Managed Money Reporter Newsletter
Editors: Carl Spiess & Allan McGlade
Chris, Jane-Ann, Debbie, Brenda, Nicole, Nalini, Andrew and seated, Carl (in the ScotiaMcLeod trader's jacket), Sharon, and Allan.
Four fund companies and three brokerage firms have settled OSC and IDA charges that they allowed a few large clients to rapidly trade in and out of funds, to the possible detriment of other longer term clients. Interestingly, this is a record settlement, for actions which were not illegal, and that their clients (not the firms themselves) undertook,
As we stated in the September Issue, we do agree that the fund companies were lax in their monitoring of client trades. We are very pleased that any fines will be paid, not to the legislators, but will actually make it into the accounts of unitholders of funds that may have been affected.
The brokerage firms affected were, RBC Dominion Securities, BMO Nesbit Burns and TD Waterhouse. The fund companies were: AGF, AIC, CI and Investors Group. A last settlement with Franklin Templeton is expected shortly.
Investors who were in the affected foreign funds in 1999-2003 will see a credit to their accounts sometime in 2005, once the fines can be appropriately prorated and dispersed. For most clients, it means a potential .5% increase in their fund value. As an example, it is estimated that a typical CI unit holder with a $5,000 will receive approximately $37. Considering that relevant proportional estimate of what CI earned by allowing the market timers to trade is on average $6, that is a stiff penalty indeed. In AIC's case, the fine is over 50 times the net amount of management fees they earned on the assets during the period the timers were in the funds.
We are glad that this period of uncertainty is behind the fund industry, and that there have been policies in place for almost 2 years now, that have prevented any further abuses. Investors, advisors and the money managers can now once again focus on the long term prospects for their funds. Please contact us if you have any questions or concerns.
Here is a complete list of the statements from each affected fund company which provide more details.
Labour funds have "laboured" to produce returns over the last 5 years. Most were heavily invested in technology companies in 2000, and with just a few exceptions, returns for the entire category have been challenging after a great run up in late 1999.
The chart (below) shows the story graphically. Click here for recent performance numbers of specific funds.
Luckily, the tax break provided by LSIFs has offset their lack-lustre performance. On a cash-on-cash after-tax basis, whether inside or outside the RRSP, most LSIFs with an 8 year history have generated positive returns on investors' capital, even if nominally the fund has a negative return. As shown in the chart (below), all but one of the 12 most popular LSIFs has returned a profit to the investor when held in an RRSP, due to the tax credits received. So while fund performance has been poor, the net outcome for individual investors has been good.
|Fund Name||8 Year Return To Nov 2004||Fund Assets||MER||End Value|
of $3,500 Investment
(46% tax rate,
|RSP Withdrawal After 8 Years|
|Dynamic Venture Opps||6.8%||57.8||4.0%||$5,924||$840||$3,199||18.2%|
|DGC Entertainment Ventures||0.2%||3.6||5.5%||$3,556||$840||$1,920||10.9%|
|Crocus Investment Fund||-1.6%||154.8||4.0%||$3,076||$840||$1,661||8.9%|
|Capital Alliance Ventures||-2.1%||42.3||3.8%||$2,953||$840||$1,595||8.3%|
|Cdn Medical Discoveries||-2.9%||290.2||3.7%||$2,766||$840||$1,494||7.5%|
|Covington Fund I||-4.0%||93.0||4.9%||$2,525||$840||$1,363||6.2%|
|GrowthWorks WV Cdn||-4.7%||260.9||5.5%||$2,381||$840||$1,286||5.5%|
LSIF industry factors are also reason for caution. The proliferation of new smaller LSIFs in recent years has left the industry ripe for rationalization. Last year, several smaller LSIFs were launched, and struggled to capture enough assets to be economically viable. The market just will not accept the high management fees (MERs) required by small funds. Economies of scale are a critical factor in operating an LSIF. Hopefully, legislation will allow fund mergers of these smaller funds in the future.
Even among the larger funds, there have been some difficulties. While we generally only comment on Ontario LSIFs, the Manitoba Crocus LSIF, has just suspended redemptions for 6 weeks, as they review the pricing of their investment holdings, subsequent to the resignation of several key personnel.
While we have concerns over LSIF performance & dynamics of the industry, they are still a suitable investment for many investors, especially if you are looking for a way to reduce your tax bill. Balance, as always, is the key. For portfolios over $100,000, LSIF investments could, in most cases, make up 5% of the portfolio while still maintaining balance. We will continue to recommend the larger and more established funds for those clients seeking LSIF tax breaks and encourage clients to hold them in RRSP accounts, if possible. Remember, each case is unique so contact us for advice on your particular situation.
For clients who own LSIFs, we are not recommending any changes that would incur penalties. For those clients who purchased LSIFs in 1997 or earlier, you will be eligible to sell them without incurring any tax or sales penalties. We will be in touch with those clients who are eligible to sell and, depending on your situation, we may recommend rolling over your LSIF into the same or similar fund to get the tax credits again. If you have 8 LISFs, you could continue to roll over one each year, without increasing your exposure to the sector.
An interesting note for clients approaching retirement - a LSIF does have the advantage of essentially being a tax-free RRSP or RRIF withdrawal. If you invest $5,000 in an LSIF (whether it grows or not), you get $1,500 or $1,750 out of the registered account as a tax credit. Contact us to find out more on this idea.
LSIF Info Page - Visit our LSIF page for more details, including an after-tax comparison of LSIF investments
Trimark recently published a report showing the performance of property prices in major urban centres in Canada. Using a 23 year history, it is interesting that some housing markets haven't even kept up with inflation (eg. Halifax). Other areas, like Toronto and Vancouver, have seen good growth, but even then, an investment of the average house price in either of Trimark's two original funds, produced significantly higher returns in all cities (see chart, below).
This is not a simple matter for comparison. This analysis does not assume mortgage interest costs, real estate commission, taxes, and insurance which would reduce the real estate returns. Nor do they include potential rental income which could increase real estate returns, but would then make the real estate growth taxable if it is not a principal residence. Fund returns are stated after management fees so they do reflect real returns, but not taxes which would reduce returns.
The most important point is really that there is no asset class that doesn't have a "management" fee. For an investment property, while looking at the change in market value for the housing index over time is interesting, there is no way to invest in property without fees. The management fee on property (insurance, maintenance, taxes etc.) is like the MER on a mutual fund. What ultimately matters is the return after fees.
When considering property as an investment, we would generally recommend trying to maximize RRSP contributions, then pay off your primary residence, as it provides a vehicle for tax free growth, then look at RESPs and only then trying to save in a taxable account or purchase investment property.
Report - The original Trimark Funds vs. Real Estate report that was
the inspiration for this article
Costs of Home Ownership - From AIC, the costs of home ownership and why also investing in other asset classes like stocks and income trusts makes sense
Other Investor Learning Pieces - Also from Trimark, here are some more interesting "investor learning" pieces
With the rise in the Canadian dollar over the last year, and the decline of the US$ globally, it makes sense to think about the future direction of currencies. In finance, there is a theory called "Purchasing Power Parity", (see excellent UBC link on PPP) or the "Law of One Price" that says that if two identical baskets of goods and services are priced differently in two different countries, eventually, the currencies should move to make the two baskets equal after the currency exchange.
The Economist magazine finds that a completely homogenous basket of goods and services in the world is difficult to find. Interestingly, the most consistent product worldwide is McDonalds Big Mac, which includes food, labour, packaging, rent and marketing in its price. From the Economist's Big Mac Index, we find that the Euro is currently overvalued, and the Chinese currency is undervalued, as is the Canadian dollar. While the Big Mac index is presented somewhat tongue in cheek, it has proved remarkably accurate at predicting long term currency trends.
Based on PPP (and not just the Big Mac Index!), the Canadian dollar should be around $.85-$.90 US, which makes sense, since right now Americans still find Canada cheap for shopping, but not as much as they used to.
Earlier this month, we attended the annual Investment Fund Awards:
http://www.investmentawards.com/awards/winners/2004 lists the 2004 winners of the Canadian Investment Awards, recognizing long term investing. The Advisor's Choice Favourite Investment Fund Company of the Year, was AIM Trimark Investments. We would be pleased to advise on and, if appropriate, help you invest in any of the funds that were recognized.
ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.
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