Managed Money Reporter Newsletter
Editors: Carl Spiess & Allan McGlade
As the year-end approaches, we would be pleased to review your tax situation and suggest if there are any investment related steps to be considered to minimize your 2003 income taxes.
If you have non-Registered investments (e.g. outside of an RRSP or RRIF) please look at your 2000, 2001 and 2002 capital gains. You can likely make some switches in your non-registered portfolio to offset those gains, allowing you to re-file those previous years taxes, and get tax money back. Any tax-loss selling needs to be done by Dec 24th.
Recall that your average cost on your statements is generally used for foreign content reporting, and in the case of funds where dividends have been re-invested, average cost is not a good proxy for account performance. Only in the rare cases of funds like AIC Advantage, that has a stated intention of minimizing taxable distributions, is your average cost equal to your invested amounts. Most other times, average costs are higher than your initial amounts, understating returns, and sometimes even making an investment seem like a loser, even though you have more than was initially invested.
Some additional year-end tax planning notes:
Please contact us if you have questions regarding your average costs, investments or other tax-saving opportunities you can review with your tax advisor.
The mutual fund industry in the United States has recently come under increased scrutiny by the regulators as a result of a few firms who are alleged to have allowed late trading and market timing activities. These illegal and harmful practices, have been undertaken by some large fund holders in the US and can marginally undermine returns for true long term investors.
As a result of this, we felt it was worth asking the fund companies we do business with in Canada whether they have policies and procedures in place to prevent this type of unethical and, in some circumstances, illegal activity. We are pleased to report that the firms we talked to all have policies and procedures in place to prevent these types of abuses. Here is a sampling of the public responses.
In the United States, there is no centralized fund trading system. However, in Canada, there is a single system that processes fund transactions (FundServe), and it does not allow orders to be entered after 4pm. Also, the OSC (Ontario Securities Commission) has asked all of the industry participants to provide information regarding policies and procedures that deal with the issues that are at the forefront of the U.S. mutual fund industry investigation.
Not to belittle the issue, it is however akin to finding out that your baker has been allowing someone to take a small slice out of each loaf of bread you buy. The issue does not affect the security of US investors mutual funds (eg. your bread), but they may not be getting quite what they thought they were.
So at this time, we do not believe that Canadian fund investors need to be concerned about this issue, but will of course continue to monitor events south of the border. We will keep you informed if there is any action required to be taken in your accounts.
The risk of being on the sidelines when the market rallies is too great, Robert E. Torray of The Torray Companies said in his June 30, 2003 letter to shareholders. He pointed out that "from one recent S&P low, on July 23, 2002, through the first half of 2003, the index gained 24.3 percent. But if the five best days during the first six weeks of that stretch were subtracted, the index would have lost 1.6% over six months. So despite a rise that would take almost a half century to match at today's money market fund rates, the odds of making anything trading in and out over this time frame were 50 to 1 against you"
Buy and hold continues to be a well recommended and successfully followed investment approach.
As a result of the change from the AGF Canadian Asset Allocation Fund to the AGF Real Value Balanced Fund, we recently heard from Keith Graham to review his investment mandate. He will continue his very conservative value style, and he made specific mention that he still cannot see value in the shares of Nortel, especially when compared to other companies with higher and more stable cash flows.
The former AGF American Tactical Asset Allocation Fund is now managed by very capable managers of the long running AGF World Balanced Fund. However, due to tax reasons, the World fund was merged into the ATAA fund, and as such, the track record showing on Morningstar/Bellcharts and other services, underrates the renamed fund. (This is a rare example of a fund merger resulting in the elimination of the better performing fund, eg. of reverse survivor bias!)
John Arnold continues to have very strong opinions about various sectors in the world, and in a departure from the old ATAA mandate, will continue to actively manage this fund for the benefit of investors.
James Morton is a unique manger. All of the Cundill funds are contrarian in nature, and make a good diversification alternative to more typical equity funds. The Mackenzie Cundill Recovery Fund has a unique mandate among mutual funds in Canada. The fund buys distressed global companies in the process of recovery. "Recovery" might involve reorganization, emergence from bankruptcy, change in ownership, or otherwise coming out of crisis. While for most investors buying companies in that much "trouble" is daunting, by diversifying the portfolio, the Cundill team is able to provide great returns, that often differ in nature to the returns of the major indexes.
As part of our ongoing service, we often visit with the companies and managers of the funds we recommend to our clients. From time-to-time, we also research firms that are not on our recommended list. Recently, we visited the head office of Capital International Asset Management. We are not surprised if the name isn't familiar to you because Capital Int'l is one the few investment management firms that doesn't advertise themselves to the general public. Despite the lack of advertising this firm is the third largest investment management firm in the United States with over $800 billion under management.
We went to visit Capital Int'l primarily because Scotia Mutual Funds has retained Capital to manage 10 global funds which are appropriately called the Capital Series. Capital is now also offering a number of funds directly to the Canadian marketplace through Capital Int'l (Canada) Inc.
The company's success appears to be as a result of doing a number of things right. First and foremost, they manage money for the long term, which is a quality we find endearing. The investment process focuses on what a company will likely look like in three to five years as opposed to the next couple of quarters. Their team of portfolio managers and analysts make as many as 15,000 visits each year to kick the tires of companies. An interesting point about Capital is that many of the analysts spend their entire career covering the same companies. It is also worth noting that the average experience of the portfolio managers is 23 years. In fact the Chairman, David Fisher has been managing money at Capital for 35 years and continues to do so today.
Besides a stellar long-term track record, we think the fact that the management fees for Capital mutual funds are below the category average has something to do with their success. They are hoping that the same formula will bring them the same kind of success in the Canadian marketplace. With management fees ranging from 1.65% to 1.8% for a global equity lineup, they have positioned themselves as a low-cost provider.
We will be watching the funds closely over the coming months to see if the company lives up to the favourable impression we came away with. Please feel free to contact us in the meantime if you would like additional information on Capital International or their funds.
A relatively unknown fund family we have been reviewing are the Acuity Funds. Their recent performance has been excellent for all funds in the family. The funds are also available in lower MER pooled versions, which can have benefits in non-registered accounts.
Hugh McCauley, the manager of several top performing Acuity funds, considers the Acuity All Cap 30 Fund to be one of best of all the Acuity equity funds, (and his competitors too), not just because of its performance, but because he can hold both large and mid cap stocks, which is a unique feature that allows him to outperform. Another fund in the family worth considering is the Acuity (pooled) High Income Fund, which holds roughly 1/3 dividend stocks, 1/3 income trusts and 1/3 high yield bonds.
Please contact us if you would like more information on the Acuity funds.
He's not an investment fund manager, but we found the recent speech by David Frum, former speechwriter to George W. Bush, about his experience in the white house to be very interesting. His stories about the process whereby a speechwriter's ideas make their way from inspiration to the President's lips and then to CNN and the world were fascinating. His insights about the current environment in the US certainly help us with our planning the global portion of our client portfolios.
Having worked with your investment team for over 8 years now, Nalini is another of the many long standing members of our group. Nalini has been pursuing continuing education on insurance products, and recently undertook training on our sophisticated Naviplan financial planning software. She is instrumental in developing and implementing many of our clients' financial plans.
Considering her background in business and computer studies, it is no wonder she is one of our team's experts on the many systems we require to monitor and manage your investment accounts. Nalini also manages a great deal of our client communication, and has been instrumental in us getting to the 200th issue of this newsletter!
Nalini returned from her second maternity leave in Jan 2002 and keeps busy at home with her rapidly growing daughter and son. We are very pleased to have Nalini as an ongoing client service representative.
Effective immediately, all of Mackenzie's existing 36 Capital Class funds now qualify as domestic property and are 100 percent RRSP eligible. Mackenzie originally launched the Capital Class funds in October 2000 to allow taxable investors in non-registered plans the ability to switch between 36 funds without triggering a capital gain. The new domestic qualification of the Capital Class structure allows both non-registered and registered investors to diversify their investments globally without worrying about foreign content limits or rebalancing.
Mackenzie plans to increase the number of tax efficient funds in this program which will provide investors with a wider variety of investment mandates and lower MERs within the Capital Class structure. For more information, see Mackenzie's news release. Effective December 12th, eleven higher MER (more expensive) RRSP funds will be merged into their lower MER Capital Class versions to eliminate unnecessary duplication in Mackenzie's fund line up. The change will not impact the investment mandates of the funds.
We also expect that other fund companies will likely follow Mackenzie's lead.
Ernst & Young has a great set of online tools, including a great 2003 Tax Bill Calculator. See how much you need to set aside for taxes this year, and how much more or less it would cost to live in another province.
ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.
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