Saturday 13 December 2014

Norway on Horns of a Fossil Fuel Dilemma

You gotta love the irony of the situation. Norway has been considering a change in the investment policy of its giant $800 billion national wealth fund by divesting all its holdings of fossil fuel companies to help stop climate change. Guess where the $800 billion came from? That's right, from its North Sea oil.

They are not gonna divest however, as they think it would not be effective. They plan instead to "influence from inside" by working directly with bad companies. That's a relief since the fund on average owns 1.3% of every developed public market equity and a sale of those assets would probably knock back Canada's energy and coal mining companies yet more.

Mind, there is another solution to the Norwegians' dilemma with their "ill-gotten wealth" that would relieve their collective conscience. Could they not just give the money away to poor African countries?

Friday 12 December 2014

Retirement Income Planning must read - Yin and Yang

"The Yin and Yang of Retirement Income Philosophies," by Wade Pfau and Jeremy Cooper is a fantastic review of the range of retirement income strategies. Non-technical, thorough, impartial, referenced, it assesses the pros and cons of each approach, starting with the 4% rule classic at one end of the spectrum to the Managed DC plan exemplified by the UK's new NEST scheme at the other end. 

Their conclusion: "While neither a probability-based nor a safety-first approach is definitively right or wrong, different people will align more easily with one or the other."

Thursday 11 December 2014

Gains from Theft are Taxable and Claiming Fraudulent Scheme Losses

The Canada Revenue Agency has just published an updated tax folio describing how thieves should declare gains from theft (it's taxable income), or losses (deductible!).

Perhaps more relevant to law-abiding blog readers it also says business can deduct losses from theft by strangers, or employees ... but not business partners (how dainty, it's termed a capital withdrawal).

And finally, to add to the woes of those investors who have been victims of a fraudulent investment scheme, the folio describes some tax relief, but it looks complicated enough that professional help is likely to be required to report income tax correctly.

Monday 8 December 2014

A fresh perspective on risk

Too true! (from Sidney Harris) Substitute the idea of investing and it puts a new light on risk.

Tuesday 2 December 2014

TFSAs creating a GIS crisis and "welfare for the wealthy? Not very likely

Last week, the CBC published on its website an article by James Fitz-Morris provocatively titled TFSAs will lead to 'welfare' for the wealthy, government warned. This week, the Financial Post followed up with a sky-is-falling article by Jonathan Chevreau, How the Guaranteed Income Supplement is on a collision course with TFSAs. Take a valium people. I disagree.

Some Facts
Guaranteed Income Supplement (GIS) is not the same as Old Age Security Pension (OAS)
The first step in toning down the rhetoric (since confounding the two and adding the numbers together makes the problem look bigger than it really is) is to distinguish these two sets of federal government payments with completely different purposes and different eligibility requirements. In this discussion I'll stick to figures for a single person. Quoting figures for couples makes them look bigger, without helping to address whether abusive use of a TFSA will take place. It's simpler and more direct to deal with an individual.

GIS (per the official Service Canada website description) is the true low income benefit, the only payment that qualifies in any sense of the word "welfare" (which incidentally is not used officially by any Canadian government).

The maximum GIS payment for an individual in 2014 is $747.86 per month / $8974 per year. GIS starts being clawed back at the rate of 50 cents per dollar of income (other than OAS and GIS itself, which do not count as income for GIS-eligibility testing). GIS is completely clawed back and recaptured by the CRA when taxable income, which includes amounts withdrawn from an RRSP, from CPP, from dividends, interest and gains in taxable accounts plus any pension received, reaches a mere $16,728 in 2014 (TaxTips has details). GIS really is for retirees who little or no other income.

OAS (see Service Canada page) on the other hand is a payment merely for being an old citizen and having lived in Canada for a long time. Anyone 65 or over who has legally parked his/her butt in Canada for ten years or more, and is not in prison now can get it.

OAS currently pays $6765 per year to a single person. OAS is NOT for low income retirees, it's for everybody except really high income retirees. OAS only starts being clawed back through income taxes when a person's income reaches $71,592 and it is only all reclaimed by the government when income reaches about $116,700. That's hardly low income, not even middle income. Low income people do get OAS, but whether or not TFSAs are involved, OAS is clearly not intended for low income people only. So please, CBC, stop referring to OAS when using the term "welfare".

The problem only happens in a brief window, the three years between age 67 and 70. Both OAS and GIS are only for people 65 and over at the moment but in 2023 the age eligibility will begin rising gradually over the following six years to 67. TFSAs will need to have existed a lot longer than till 2029 to grow large enough to generate enough income to support a high-income lifestyle. At age 70, CPP must start (or you miss out, it's not paid retroactively). A rich person would likely have worked in a high-income job and likely therefore to get maximum CPP, which would be 42% more than at age 65, or $17,693, which is more than enough income (CPP counts as income when calculating the GIS clawback) to wipe out the GIS. At age 71, forced withdrawals from registered plans would easily (especially for rich people who would almost surely also have saved lots in such plans) take care of GIS.

TFSA accounts allow the tax-free accumulation of any type of investment earnings like dividends, interest and capital gains. The flat contribution limit is currently $5500 annually, starting at age 18, and carries over and accumulates through any years where no contribution is made. There is no tax refund like RRSPs give for contributions i.e. TFSA contributions are made with after-tax dollars. TFSA withdrawals are completely tax-free, not included in income on an annual tax return. There is no tracking or attribution of contributions vs income/profits in a withdrawal.

If the TFSA is thought to be the problem because it holds a large tax-free balance then it is not the problem. To be large enough to support a high income lifestyle for three years, wealthy people would have had to save / contribute the maximum $5500 every year. Over 35 years from age 32 to 67 that would total $192,500. For three years from 67 to 70, the wealthy steady saver could spend those contributions to support $64,000 in annual spending - tax-free, of course, because it's their own after-tax contributions. It's not income and no further income taxes are due and they could keep all their GIS. No tax-free income from the TFSA is needed for rich people to unfairly grab the GIS. Similarly, a rich person could well have large bank savings or a non-registered account, which could be converted for few years into low- or non-interest cash accounts to have plenty of tax-free assets generating no taxable income to spend. Blaming the TFSA as the threat to GIS is a red herring.

The tax-free earnings within a TFSA would help more middle income people implement a GIS-grab strategy since they would not need to contribute as much to the TFSA. Re-invested growth within the TFSA could be combined with the contribution capital to achieve a similar balance e.g. contributing $2500 annually for 35 years from age 32 (an age where more people start to be in a position to save) at 3.5% compound return produces a balance of $172,500 at age 67. As the FinAid calculator shows with those inputs, half the balance is the investor's own after-tax accumulated contributions and half is income.

Using unlikely assumptions to trump up the argument - It is only by using improbable figures that the CBC article's Kesselman puts together an argument that someone could live entirely off tax-free TFSA income. A 6% sustained return on a balanced portfolio that generates a $1 million portfolio? Not very likely! Historically, Stingy Investor's Asset Mixer tell us a real returns from 1980 to 2013 were 6.1% geometric (compound) for a 50-50 bonds-Canadian equity portfolio. Sounds right .... except those are index returns before fees. Select the Global Alpha Assumption of "Average Fund" for typical mutual fund fees that the Canadian investor faces and returns are down to 4.6%. As the famous Dalbar studies have repeatedly shown, investors on average do far worse than their funds by bad timing of buying and selling. Compound 4.6% for 35 years of $5500 annual contributions and the portfolio total is only $478,500, of which only $286,000 is accumulated income, the rest being the investor's own after-tax contributions. It is only by assuming that the rich investor would have been able from age 18 to contribute an unlikely $5500 per year for 49 years that a 4.6% return would produce a portfolio worth $1,008,000 by age 67, when they could achieve their goal in life of taking $9k of GIS by living off tax-free TFSA income for the next three years.

Is the historic average 6% return likely for the future? Um, no! - But let us suppose that rich investors have become so by being smarter than the average. They will buy and hold with mechanical (no gut-feel!) rebalancing low-fee index ETFs and so lose only 0.1% or so return per year off the index. What return can they reasonably expect?

The future return environment is nowhere near as rosy as the halcyon decades of the 1980s and 1990s when stocks were going gangbusters and bonds benefited hugely from continually declining interest rates. Today's reality - Stocks in future might return 3 to 5% while bonds look set for 2% returns. A portfolio combined 3 to 4% is more reasonable. We'll use 3.5%. That has a big effect. TFSA contribution room accumulates and never expires, but most of the growth in a portfolio comes from long term compounding. Starting an investor at age 30, giving 37 years of savings and growth at 3.5% return, gives a TFSA portfolio of only $418,000. At that stage taking out a 3.5% return as tax-free income would provide only $14,600, hardly enough to sustain a wealthy lifestyle. The investor would need to withdraw some $45,400 of the accumulated capital and past income (each of which constitutes about half the portfolio total) to reach Kesselman's $60k of tax-free spending.

In short, a few investors may be lucky or skilled enough to accumulate huge TFSA balances that will enable them to live entirely off tax-free income while collecting GIS for a few years but they aren't likely to be numerous. Is it worth turning the tax system upside down, such as testing for assets instead of income, or drastically changing the TFSA by making some of the income taxable?

The TFSA exemption for GIS (and OAS) eligibility is not a flaw or a "loophole", it is fundamental design feature and deliberate rule to benefit large numbers of modest income retirees.
The government itself explicitly touts the feature as an advantage. The TFSA was designed to especially help, and various analyses comparing the TFSA to the RRSP (including my own), show that it is most attractive to people with low income. So CBC should stop pejoratively describing this as a loophole and people like John Stapleton quoted in the Financial Post should stop calling it a "policy flaw".

Are the rich likely to try grabbing GIS, even though they could do it?  Too many other factors mean likely few will.
Future very well-off retired people will have lots of assets. They probably will have maxed out their TFSA and their RRSP, be entitled to maximum CPP and maybe even have non-registered assets too. Assuming that rich people want to stay rich and have no moral qualms (which might deter a few) about possibly claiming GIS, it will be one of the factors in the mix. Staying rich means considering more than the short period from 67 to 70, it means taking account of the whole of remaining lifetime. It may not be worthwhile taking GIS if that means pushing up into higher tax brackets later and paying more tax in total with less disposable after-tax income. Taking GIS is not a single dominant no-brainer must-do. Sophisticated retirement planning tools like RRIFmetic that figure out the best withdrawal strategies depend on many assumptions and factors.

Is there likely to be a problem with public finances? Nope, according to the Chief Actuary at the Office of the Superintendent of Financial Institutions in this latest 2014 report on the Old Age Security Program. Note that the conclusions quoted below are about the entire expected effect of the TFSA, including especially the mass of lower income Canadians using TFSA tax-free income to get GIS as intended, and not just rich people abusively using the GIS-gambit.
  • "The GIS recipient rate is projected to slowly increase from its current level of 32% to 34% by 2030 due to the impact of TFSAs. The GIS recipient rate is subsequently projected to reduce to 31% by 2050." i.e. in the major impact in 2030 is when TFSA have been in existence only 21 years and have not yet grown to large amounts, then it tails off ... is this an ominous problem?
  • "... the fact that individuals are also assumed to invest in TFSAs results in GIS and Allowance recipient rates increasing slightly over time. Ultimately, however, the fact that benefits are indexed to inflation as opposed to wages drive the cost of the OAS Program relative to the GDP down over the long term, with the result that annual expenditures are expected to fall to 2.4% of GDP by 2050." Doesn't sound like the sky is forecast to fall does it?
A much more sensible reaction than the hyperbolic media reports is found in the comments of a Department of Finance official reported in the Financial Post
  • "... he thinks this [suppressing all taxable income to claim GIS] would rarely be possible. Most high-income individuals have other income sources and would inevitably render them ineligible for GIS. And since TFSAs have only been around five years and so remain mostly small, “this might be too hypothetical to comment on, given that the purported optimal scenario is decades away,” he said."
Leave the TFSA alone, except to double the annual contribution limit as the government has promised.

Monday 27 October 2014

Why I still like Low Volatility ETFs

The recent equity market air pocket turbulence has added a bit more comfort and confidence to my decision to devote a substantial part of my Canadian equity allocation to BMO's low volatility ETF (TSX symbol: ZLB). The Google Finance chart says it all - less than half the price drop in October compared to the broad market TSX Composite ETF from iShares (TSX: XIC). What correction?

iShares' low vol ETF with symbol XMV also has a lower drawdown than XIC. I notice also that iShares' value ETF symbol XCV behaved just like XIC. That doesn't seem to offer much support to those who complain that low vol is just the value factor in disguise.

Dave Dierking writing in Seeking Alpha found the same pattern in the USA with the SPLV ETF compared to the S&P 500 SPY fund.

Wednesday 25 June 2014

WaterFurnace Renewable Energy - All's well that ends well

WaterFurnace (TSX: WFI) is being acquired by a Swedish company in the same business, bringing to an end the four-year holding that I posted about in 2010 when I first bought shares in WFI. Though WFI's price took a big jump up from recent $25 or so to about the $30.60 acquisition price, that has only made for an "ok" investment overall. As the Yahoo Finance chart shows, shortly after I bought it, WFI took a prolonged downward slide that it only recently has recovered. Compared to an market index ETF like iShares TSX Composite XIC, the ride has been a lot bumpier to get to pretty well the same place, though dividends are not included and that would put WFI ahead of XIC since its yield in 2010 was 3.5% while XIC's would have been 1% or so lower - thus 5 years x 1% = 5% more return for WFI bumping it slightly ahead of XIC. Anyhow it's a friendly acquisition so is almost sure to go ahead and thus is the end of the line for WFI.

Here are my takeaways from the experience:

  • Extreme patience is required and the only way to be able to exercise patience is to have some confidence in the on-going value of the company. The seemingly endless downward slide of WFI's stock price from 2010 through 2011, 2012 and 2013 didn't feel great. Stagnant actual company results didn't help much. In early 2013 when I posted after the release of 2012 results, it looked as though the stock price could only be worth $20 max. Regular in-coming dividends - WFI even increased its dividend during the downward slide of stock price - also help greatly to exercise patience. You are getting something back out of the investment. Funnily enough, WFI's recent business results haven't been inspiring enough to think significantly higher stock prices are justified so I am more than happy to sell my shares at $30. As Yogi Berra said, "It's never over till it's over".
  • You can still get sand-bagged by the unexpected no matter how good your due diligence. My MBA-style due diligence before purchase in 2010 was as good as I could make it, yet I still missed the one key factor that has been a severe drag on WFI's business performance (in addition to housing starts), namely the huge drop in natural gas prices and relative loss of attractiveness of ground source heat pumps for heating/cooling as a result of fracking. I'm still not sure whether WFI management didn't realize themselves the importance (incompetence), or just didn't want to tell shareholders (untruthful), but they sure didn't talk or write about it. On-going paranoia about what could go wrong seems to be a necessary attitude to maintain when investing in individual stocks.
  • A follow-on is that Socially-responsible environmentally-friendly companies are not necessarily the best-run. Managers missed the boat on natural gas prices and they have been increasing their pay much faster than performance would justify too.

Thursday 8 May 2014

Sustainability and Executive Pay in S&P 500 Companies compared to Canadian Large Caps

Pensions and Investments reports on a study by GMI Ratings research firm that found the majority (58%) of S&P 500 linked executive pay to performance on sustainability (aka environmental social and governance) factors. That's perhaps impressive news at first glance, but the link seemed quite weak in most cases according to the article.

It's interesting to compare results with what I found on my other blog when I compiled the numbers for large Canadian companies in various sectors:

... which in total is 34 out of 68, or exactly 50%. It's not far off, though a bit behind, the US results.

Tuesday 6 May 2014

Book Review: Stocks for the Long Run (5th ed) by Jeremy Siegel

SfLR is a classic, a book that every self-directed investor should read. Primarily history, but with a good dose of explanation, and primarily about the USA, it's the best overview of the equity side of investing one can find. It's a book about stocks in the broad collective sense, not about individual stocks or analysis thereof. Anything you wanted to know about stocks (see the table of contents in the Amazon preview of SFLR) and were wanting to ask and get a succinct intuitive (non-academic, non-mathematical) answer, this is the book.

The mere fact the book is now in its 5th edition twenty years on from initial publication is testament to its enduring well-earned popularity. Author Siegel has not rested on reputation, the main update being an account of the 2008 financial crisis and its aftermath in the first 70 pages.

It's hard to say these are criticisms, but here is what I would like to see expanded (I'll gladly take another 100 pages despite the book being already almost a brick at 400 pages):

  • Central thesis past vs future? - The fact in the following quote accounts for the fame, and the title, of the book "... stocks, in contrast to bonds or bills, have never delivered to investors a negative real return over periods lasting 17 years or more" (going back to 1802 up to 2012 in the USA). OK, so how about the future? What are the chances this streak will continue and what are the factors to support the expectation? Is it just that the USA is lucky, as the-world-is-random folk believe? Siegel does address this crucial question to some degree - yes, since i) emerging markets country investors will buy up the assets of the boomer generation as they sell to finance retirement, ii) prosperity comes from productivity growth in the USA, which will continue. This is not totally convincing. How have stocks done around the world? The experience of other countries is not examined to any degree (Canada itself gets a couple of insignificant mentions), especially those where stock investors lost everything. Others like Elroy Dimson, Paul Marsh and Mike Staunton in Triumph of the Optimists and in their annual Credit Suisse Global Investment Returns Yearbooks have taken a much more extensive long term look. Siegel really considers only volatility risk since that is all that has transpired in the USA. It would be helpful for him to consider other long run equity risk, such as William Bernstein does in Deep Risk (which I discussed here). 
  • Investing strategies beyond cap-weight and fundamental weight? - As his own dissection of the Dow Jones Industrials and S&P 500 stock indices makes clear, cap-weight indices and the funds that implement them are strategies themselves, with significant inefficiencies, despite being miles better than actively managed mutual funds. There are better alternatives but he covers only one - fundamental weighting. Siegel describes small size, value and momentum factors but neglects low volatility and then misses the chance to tie all that together by describing the current state of the art indices/strategies being developed in places like the EDHEC Risk Institute in Smart Beta 2.0, such as maximum diversification, efficient maximum Sharpe, maximum decorrelation, minimum portfolio volatility, risk parity etc.
Nevertheless, it's hard to knock Siegel too hard for the tremendously useful contribution this book makes to investing knowledge. 

There's plenty of footnoting for further reading of sources. There are lots of charts and tables. The lengthy 17 page index is excellent. The writing is clear and jargon-free for the ordinary investor though it helps to have basic knowledge of investing. It's a book one can return to again and again. It gave me plenty of blog post ideas.

Rating: 4.5 out of 5 stars.

Disclosure: The publisher provided me with a copy of the 5th edition for review.

Wednesday 23 April 2014

Good new, bad news: Living even longer than previously expected

Back in February a Canadian Institute of Actuaries press release told us that as a result of compiling data specifically on Canadians (previously, they had always apparently relied on US data), they discovered that we can all expect to live a couple of years longer. If a man gets to 65, he can expect to live another 22.1 years, vs the older US-based estimate of 19.8 years. Women go up from 22.1 to 24.4 years. Good news - we get to live longer. Bad news - we have to find the money to pay for it, as do our pension plans, which apparently take anywhere from a 1% to to 7% under-funding hit. It also means we'll be getting lower monthly income henceforth when purchasing annuities. Fortunately, it seems from the detailed report on the CIA website that the revised estimates are in accord with the assumptions used in the C/QPP so their long term funding sustainability is not being put in question.

Thursday 17 April 2014

How long in advance to buy air tickets: USA data

Interesting post on on the best time to buy a US domestic air ticket - but warns answer is different for international flights. Need this stuff for Canada! Their advice - check early and often.

Wednesday 16 April 2014

Why my core Canadian equity ETFs deviate from the norm

Some years back I switched my core Canadian equity holdings from the norm - the ETF with the largest net assets by far, the iShares S&P / TSX 60 Index ETF (XIU), which is built on the traditional cap-weight principle - to a combination of two non-cap weight ETFs in equal amounts:
  • Invesco PowerShares FTSE RAFI Canadian Fund (PXC)
  • BMO Low Volatility Canadian Equity ETF (ZLB)
Here's why such a move was the right thing for me (I'm now semi-retired in my early 60s).

1) Better long term returns - Both the RAFI fundamental indexing strategy and the low volatility have been shown by plenty of research to reliably outperform, by 1 to 2% per year, cap-weight over long periods, like 10 years minimum but more surely over 15 years. Given that my selected ETFs have higher MERs by about 0.3 to 0.4% vs XIU and probably extra trading costs, I'm expecting to outperform anywhere from about 0.5 to 1.5% net per year over the long haul. Over 15 years, an extra 1%, such as 4% vs 3% annual compound growth, means an extra 15% more in end value. I'll take that thanks.

But achieving that expectation depends on several other factors and circumstances.

2) Sticking to the strategy - One big danger is getting nervous or impatient in deviating from the norm, being different from everyone else. That's a danger especially when the inevitable lag in performance of PXC and ZLB vs XIU happens and it is tempting to sell out and switch back to XIU. We dumb money retail investors are notorious for switching funds at the wrong time and earning less than the funds we invest in. Though one never knows for sure, I believe the odds of avoiding the premature abandonment of ZLB and PXC are on my side for these reasons:

a) Real after-inflation, after-tax positive return, not the TSX Composite, is my benchmark. My measure of success is going to be on absolute gain or loss terms, not one of keeping up with the XIU Joneses. I am my own investment boss, unlike professional portfolio managers, who get judged compared to the equity market index and so have a marked tendency to need to perform accordingly. It is quite serious stuff for institutional asset managers, as one can detect reading the extreme efforts to build investment strategies that do not deviate too far from the index but still outperform, such as those being developed at EDHEC Risk Institute in papers like Smart Beta 2.0.

b) Expectations, knowledge and experience. I have now been actively investing on my own since 1997, and doing plenty of reading and writing, like this blog and my other blog I've lived through both the tech bubble cum crash and the credit crisis and its aftermath. I've experienced the sickening sinking feeling. I think I know what can happen. I know it can take 15 years for my strategy to pay off.

Despite being semi-retired, my time horizon is not zero, or even a few years. Though I am consuming my capital saved over my life to date, I expect, and plan, to live many more years. My time horizon is a continuum. Some of my money will only get used in twenty five years if I'm only of average life expectancy. And if I'm wrong and die sooner, then it doesn't matter.  Shrouds have no pockets as the old expression goes. Dying cannot hurt you financially.

c) Properly diversified portfolio. I think I've built a portfolio structure with various types of assets that will be resilient to inevitable future shocks, unless the world descends into nuclear war or a global pandemic wipes out half the global population, in which case it won't matter anyway. I also own lots of resiliency enhancing non-equity assets like ordinary bonds and real return bonds. In addition, the Canadian equity ETFs above have some other features that are beneficial.

Part of my "portfolio" is the fact that my income stream to live off is not wholly dependent on withdrawals from my investments accounts. Sources like CPP and part-time income allow me to fund a good chunk of my essential spending and I can reduce withdrawals somewhat without major lifestyle constriction. Having observed that equity dividend income is in fact quite stable at an aggregate level, even through the worst of times like the recent credit crunch crash, I figure that withdrawing the 2 to 2.5% distribution yield (ZLB's is currently 2.1%, PXC's is 2.6%) will allow me to avoid selling shares at market bottoms and thus largely counter sequence of returns risk. Plus I have a near-term cash cushion for my year-ahead spending that lets me avoid any withdrawals during frequent market corrections aka short-term volatility.

Features of PXC and ZLB
1) PXC essence is a Value tilt while ZLB is a Small Cap and Low Vol tilt. PXC's fundamental strategy relies a lot on a heavier emphasis on out of favour "Value" stocks, while ZLB is accidentally focussed on Smaller Cap stocks (amongst albeit the larger cap end of the TSX) and explicitly selected and weighted by low beta (which more or less corresponds to low volatility and has been found in research to behave the same way). The different essence means that ZLB and PXC will be less correlated with each other (according to's calculator over the past year, the correlation between the two is only 0.43) and provide a diversification benefit. Both ETFs have so far been more correlated with XIU than each other. Looking inside the ETFs, that is not such a surprise. No less than 58 of XIU's 60 holdings are held within PXC, accounting for almost 85% of its assets. In contrast, the overlap in holdings between ZLB and PXC makes up only 20% of PXC's total weight in assets.

Of course when a big crisis hits again, their correlations will rise (see this table from William Coaker for an instructive look at how correlations changed in the USA under the various market environments since 1970), so it is other asset classes / holdings, like real return bonds and cash that will provide the un-correlation, but in the meantime of relative market calm, it is worthwhile benefit.

There's a bit of a psychological bonus to ZLB and PXC being so different. At times one will follow along XIU better while the other lags, or vice versa. So far, PXC seems to have tracked XIU better than ZLB, which has powered ahead of both, as the chart below shows. To the extent even I cannot resist comparing with the TSX, I can comfort myself that I am not as much different as all that.

2) ZLB is considerably less volatile. It is no surprise that an ETF whose holdings are selected for low volatility should be less volatile overall. The InvestSpy tool shows that ZLB's past year volatility (standard deviation) of daily prices is only 8.0% vs XIU's 10.2% and PXC's 10.1%. Anything that reduces volatility is especially beneficial for me in the early stages of semi-retirement, where withdrawals at the time of severe downside (historical worst-case figures on this post) can permanently damage a portfolio, the so-called sequence of returns risk. ZLB's maximum downside drawdown should be less than XIU's (as Cass Business School found in table 2 of this paper for this type of fund strategy) though PXC might do worse (table 1 of this paper).

3) PXC and ZLB inherently and automatically incorporate the Value and Small Cap factor tilts. Most investors beyond the beginning stage recognize the accepted reality of outperformance from Volatility, Value and Small cap factor tilts. It's finance mainstream accepted truth. But there's a practical problem for individual investors wanting to take advantage. Using cap-weight ETFs to tilt and capture such benefits requires buying a multiple funds and figuring how much of each to buy. There's no finance theory about how much of each to hold. I have not seen anything more than arbitrary suggested funds and percentages. Do I buy a separate small cap fund only, or a small cap value fund and large cap value fund and should the allocation be 5% or 10% etc? Multiply that by many countries and geographies (Canada, USA, developed market, emerging market) and pretty soon you have a dog's breakfast of funds that is an increasingly costly nightmare to rebalance. Add in multiple account types (TFSA, RRIF, LRIF, LIRA and taxable) and the brain starts to hurt. I like the practical the convenience of two funds only that cover the field. The fewer ETFs I have to own across my multiple accounts, the better.

Sunday 13 April 2014

Corporate (Large Company) Sustainability Leaders in Canada

Those interested in finding companies that are highly rated for Corporate Sustainability with an emphasis on aspects that are financially material may want to look at research company RobecoSAM's list of 2014 leaders from around the world, including 17 from Canada. A similar list is Corporate Knights' 2014 Global 100, which has 13 companies from Canada. Both these lists contain only very large companies.

Then there's a list focussed only on Canada - MacLean's Top 50 Socially Responsible Corporations 2013.

Companies that show up in all three:
  • Bank of Montreal
  • TD Bank
  • Bombardier
  • Cenovus Energy Inc
  • Teck Resources Ltd
All five are also amongst the 60 companies in the iShares Jantzi Social Index ETF (XEN), which is limited to Canadian companies, and the 443 companies of the UK-listed iShares Dow Jones Global Sustainability Screened UCITS ETF (unfortunately not available to Canadian investors, not even through a US-listed version, an odd situation given the vast array of US-listed ETFs), which contains 28 Canadian companies.

Thursday 3 April 2014

Sense and insight from Ontario Health sector pension fund CEO

This Financial Post interview with HOOPP CEO Jim Keohane just nails it in so many ways on pensions in Canada, it is worth printing and glueing to the wall. What does he say about pensions that makes such good sense?

  • Governance under fiduciary duty, by un-conflicted boards and managers for the single purpose of providing a pension, succeeds best
  • Risk sharing by companies and employees, who have different objectives, causes trouble; quote - "Shareholders have put on a lot of pressure to get out of that business because if I want to invest in a car company, I want to see the results of the car company, not its pension plan"
  • Pooling and portability across many employers and sectors is what is needed for today's work world of multiple job changes in a career
  • People want, and should be provided, a PENSION, a target steady stream of income during retirement, (i.e. not a savings plan with a big accumulated lump sum after 40 years that must somehow be turned into income). What he doesn't say, but which is an integral part of HOOPP, is that the assurance of a lifetime pension comes from pooling individual risk so that how long you live is no longer a big issue - they know on average how long people will live and plan on that basis. An individual with a DC plan can only deal with their own unknown life expectancy that through buying an annuity, which entails a higher cost structure than what HOOPP can do internally (HOOPP has none of the annuity-selling insurance company's profit margin to pay for). Peter Benedek at Retirement Action has looked at annuity pricing and found it not very close to fair value. In contrast to a HOOPP-like DB plan, the proposal recently made by Keith Ambachtsheer for a supplementary retirement plan, though it has desirable features of low cost and aligned governance, still appears to (it's not explicit in his paper but the cited example of the UK's new National Employment Savings Trust (NEST) plan does it that way) maintain individual account ownership and thus no automatic, integral promised pension payout i.e. there's no longevity risk pooling. 
  • Failure to enact pension improvement today will create social problems down the road as Canadians will not want "grandmothers eating dogfood". This to me is the problem with the argument that people should be free and responsible to save or not - are we really going to let them drown in old age poverty when they fail, as they will since they do not save enough unless coerced or "nudged" into it?
  • Costs matter a lot, and DC plans with typical mutual fund fees will inevitably leave people an order of magnitude worse off than a good DB plan like HOOPP (or, not as he says, but as I have said, than the CPP)
There are also some thoughts useful to individual investors:
  • Matching the investment portfolio's structure to control the risks - so-called liability hedging - is a key principle. Unexpected inflation is one of their three big risks - something which applies especially to individual retirees as well. HOOPP responds by holding real estate and real return bonds. 
In short, revived Defined Benefit plans along the lines Keohane is advocating, could work as an effective alternative to enhanced CPP. 

Tuesday 25 March 2014

Good news for investors - BlackRock Canada slashes fees on key index ETFs

iShares Canada ETF providers BlackRock have just announced immediate significant cuts to nine mainstream index ETFs, covering Canadian, US, developed country market and emerging market equities, as well as several bond funds. Morningstar compares the old and new expense ratios here while the BlackRock info is here.The reason this is great news for investors was well said by BlackRock itself - every dollar less in expense flows right into the pocket of the investor.

The longer the investment period the greater the impact through the effects of compounding. The cut of 0.20% in the MER of the Canadian Capped Composite equity index fund XIC means, for instance, that a $10,000 investment held thirty years that earned 5.2% net returns instead of only 5.0% would end up being worth $45,758 versus only $43,219, a $2,539 or 5.88% difference. Extend the holding period to thirty-five years and the difference grow to 6.9%.

Though not as powerful an effect of such lower MERs, at current low rates of return on all types of assets, the same compounding math provides a greater relative boost to net returns e.g. change the return pair to 4.2% vs 4.0% and the above calculation makes for $34,358 vs $32,434, a $1,924 or 5.93% difference.

Kudos to BlackRock. Let's hope this competitive move spurs the other ETF providers to sharpen their pencils too.

Sunday 23 March 2014

Investing History Lessons on Emerging Markets, Dividends from Credit Suisse 2014 Yearbook

The annual release of the Credit Suisse Global Investment Returns Yearbook is a delight. As before the free download 2014 Yearbook, written and compiled primarily by London Business School professors Elroy Dimson, Paul Marsh and Mike Staunton, provides unique data - equity and fixed income returns for 114 years across 25 countries - and topical insights - this year on Emerging Markets.

The report is well worth the time for everyone to read, but here is what I found especially noteworthy:
  • Emerging Markets equity return volatility has dropped drastically since the 1980s from about 2x developed markets to only 1.1x today. In classic risk terms of volatility, emerging markets are not much riskier than developed markets.
  • Correlation of returns has been rising strongly due to globalisation but " emerging markets still offer useful diversification benefits". In other words we should keep an allocation to them in our portfolio. ... but ....
  • Canada's equity market is less correlated with developed markets than emerging markets (see chart page 10). In other words, for Canadian investors, it is more important for diversification to have a developed market holding than one for emerging markets.
  • Countries with the weakest currencies give the strongest future returns. 
  • Stock markets predict economic growth, not the other way round
  • Canada's real foreign exchange movement against the US dollar from 1964 to 2013 was 0.0% (see Fig.3 on page 41). Does a long term investor really need currency-hedged funds and their considerable drag that will exact a far greater and far more certain cost on returns?
  • Canadian investors seem to be the smartest in the world! In every other country, the buy and hold returns of an index exceeded the dollar / asset weighted returns of investors per the chart below based on this study published on SSRN. The lesson for the investor to avoid under-performing is to maintain a consistent asset exposure. 
  • China has given equity investors over the period  1993-2013 negative real returns (see page 42).
  • Dividends constitute by far the major part of equity returns over the long run. Per table 1 on page 27, of the total real return on equities averaged over 21 developed countries from 1900 to 2013, dividends provided 4.35% return while the total return was 4.54%! In Canada, the numbers were 4.35% and 5.75%. Message to corporations everywhere - show me the dividend. 

Wednesday 5 March 2014

UFile Tax Software Giveaway Winners!

Don't you wish the lottery ran like this? There were five codes to give away for the UFile web version and exactly five comments. So, you smart folks who noticed the giveaway, come and claim your prize:

  • canoetoo aka Harold R
  • erloo
  • skip
  • unknown aka Niels R
  • Crescent

Would these lucky winners please contact me by the email link in the right hand column of this blog page so that I can send you the access code. Congratulations!

Tuesday 25 February 2014

UFile Tax Software Giveaway!

It's tax season and those receipts should be flowing into your inbox or mailbox. Here's an opportunity for blog readers to ease some of the hassle of doing taxes by taking advantage of a giveaway from one of the leading tax software providers. The software will let you prepare and file online electronically on Canada Revenue Agency's NETFILE tax submission service

Thanks to UFile, I am giving away five codes for the online web version of their personal tax preparation software for Canadians. That's a value of $15.95.

Here are the details of the giveaway:
  • To enter, submit a comment on this post below - Though you don't have to, I'd be interested in your comments on tax prep software since I am again working on my annual review of all the CRA NETFILE certified packages; use a unique name (Anonymous won't suffice!) so I can distinguish people
  • One entry per person please
  • Entries close Tuesday, March 4th midnight EST
  • I'll do a random draw of five (5) names from amongst the entries after the deadline
  • Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the UFile tax software (your email will not be used for any purpose other than to contact you as a winner)
Good luck! 

Tax Havens - the pot calling the kettle black

When it comes to preventing tax avoidance or evasion, it seems that many countries apply the principle that while making sure collection of their own taxes is high priority, enabling other countries to collect their own doesn't matter so much. The degree of secrecy taken together with the scale of activity in each country make for some surprises in the Financial Secrecy Index ranking of world countries by the Tax Justice Network.

Achetype tax havens like the Cayman Islands are high (#4) on the list for sure but it is refined, reserved Switzerland in top spot. Nipping at the Cayman's heels, ahead of Bermuda, Panama and Jersey, is the good ole USA in #6 spot! Why? Because while it is fanatical about collecting its own taxes, it doesn't bother nearly as much in helping other countries collect theirs. #17 Canada sins that way too, if one reads the linked country report, backed up by very detailed database info.

Let he who is without sin etc.

Monday 24 February 2014

CP Rail vs CN Rail - Pricing in perfection?

Ever since the big shareholder battle and the installation of Hunter Harrison as CEO of CP Rail (TSX: CP), CP stock has been on tear, with returns far outstripping those of rival CN (CNR). Is this justified, should I be riding the rails with CP instead of my well-established holding in CN?

The short answer is, I don't think so. It sure looks like CP shareholders are fully paying in advance for business improvements that meet or exceed present performance of CN, which is termed the best-run railway in North America. No doubt tremendous improvements are taking hold at CP, as evidenced by CP's most recent quarterly results.

But the numbers below, which include the latest results despite some sources that have not yet updated their databases weeks after the results were released (I ignored those), say to me that CP still has a lot of catching up to do. CN is green / better almost everywhere, except for profit improvement.

Management is getting richly rewarded for the job they are supposed to carry out in future. The cart is before the horse. Named Executive Officer (which includes CEO Harrison and the other top execs) pay is up enormously since the doldrum years of 2007 and is now a much bigger slice of the pie than at CN. It's not just Harrison receiving platinum compensation, it's all the execs. CP's execs are about 85% over-paid. It's like paying one of your kids more to clean her room when another kid doesn't get anything because her room is already clean.

Business performance measures still lag CN's by a lot. Whether you look at ROE, ROA, Operating or Net Margins, Operating Ratio, Revenue per employee (and different data sources give frustratingly different numbers for the supposed same metric), CN is still far ahead of CP. CP is also more levered / riskier with its higher debt load.

Valuation of CN is much less rich than CP. The ratio of market Price to present Earnings, Book Value, Sales, Cash Flow or EV to EBITDA, all point to a cheaper CN. There is evidently an expectation of significant improvements to come at CP. How much improvement is expected? It looks like pretty much complete catch up to CP, as suggested by the highlighted cells. Expectations of sales growth are not be the source of CP's potential advance, it is all in profitability gains, as analyst Sales and Earnings estimates testify. But CN isn't standing still, it has been increasing dividends steadily and is still much ahead of CP's and it is forecast to grow Sales and Earnings.

The overall combination of various sources on analyst recommendations seems to indicate CP more over-valued than CN. Blogger Sylvia Brunner's more thorough run-through of CN's numbers concludes that CN itself is on the pricey side.

But like her I will continue to hold it. Good luck to CP shareholders. Here's hoping all goes perfectly according to plan as you seem to expect. Meantime, for CEO Harrison congrats on picking a nice bet - heads, you win and tails, you win too!

Saturday 22 February 2014

An Investor's lament - crap data everywhere

I've just been trying to do a quick comparison of CP Rail with CN Rail. Gather a few key financial numbers and start thinking and writing. Alas, such a simple task is frustratingly difficult with various data sources, some of them paid subscription, that don't agree with each other, or are just plain wrong, or unforgivably out of date:

  • EPS estimate dispersion (high vs low analyst estimate for next financial year), a useful measure of a stock's riskiness - Yahoo Finance Canada has 10.7% for CP but my broker BMOIL has it at 6.3%; for CNR it's much closer - 12.1% vs 11.8%, respectively. Who's right? Is it just a different set of brokers?
  • CP year-end results - the release came out on January 29th, yet more than three weeks later, these results are not yet available in BMOIL (which gets its data from GlobeInvestor Gold) or Morningstar Canada (which I happen to pay for!). Yet the free TMX Money, Yahoo Finance Canada and most curiously Globe Investor WatchList, do have year-end results.
  • CNR per share data - last November the stock split 2 for 1 and most data sources have adjusted prior years to make data comparable ... that is except for TMX Money on this table. Grrrr
  • Return on Assets - one would think that such a straightforward traditional ratio could be the same whatever data source, if one is careful to look for the same time period, like trailing twelve months or financial year and when the latest quarterly updates have been done. That thinking would be foolishly wrong, however. Here are the variations on this ratio for CNR - Yahoo Finance 8.52%, Morningstar 9.19%, BMOIL 13.89%. Just great, that's a big spread, who's right? It's back to the company 2013 year-end release: Net Income $2612M / Assets $30163 = 8.66% i.e. none of the above. I've noticed that ratios are especially problematic - none of the providers ever define how their particular version is calculated so the only hope is to use one provider for each ratio to compare across companies or through time. Or, to do the figures yourself, but that gets very time consuming.
Investors can be forgiven for giving up and buying broad index ETFs.

Thursday 20 February 2014

Canadian Government to Stop Paying Cheques!

Once in a while, it's fun to imitate those cheeky deceptive headlines. No, the federal government is not having a debt ceiling crisis and government operational shutdown such as the USA had in 2013. Nope, it's just that as of April 1st 2016 (no, it's not an April Fool's joke) the government will only pay by direct deposit. No more paper cheques. Which is a good thing all round. The government / taxpayers save money and it's a lot more convenient for payment recipients as the government publicity that I received states:
"Direct deposit is:

Fast. The money is guaranteed to be in your bank account on time. That’s especially important if you have arranged automatic withdrawals to pay rent, property taxes, hydro, etc.

Secure. There’s no risk of your payment being delayed, misplaced, lost, stolen, or damaged.

Convenient. The money is in your account when needed even if you’re away from home on a holiday or unable – for any reason – to get to the bank right away.

A timesaver. There’s no need to adjust your schedule (picking up the kids, attending classes, visiting the doctor, etc.) to accommodate banking hours and there’s no need to wait in line for a teller or ATM either."

It's possible to enrol for direct deposit online: for CPP, unemployment, Child Tax Benefit
- for its various payments, though here you still have to print and mail in a paper form.

As someone who spends a lot of time out of the country, I've long been a fan of direct deposit and any form of electronic payment. I only wish Canada's banking system had the equivalent of the UK's Faster Payments system, which since 2007 (!) allows anyone to make more or less instantaneous payments and transfers to businesses or individuals.

Update: here is graphic from the government's publicity people showing the various other ways to sign up.

Wednesday 19 February 2014

TurboTax Software Giveaway Winners!

The random draw for the TurboTax web version has been done and the three winners are:

  • Pat
  • IG
  • Jeff MacDonnell
Would these lucky winners please contact me by the email link in the right hand column of this blog page so that I can send you the access code. Congratulations!

Thursday 13 February 2014

Why the delay CRA? NETFILE software certification still on-going!?

The Canada Revenue Agency NETFILE service has been officially open to receive 2013 tax returns since this past Monday February 10th. Yet only a handful of packages have completed the certification process. Today, for the first time there is a list of packages "in process" to at least let people know which are likely to get certified. Still, it's quite shocking that things are so late, especially since CRA is promoting online instead of paper filing. I cannot imagine that all those software companies, including the biggies TurboTax and UFile, have been sitting on their hands. So what gives CRA? Will the April 30th tax submission deadline will be extended to compensate?

Tuesday 11 February 2014

TurboTax Online Income Tax Software Free Giveaway!

Now that the Canada Revenue Agency's NETFILE online tax submission service is open for business, it's time to start thinking of preparing a tax return for 2013 even though the deadline for submission is a distant April 30. 

Thanks to TurboTax, I am giving away three codes for any online web version of their personal tax preparation software for Canadians. That's a value of $17.99 for the Standard version on up to $44.99 for the Home and Business version for contractors and consultants.

Here are the details of the giveaway:
  • To enter submit a comment on this post below - though you don't have to, I'd be interested in your comments on tax prep software since I am again working on my annual review of all the CRA NETFILE certified packages; use a unique name (Anonymous won't suffice!) so I can distinguish people
  • One entry per person please
  • Entries close Tuesday, February 18th midnight EST
  • I'll do a random draw of three (3) names from amongst the entries after the deadline
  • Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the TurboTax tax software (your email will not be used for any purpose other than to contact you as a winner)
Good luck! 

Monday 10 February 2014

Dissecting a phishing scam email

Check out out this email I received today from a friend whose email account has evidently been hijacked:

How are you doing? I am sorry for reaching you rather too late due to the situation of things right now..I'm stranded in Manila(Philippines) and had my bag stolen from me with my passport, mobile phone and personal effects therein. It was a terrible experience for me thank God the embassy has just issued me a temporary passport but I have to pay for a ticket and settle my hotel bills with the Manager before leaving.

I have made contact with my bank but it would take me 3-5 working days to access funds in my account, the bad news is my flight will be leaving very soon and but i am having problems settling the hotel bills. Please let me know if i can count on you i promise to refund the money back as soon as i get back home



The smelly details that aren't quite right:
1) "Hello" - only that, not my name? of course, that makes for easy mass mailing to lots of people on Dianne's email log. The whole lack of detail in the message (no hotel named, no dates, etc) is too deliberately vague.
2) "How are you doing?" That's a rather calm tone for the story that follows.
3) "... due to the situation of things ..." Dianne is more literate than that. Lack of other punctuation looks rather suspicious for someone who is a communications professional.
4) If she was in contact with the Embassy then she would also have been in contact with family who certainly could have provided assistance. Besides, I would be surprised if Dianne would travel alone.

In fact Gmail spotted the scam attempt too and there was a big red warning banner across the message. Even the computer knows better. So, sorry "Dianne", I won't be sending any money today.

Thursday 6 February 2014

Canadian Personal Finance blogs poll

Jeremy at Modest Money is conducting his annual vote for readers' favorite personal finance blog, which flatteringly includes this blog. Have a look at the long list of blogs for more reading pleasure and by all means give this blog a pat on the back with a click vote.

Monday 3 February 2014

The asset allocation difference between professional investors and ordinary investors

Pension & Investments shows us what happens to asset allocation choices , reproduced below, when professional investors manage Defined Benefit pension plans versus ordinary investors doing it in Defined Contribution plans in the latest update for the largest US-based plans.
It's a dramatic difference:
  • though the total allocation to stocks is pretty much the same, ordinary investors in DC plans have a much heavier weighting in domestic stocks - the potential for international diversification is much under-exploited
  • pure fixed income seems to be much neglected by ordinary investors; instead there are huge dollops in DC plans of something odd and undefined (that I could find at least) called Stable value and the synthetic Target date funds.
  • professional investors in DB plans take advantage of Private equity and Alternative investments, which ordinary investors cannot do easily, if at all
  • the DC plans of ordinary investors have large piles of un-productive, idle cash, which the pros don't
  • real estate is absent from DC plans of ordinary investors, again a missed diversification opportunity
This sure looks like an example of the oft-stated idea that ordinary investors don't do as good a job as the professionals. However, it's not inevitable. Ultra-simple basic portfolios of broad market funds, requiring only annual rebalancing maintenance, that give a pretty good result are easy to specify (e.g. Simple Portfolios or a Canadian version of famous pro investor David Swenson's model on my other blog HowToInvestOnline). Most ordinary people I suspect just don't pay any attention and don't bother to learn even the most basic principles of investing. It seems odd when so much is at stake.

Thursday 23 January 2014

More Pension Reform Ideas from the UK

The UK think tank Policy Exchange has just released the Help to Save report proposing pension system improvements. It contains some interesting ideas, primarily private-sector oriented measures. Here is what they propose [my comments in brackets]:
1. Replace auto-enrolment with compulsory membership of a pension schemes
for all those earning more than the tax free personal allowance.
[They want the State to be on the hook as little as possible. Auto-enrolment, which is already in place in the UK for large employers, gets most people in, but the other 10% who opt out are still a problem.  People could only opt out if they had enough savings]
2. Increase the minimum contribution rate to 12% from 8% phased in over 5 
years. [This is over and above the deductions for CPP-equivalent State pension. If you live and are retired a long time, you need to save plenty]
3. Make the annuity market more competitive by issuing government annuity 
bonds. Individuals could buy their initial interest rate exposure from the 
government with insurers providing annuity insurance only for when this 
expired. [Instead of the traditional bond that pays interest coupons and re-pays the principal at maturity, the bond would pay back both interest and principal throughout and nothing at the end. These bonds, which would not have mortality credits that insurance company annuities do, would provide a lower bound on annuity prices, thus forcing better private sector annuity pricing. They could be inflation-linked too.]
4. Allow up to 50% of the minimum income requirement to be funded through 
non annuity products such as income drawdown. The drawdown should be 
limited to the yield on the relevant fund to limit the risk of fund exhaustion. [Their example is to extract dividend yield, which is relatively stable and grows over time - e.g. some ETFs in Canada, from a market equity fund]
5. Encourage a greater focus on asset allocation through the promotion of 
outcome oriented investment funds. [Simple target date funds didn't do well through the 2001 Tech meltdown and the 2008 financial crisis]
6. Encourage the development of Super Trusts, which would be large enough to 
generate economies of scale, have a better diversification of assets and greater 
use of asset allocation. [Super Trusts would invest kinda like the CPP, infrastructure, alternative assets etc, except be private sector]
7. Cap fees at 1% not 0.75% in order to keep a wide choice of funds available 
to pension fund investors [hah! Canadian RRSP mutual fund investors can only dream of 1% fees]
So pension reform in Canada might not need to be CPP expansion, just something that has many of its key features - mandatory participation, employer and employee contributions, full funding by the individual who benefits, good governance, lower controlled fees, large scale management with wider investment scope, sustainable managed retirement phase decumulation income.

Wednesday 22 January 2014

Executive Pay at Canadian Public Companies - More Good than Bad

One of the problems with studies like the one The Canadian Centre for Policy Alternatives' Hugh Mackenzie has come out with, All in a Day's Work? (CEO Pay in Canada), is that it tars all companies and their executives with the same black brush. As I compiled the data to do some posts (Over-paid CEOs, Fairly-paid CEOs) on my other blog about the really bad (at least from an investor's viewpoint) companies and some good companies, there was some data that I did not use on the pay received by the companies' Named Executive Officers (NEOs) i.e. the top managers.

The Data
My data looks at the change between 2007, in the heady good time just before the financial crisis and the stock market was at a peak, to 2012. So it isn't taking a market low for stock prices that company executives could easily beat just by hanging around through the recovery.

There are 39 companies in the table, a mix of big ones, such as are in Mackenzie's list (8 of his top 10), but also smaller ones. It was not scientifically systematic or randomly chosen, I was looking for especially good or bad performers.

Lots of companies with high rates of pay increases ... but what about ...
Executive pay in companies as a whole rose at 12.9% annualized. That's far above inflation of 1.73% (cf Bank of Canada Inflation Calculator). Is that bad when total stock return has reached 11.2% for the TSX 60, or an unweighted 29% total return average for our good and bad companies?

Some falling pay companies!
Four companies even had falling NEO pay - Cott, Potash Corp, Keyera and CNR (goodbye Hunter Harrison) - while investor returns beat the market. Is that a good deal for an investor or what?

More good companies than bad
Most of the companies with high executive pay increases have given shareholders much more in return as shown by those above the Red line of shame. Below the line it sure looks to me that executive pay is out of control and out of whack with investor returns.

Maybe the balance would be different if I had the patience to plow through all Sedar Proxy Circular filings (which is where the data comes from) of the 241 companies in the S&P / TSX Composite Index. But my sample is fairly large. A number of the worst over-paid stinkers like Niko, Blackberry, Barrick Gold and EnCana are not even in the above table.

Poor value for pay is a relative term
Some companies below the line on the over paid-list have had excellent stock returns, like CP and B2Gold but the executive pay has risen so much faster. Other companies like Shaw have had more modest, though still well ahead of inflation, pay rises, but stock returns have been weaker, or even negative, like Agnico-Eagle Mines.

Some might like to put SNC Lavallin below the line for poorer than market returns since executive pay has still gone up double inflation but I measure fairness in terms of stock return vs pay rise, 8% vs 4% in this case.

Tuesday 21 January 2014

Advisors, Mutual Funds and ETFs - Savings Discipline vs Expert Unbiased Advice

Blogger Robb Engen at Boomer and Echo received some darts from a mutual fund industry representative recently for recommending that investors switch to index mutual funds or ETFs. He defends himself quite well but there is one line argument he has not pursued.

The mutual funds industry says investors with mutual funds get savings discipline from their advisor and they end up with more savings than households who do not receive advice as a result. Ok, turn that around, how do people with high savings, the wealthy, invest? How do investors who use ETFs fit on the wealth ladder? It seems that no one has actually done large scale survey studies. But some evidence points to ETF investors being even better off. ETF Trends' High Net Worth Investors Adopting ETFs reported on a Spectrum study of US investors in July 2013 that found that the higher up the wealth scale, the more the investors own ETFs. An older 2010 study on Canadian high net worth investors ($500k+ investable assets) from ETF provider BlackRock (which admittedly raises the same concerns about bias as do mutual fund studies from that industry) found that the majority of HNW investors favour ETFs over mutual funds. The HNW investors, apparently unlike the hoi polloi LNW investors who look to their mutual fund advisors for "savings discipline" according to IFIC's justification for high mutual fund fees, look to their advisors "... to help manage risk and provide counsel on investment products they have not considered". The HNW felt it important that the advisors put client interest first. Unbiased advice is key.

A second key element is the actual investment expertise of the advisor. To a large degree the attitude of younger investors cited by BlackRock rings true to me:  "61 per cent of HNW investors under 35 years of age felt that advisors provide no better information or advice than can be found on the Internet for free". The reason is two-fold. First, basic investing success is not rocket science - simple model portfolios, one-minute portfolios with yearly rebalancing do an adequate job. Second, the more sophisticated investing, the rocket science of finding extra return and controlling better various risks, such as I believe is possible with smart beta ETFs, post simple-beta portfolio management (the kind Jacques Lussier writes about in Successful Investing is a Process) along with tax management is not expertise I would expect to find often amongst mutual fund sales people / advisors. They don't have the training and the knowledge, let alone the motivation.

Monday 20 January 2014

Cap-Weight vs Fundamental Portfolio 3 1/2 Year Update - Fundamental Widens Slight Lead

It is now three and half years since we started a realistic contest between a traditional cap-weighted portfolio and another based on fundamental factors. The live updated prices are shown in the spreadsheets at the bottom of this blog, though I only update the distributions every six months or so, which means the cash balance is not constantly up-to-date. Today, I've updated distributions up to and including December 2013.

Tight contest - small differences in total portfolio value
2010 Year-end - dead heat: 0.1% difference
2011 August - cap-weight slight lead by 0.6%
2012 March - dead heat, 0.07% difference
2013 August 7 - fundamental slight lead by 0.6%
2013 Year-end - fundamental slight lead by 0.8%

Both portfolios performing well
The fundamental portfolio value is up 37.9% since June 2010 inception to $137,901. The cap-weighted portfolio has risen 36.8% to $136,821. This is the largest difference since the start. The plunging Canadian dollar has given a boost to both portfolios since the last update in August.

More idle cash from cap-weighted portfolio
The latest year-end distributions from the various cap-weight ETFs have been a fair bit more than what the fundamental ETFs generated. This is despite the fact that the Canadian equity cap-weight ETF, the Horizons HXT, makes no distributions at all due to its construction as a swap. Whether the higher cash distribution is due to the higher MERs of the fundamental ETFs chewing up cash or is caused by the portfolio holdings with different dividends I cannot tell. In the meantime though, the cash sits idle, not invested, which is not the objective of the portfolio. By June, there should be enough cash to justify reinvestment and rebalancing purchases, considering trading costs, as stated in the rules set out for the portfolios at start-up. None of the holdings is currently beyond the policy limit of one quarter away from its target weight that would force immediate rebalancing.

Developed and Emerging equities will determine the winner?
Google Finance charts show that, up to now at least, the Canadian and US battling ETFs seem to track each other quite closely. It's the developed and emerging market equity ETFs that seem to follow much more different paths of ups and downs. Witness this chart of developed market ETFs VEU vs PXF since our portfolio launch.

Compare that to PRF and VV for US large cap equities.

The contest continues.

Monday 13 January 2014

HSBC surveys: Save for holiday or retirement?

HSBC has conducted a series of surveys on what people around the world, including Canada, think about retirement. Among the interesting findings:
  • #1 Advice from those retired in Life after work: "Start saving at an early age", closely followed by "Don’t spend what you don’t have" and then "Start saving a small amount regularly". Clearly successful retirement planning is rocket science. Some not very common advice: "Stick to low/lower risk savings" and "Try high/higher return investments".
  • #1 Reason non-savers are not saving for retirement in A new reality: "All my money goes into living day-to-day" ... but another chart (copied below) from the same report finds that saving for a holiday is as important as saving for retirement. Hmm, so what exactly are those essential day to day expenses people think of when they say they cannot contribute to their RRSP?

  • #1 Policy desire by Canadians for what the government should do to help people prepare for retirement in Investing in later life: "Enforce additional private savings". Yet another survey in 2009 seemed to find the opposite opinion as 48% favoured what looks like a voluntary approach: "Encourage more private savings through tax relief on savings". Perhaps this is why the government is sitting on the fence?

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