthy Boomer Jonathan Chevreau's comments in the Financial Post gave some nuance to Gail's points.
  • The PRPP will complicate and confuse - The retirement landscape is already tough enough to understand, what with RRSPs, Defined Contribution and Defined Benefit Pension plans and TFSAs. Another layer of complexity is added. How will people make intelligent informed decisions about which to choose under what circumstances? There is no advice-giving component included in the PRPP structure. Blogger Preet Banerjee was right on the mark pointing this out in a CBC article on the announcement. With each province being required to implement its own complimentary legislation, it's a sure thing Canada will add another patchwork of permutations and combinations in rules, all of it totally unnecessary. What will happen when people move to different jobs in different provinces or with different companies? The minister says the plans are portable and transferable but sure as to betsy a lot of folks will end up with several plans. I already have two different LIRAs that cannot be combined (one is federal, the other provincial) on top of an RRSP and a TFSA. Another possibility to add?! Gimme a break!
  • Low pay workers will likely get scr***d - Tax-wise, the logic of the PRPP will work the same as an RRSP. In a couple of posts here and here on the HowToInvestOnline blog comparing the TFSA and the RRSP for retirement savings, it is quite clear that anyone earning less than $37,000 is better off using a TFSA. If such workers get auto-enrolled into the PRPP and they don't opt out (who is to tell them to opt out except for lowly bloggers that they never read anyway?), they will be appreciably worse off in retirement. Thanks for your help, government!
  • PRPPs pale in comparison to the CPP - The much debated alternative solution, that of expanding the CPP, as we have previously argued here and here, meets the criteria of what is needed much better. Over at Moneyville, author and pension expert Moshe Milevsky points out that the Pooled Retirement Pension Plan doesn't even live up to its name. It doesn't provide a pension - a lifetime of secure guaranteed income - at all, it is only a savings and investment plan that will go up and down with stock and bond markets.
Later addition: Commenter Leo's new blog PRPP Canada devoted to PRPP (the blog's mere existence is a sign of the additional complexity Canadians are soon to face) contains a link to lawyers McCarthy Tétrault's review of some of the ins and outs of C-25. From what McCarthy says, the law won't require that there be a default option if the PRPP offers a menu of investment (aka fund) choices that a "reasonable and prudent" person could use to assemble a retirement savings portfolio. That's one less small but critical nudge.

Wednesday 16 November 2011

WaterFurnace Renewable Energy Inc 3Q2011 Results

In September 2010, I reviewed WaterFurnace Renewable Energy Inc (TSX: WFI), a manufacturer of geothermal heat pumps, and decided to buy shares. Four quarters on, how do things look?

Industry Prospects - The business environment remains weak.
  • Residential slump continues - US Housing starts, a prime driver of demand for WFI's residential products, continue at an extremely low rate of about 500,000 - 600,000 starts per year vs historical norms well above 1 million. That situation doesn't look set to improve soon. In the latest conference call and in the published report on Q3 results, company management says it expects 2012 to see an overall industry decline of 10-15% for residential geothermal heat pump sales in the USA. Residential products, according to WFI management, have a higher profit margin than the commercial products that the company has emphasized to fill the sales gap. New housing, in which the substantial initial capital cost of geothermal is embedded and financed by a mortgage for amortization over a long period, overcomes the sticker shock impediment to geothermal's market success.
Financials - The overall picture is that the company is maintaining its financial strength, or even improving it slightly, in the continuing difficult environment.
  • Gross Profit Margin - GPM seems to be staying about the same. This is not so bad considering the shift in product mix from residential to lower margin commercial. But GPM is not improving as management says on page 3 of the Quarterly report - if one adds back the $727k difference for Q1-3 of 2011 that resulted from the change in method of calculating Warranty costs (page 31), then GM is not 37.7% as stated but only 32%, which is at the lower end of those in the last five years according to ADVFN.
  • Net Profit Margin - The same ADVFN page shows that the NPM has stayed quite stable at around 10% through the last five quarters.
  • Cash Flow - Whether it is by simple cash flow from operations or including capital expenditures (or depreciation instead of capex since the relatively new factory doesn't seem to be needing much investment for now), 2011 results are stronger than 2010 which were an improvement over 2009. WFI is thus adding to its cash reserves, probably more than it has an opportunity to spend effectively at the moment. No doubt this has enabled and justified the announced increase this quarter in the dividend from USD$0.22 to $0.24 per share.
  • Dividend - The strong and improving cash flow, along with complete absence of debt on the balance sheet, indicates that the dividend is quite sustainable. The dividend salves the pain of the stock price drop since last year.
  • Warranty Reserves - The rapidly rising warranty reserves, a non-cash liability but one which eventually happens in cash if the estimate is correct, could become an issue down the road. About half the increased liability, according to note 12 on page 31, in the first nine months of 2011 came from increased claim rates, not merely extra sales of units. It does not yet come to a level that is at all a problem but might be something to monitor.
Market Share - In the Q3 report, management states that it is gaining market share but the story is not so clear to me. It may be a question of how one defines the market.
  • WFI's sales increased 2.3% in the first nine months of 2011 while competitor LSB Industries saw a 19% rise (cf its Q3 report).
  • Though the numbers are out of date and have not yet even been released for 2010, WFI's shipments fell from 2008 to 2009 (as indicated by the figures Indiana) while those of LSB rose (cf the numbers for its home base of Oklahoma) according to the US Energy Information Administration website.
Insider Trading - Company insiders are keeping the faith.
  • The only activity in the past six months (see here) consists of stock purchases or dispositions by gift.

Strategy - The theme at WFI seems to be "steady-as-she-goes".
  • The HyperEngineering acquisition earlier this year has not been mentioned in the last two conference calls and is a minor revenue generator ($2.9 million in total with regular WFI international product sales) with a profit margin of around 8% (cf page 26 of the Q3 report), slightly less than the overall company margin.
  • Cash is being given back to shareholders through dividends instead, for instance, being kept in the company to make acquisitions
  • There are no initiatives to address a key issue of the large capital outlay required by a residential homeowner doing a retrofit conversion to geothermal of an existing home. The development of options to allow customers to finance installation costs as well as other strategic challenges and opportunities is laid out in the business school case study on WFI prepared by Charles Shanabruch in 2009.
  • Not much has changed since that date under CEO Tom Huntington who took over from the dynamic former CEO Bruce Ritchey. Perhaps the only glimmer of a new direction is international sales expansion beyond the USA and Canada, where the tiny sales volume tripled despite receiving no focus by management.
Valuation - Somewhere above the low end valuation of $29 per share that I estimated last year seems reasonable.
  • WFI has grown EPS 4.5%, and Free Cash Flow from negative to positive, over 2010; both are positives
  • US housing starts remain flat, a constraining negative that tends to the lower valuation. The guess/assumption last year that it might take two years to get back to normal levels should probably be re-stated as two more years from today in order to be conservative.
  • The stock price of WFI has slumped considerably from the $25-26 range of last year to around $19 nowadays. That makes WFI an even better value. Last year I said that WFI is a good buy, but for the long term. That is still my view.
Disclosure: I still own the shares I bought last year. I even bought more at around $21.

Disclaimer: This post is my opinion only as to how and why I came to my own investment decision. Whether you agree or not, it should not be taken as investment advice.

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