tag:blogger.com,1999:blog-47516106671100657632024-03-18T03:46:52.971-04:00HowtoInvestOnlineHow to's, guidance, tips, practical advice on getting started with on-line investing, especially for Canadians. Learn the mechanics, investment choices, on- and off-line sources of information.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.comBlogger343125tag:blogger.com,1999:blog-4751610667110065763.post-48546495928151620352022-12-20T16:37:00.000-05:002022-12-20T16:37:36.591-05:00ESG, a good idea gone bad<p><span style="font-family: times;">Some years ago we praised the assessment of Environmental, Social and Governance (ESG) factors to evaluate</span><span style="font-family: times;"> potential investments. Now we unfortunately must say, forget it, don't do it. Whether you are looking to ESG to apply your morals or values, or you simply want to find investments that outperform in the long run, ESG has become a waste of time and money.</span></p><p><span style="font-family: times;"><b>Problem #1 ESG Scores are inconsistent, contradictory and opaque and therefore useless to the investor</b></span></p><p><span style="font-family: times;">Brian Tayan has saved us a lot of time compiling the details of ESG's sorry condition in a lengthy well-documented review article at the Harvard Law School Forum on Corporate Governance titled </span><span style="background-color: white; color: #b1233d; font-family: BentonSans;"><i><a href="https://corpgov.law.harvard.edu/2022/08/24/esg-ratings-a-compass-without-direction/?mc_cid=80f67e4c1f&mc_eid=c2e20ab598" rel="nofollow">ESG Ratings: A Compass without Direction</a></i>. </span><span style="background-color: white; font-family: BentonSans;">A key comment in the review highlights a critical problem:</span></p><blockquote><p style="text-align: left;"><span face="sans-serif" style="background-color: white; font-size: 13.3333px; text-align: justify;">"Studies find low correlations across ESG ratings providers. [professional ratings companies like MSCI, FTSE, S&P, Sustainalytics, Refinitiv] This is perhaps surprising if ESG ratings are supposed to measure the same construct." </span></p></blockquote><p><span style="font-family: times;"><span style="background-color: white; text-align: justify;">They don't come up with the same evaluation result at all, so whose is one to believe?</span> Which ESG fund is best amongst the many with non-overlapping holdings? It's impossible to tell. Diving into the details of the hundreds of data points each ESG evaluator collects would be daunting in itself. It is impossible in practice given the opaqueness of the assessment criteria along with the considerable dose of judgement calls by analysts looking at the exact same facts and figures. Even professional investors like big pension funds cannot figure out what the ESG scores mean. Do you think we individuals have the faintest hope of doing so?</span></p><p><span style="font-family: times;">An indication that ESG has become a fad that the investment industry is exploiting to "skin the rubes" is that the marketing of many ESG funds to the public emphasizes making the world a better place (i.e. the moral virtue argument) while the rating scheme actually aims to gauge the risk the world poses to the company (i.e. the maximize investment performance approach). Worse yet, Tayan cites research that "... </span><span face="sans-serif" style="background-color: white; font-size: 13.3333px; text-align: justify;">companies in ESG portfolios (those with high Sustainalytics ratings) have worse records for compliance with labor and environmental laws relative to companies in non-ESG portfolios during the same period." </span><span style="background-color: white; text-align: justify;"><span style="font-family: times;">High ESG can thus mean the exact opposite of what many morally-driven investors seek! Yiles!</span></span></p><p><span style="font-family: times;">More research is cited indicating a doubtful link between ESG and investment performance: "</span><span face="sans-serif" style="background-color: white; font-size: 13.3333px; text-align: justify;">They conclude that “the financial performance of ESG investing has on average been indistinguishable from conventional investing.”</span></p><p style="text-align: justify;">Bottom line, <b>individual investors are best off in low-expense broad-market funds</b>. There's little point to ESG funds. The top ESG scoring companies are all in the broad market funds anyway.</p><p style="text-align: justify;"><b>Problem #2 Mandated ESG scoring and reporting replaces markets with government coercion towards political and social objectives</b></p><p><span style="font-family: times;">An example is already here. The Canadian federal government announced in its spring 2022 Budget that <a href="https://www.esgtoday.com/canada-introduces-mandatory-climate-disclosures-for-banks-insurance-companies-beginning-2024/#::text=Canada%20Introduces%20Mandatory%20Climate%20Disclosures%20for%20Banks%2C%20Insurance%20Companies%20Beginning%202024,-Posted%20by%20Mark&text=Canada%20will%20require%20banks%20and,government's%20newly%20released%20Budget%202022.">banks, insurance companies and pension funds will be obliged to report "climate-related risks and exposures"</a> after 2024. And not only about themselves but about their clients too. The climate crusade against fossil fuels is being institutionalised by force. The extension from reporting to mandatory financing restrictions on oil, gas and coal is merely a next step already being pursued. Banks are being forced to abandon lending at a profit as their primary driver to a different one imposed by force by political agents. ESG has become dominated by the single factor of climate. That's not healthy or sensible.</span></p><p><span style="font-family: times;">An excellent summary of the debasement of ESG is <a href="https://www.aier.org/article/why-business-should-dispense-with-esg/" rel="nofollow" target="_blank"><i>Why Business Should Dispense with ESG</i></a> by Samuel Gregg on 4 Dec 2022 at the American Institute for Economic Research. The key knock Gregg levies against the new and useless strain of ESG is Stakeholder Theory, which maintains "...<span style="background-color: white;"><i> that the purpose of business goes far beyond profit and maximizing shareholder value</i>". ESG is thus no longer "... </span></span><span style="background-color: white;"><span style="font-family: times;"><i>the practice of businesses prudentially assessing their surrounding economic, political, and social environment to identify those constituencies (“stakeholders”) with whom any company must work if it is to realize profit.</i>"</span></span></p><p>Hilariously, Tayan reports a study that found more ESG disclosure does not improve consistency of scores, it widens the divergence due to the subjective nature of evaluations. </p><p>Whatever value ESG had for investors to be able to invest as they see fit has rapidly been usurped and corrupted. </p>CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-60648585026409958752016-06-09T12:16:00.000-04:002016-06-09T12:16:06.402-04:00Retirement Risks - Unexpected Events: Family Trouble, House Repairs, Bankruptcy, Funerals, Divorce etc
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Bad things with significant negative
financial effects can and do happen in retirement, not just
occasionally but often. The 2015 survey by the Ontario Securities
Commission <span style="color: navy;"><u><a href="http://www.osc.gov.on.ca/documents/en/Investors/inv_research_20150601_report-life-stages-older.pdf">Financial
Life Stages of Older Canadians</a></u></span> found that close to 60%
of people 50 and over had experienced an event that was major enough
to affect their retirement plans or ability to live off their
retirement savings. Health issues were certainly prominent but a
range of other matters also caused serious financial problems –
helping out adult family members, permanently losing money in the
stock market, major home repair bills after a disaster, losing
employee benefits, divorce or separation, funeral expenses, collapse
of real estate value, business or personal bankruptcy and investment
scams. Often more than one event descends on the unlucky. Such events
do not lessen the longer one is into retirement either. They happen
at any age with about the same frequency.</div>
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You may well find that your job as a
parent never really ceases. Retired parents often find themselves
providing financial help to adult children. You never cease being a
sibling or a child either. If brothers, sisters, mom and dad, maybe
even cousins, aunts, uncles run into financial trouble there might
well be requests for help or a perceived obligation to do so,
especially if you are comfortably well off. However much one may wish
to apply “tough love” and say no, it seems to be very difficult
to overcome emotional bonds. A 2015 survey from the Bank of Montreal
Wealth Institute, aptly named <span style="color: navy;"><u><a href="http://www.bmo.com/pdf/ewp/15-2574_bwi_dec_2015_family_bank_report_cdn_en.pdf">The
Family Bank</a></u></span>, found that parents were willing to delay
their own retirement, save less, withdraw savings and have a less
comfortable retirement, even take on debt at times, to provide
financial support. Very often it's not just emergency or one-time
support, it's also monthly bills and day-to-day expenses as the
survey found.
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People retired nowadays are giving
support about twice as much to their adult children as they received
from their own parents. BMO quotes psychotherapist and parenting
expert <span style="color: navy;"><u><a href="https://www.facebook.com/AlysonSchaferParentingExpert/info/?tab=page_info">Alyson
Schafer</a></u></span> who says there is a danger that this will
create an unhealthy dependency and prevent the child from attaining
the mental resiliency, skills and strategies to deal with life's
inevitable frustrations, challenges and setbacks. It's tough to find
the right balance between helping people get on the road to
self-reliance and creating dependency.</div>
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There are various possible ways to deal
with these life events to ease or avoid the financial pain. The
simplest and most general plan is to have a larger cash emergency
fund and a spending buffer in the form of a higher income than you
need strictly for yourself. On specific events, pre-paying for a
funeral is one tactic. Home insurance is a natural protection against
major home accident repair bills. Permanently losing money in the
stock market, to the extent that it could cause serious financial
harm, should simply be avoided with a proper set of investments, as
we have explained in many previous posts (see our <a href="http://howtoinvestonline.blogspot.co.uk/2014/05/howtoinvestonline-guide-to-self.html"><i>Guide to Self-Directed Investing</i></a>). One of the key principles to do that
– diversification – also applies to preventing catastrophic harm
from personal or business bankruptcy and real estate value collapse.
When bad events do happen, most already-retired people end up cutting
back their spending i.e. being forced into a lower standard of
living and / or cashing in savings earlier than desired.</div>
CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-52259575472098347492016-01-31T11:14:00.001-05:002016-01-31T11:14:22.026-05:00Long Term Interest Rate Outlook: Persistently Low In <a href="http://howtoinvestonline.blogspot.co.uk/2015/11/how-much-do-interest-rates-need-to-rise.html">our last post</a> we explored how much interest rates would need to rise to justify holding off purchasing an annuity by five years. It wasn't much - depending on present age, sex and assumptions about returns on the interim portfolio, it could range from 0.30% to 2.85% rise over five years. But constant expectations of rate rises since the financial crisis of 2008 have come to nought as the Bank of Canada base rate has remained at 1.0% or below since then (see <a href="http://www.global-rates.com/interest-rates/central-banks/central-bank-canada/boc-interest-rate.aspx">Global rates.com graph here</a>). Yields on long term Government of Canada bonds have steadily dropped from around 6% in 1999 to 2% recently (see <a href="http://www.investing.com/rates-bonds/canada-30-year-bond-yield-historical-data">Investing.com's historical table of 30-year bond yields</a>). In December 2015, the US Federal Reserve finally raised its interest rate by 0.25% after seven years at 0.25%. The Bank of Canada did not follow suite and the business media speculation seems more pointed to a rate cut than a rise in Canada due to the effects of plummeting oil prices on the Canadian economy.<br />
<br />
So are these low rates still just a temporary phenomenon till the economy gets going again? How much longer could temporary last? The answer is many years, it appears. Here's why.<br />
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<b>Demographics will be a decades-long stiff headwind</b> - The combination of increasing longevity exacerbated in the immediate future by a mass of retiring baby boomers (mea culpa, I'm one of them) means the working age population will continue falling for the next several decades (see graphs in the Globe and Mail's <i><a href="http://www.theglobeandmail.com/globe-investor/retirement/the-boomer-shift-how-canadas-economy-is-headed-for-majorchange/article27159892/">Boom, Bust and Economic Headaches</a></i> of November 2015). It's happening not just in Canada but throughout most developed economies as shown in the chart below from the Bank of Canada report <i><a href="http://www.bankofcanada.ca/wp-content/uploads/2015/11/boc-review-autumn15-reza.pdf">Is Slower Growth the New Normal in Advanced Economies?</a></i><br />
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<i>(click image to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjz2hLIuD_8EfR52gI4WCB31SMyR1qGwg_y8QRfrMc-EeQWebw6VMDCsqMIdwiCjke9LvEQUPUYJaQXCwF0X-7eYm0LmiWKkZDmOrV6Rmou3ijdUq7tBA_S_GoDH7Gm2K3wP3OuDYie4vEG/s1600/Screenshot+from+2016-01-13+14%253A56%253A58.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="220" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjz2hLIuD_8EfR52gI4WCB31SMyR1qGwg_y8QRfrMc-EeQWebw6VMDCsqMIdwiCjke9LvEQUPUYJaQXCwF0X-7eYm0LmiWKkZDmOrV6Rmou3ijdUq7tBA_S_GoDH7Gm2K3wP3OuDYie4vEG/s320/Screenshot+from+2016-01-13+14%253A56%253A58.png" width="320" /></a></div>
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A growing population and a growing working population is a major source of economic growth so when it is slowing down, as it forecast to do, that is causing forecasts for economic growth to be constrained to lower than historical performance. Long term Canadian economic growth forecasts hover around 1.7% (<a href="https://www.td.com/document/PDF/economics/qef/long_term_dec2015.pdf">TD Bank</a>, <a href="http://www.rbc.com/economics/economic-data/pdf/economy_can.pdf">Royal Bank</a> and the Centre for the Studies of Living Standards and the Parliamentary Budget Office cited in <a href="https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/e-brief_216_0.pdf">a paper from the CD Howe Institute</a>), or a bit higher 2% (<a href="http://www.oecd.org/eco/growth/lookingto2060.htm">OECD</a> in <a href="http://www.oecd.org/eco/growth/Growth-prospects-and-fiscal-requirements-over-the-long-term.pdf">an older 2013 forecast</a>). That's a contrast to the heady years of the 1970s, 80s and 90s when 2% growth was considered a poor year. The downward trend is very evident in <a href="http://www.tradingeconomics.com/canada/gdp-growth-annual">this chart from Trading Economics</a>.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHsaGjnQGbnAM46Udk0jZt7Fcd9Bmbx5PdH7nOb5vO76Kl3i1lN9-fxlz4lolaYBhKTZC5hfEVeRkjl_1YExIsI7X_Cys2DvTF2KbFjmvMrZfTT1HIt2l5wmu5C6USj_Vv2bNUJnbp70XS/s1600/Screenshot+from+2016-01-13+16%253A12%253A27.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="199" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHsaGjnQGbnAM46Udk0jZt7Fcd9Bmbx5PdH7nOb5vO76Kl3i1lN9-fxlz4lolaYBhKTZC5hfEVeRkjl_1YExIsI7X_Cys2DvTF2KbFjmvMrZfTT1HIt2l5wmu5C6USj_Vv2bNUJnbp70XS/s320/Screenshot+from+2016-01-13+16%253A12%253A27.png" width="320" /></a></div>
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<span style="color: orange;"><b>Sluggish growth means continuing low interest rates</b></span> as central banks including the Bank of Canada attempt to provide policy stimulus. In slow growth there is less demand for money for investment to take advantage of business opportunities. Meantime, the greater mass of retirees buying bonds or pension funds and insurance companies offering annuities, i.e. supplying money for companies and governments to borrow, provides supply that also pressures rates lower.<br />
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<b>Paying off massive accumulated government and private debt will also work to keep rates low</b> - The huge amounts of debt that helped precipitate and exacerbate the 2008 financial crisis still have not been paid down to more normal sustainable levels according to common consensus (e.g. see the Bank of Canada paper cited above, also the US-based money manager Research Affiliates <a href="http://www.researchaffiliates.com/Our%20Ideas/Insights/3D%20Hurricane/Pages/Home.aspx">3-D Hurricane</a>'s colour-coded map of countries' debt levels). McKinsey & Company <a href="http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging">reported in early 2015 that worldwide debt has increased</a>, not decreased since the financial crisis. Canada may have started better off with significantly lower debt but it is worsening. One of McKinsey's charts (see below) shows Canada's total private and public debt rising much faster than the USA and the UK. It is hard to see that changing with a new federal government in Canada taking the stance that deficit spending to stimulate the economy is a priority.<br />
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<i>(click image to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKVpaljLsgOPHHWvcM0syIsOCEqVGCfMOCZ6magNqwVFr_PEhmKXt9qyyekfvayuq8A6n-Q6B_k4_1H-cAttLOzBaIR2JvmwbHOi56v8vG5-kncDgj23qs6UytfXxy7QxQTP0sB4m4apOC/s1600/Screenshot+from+2016-01-30+18%253A52%253A53.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKVpaljLsgOPHHWvcM0syIsOCEqVGCfMOCZ6magNqwVFr_PEhmKXt9qyyekfvayuq8A6n-Q6B_k4_1H-cAttLOzBaIR2JvmwbHOi56v8vG5-kncDgj23qs6UytfXxy7QxQTP0sB4m4apOC/s320/Screenshot+from+2016-01-30+18%253A52%253A53.png" width="209" /></a></div>
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The motivation of many countries to make their debt loads more sustainable will lead them to keep interest rates low, a policy caustically termed financial repression. <br />
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In October 2015, the CD Howe Institute published a paper by Craig Alexander and Steve Ambler that projected a 1% real interest rate on T-Bills for the long term based on expected economic growth, itself based on projected demographics. Adding 2% inflation, that would amount to a 3% nominal rate, which is about 2.5% above the slightly less than 0.5% as of the end of January 2016 (see <a href="http://www.bankofcanada.ca/rates/interest-rates/t-bill-yields/">Bank of Canada T-Bill rates</a>). A 1% real rate is far below the 2.2% real T-Bill return achieved over the last half century according to the <a href="https://publications.credit-suisse.com/tasks/render/file/?fileID=AE924F44-E396-A4E5-11E63B09CFE37CCB">Credit Suisse Global Investment Returns Yearbook 2015</a>.<br />
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1% real risk-free interest rates are most likely an upper bound. The Credit Suisse report says the real T-Bill return was only 0.4% from 2000 to 2014. When TD created its forecast in December 2015, it projected a 1.8% end of year nominal rate on 10-year Government of Canada bonds. But no sooner had it done so than the yield dropped to about 1.25% where it stands now. One wonders if TD would still stand by its forecast of a 10-year rate rise to 3.45% by the end of 2019. <a href="http://pensionpulse.blogspot.co.uk/2016/01/the-new-negative-normal.html">Leo Kolivakis at Pension Pulse even makes a case that negative interest rates might be around the corner in Canada and the USA</a> in his observations following the Bank of Japan's recent cutting of rates below zero (i.e. charging banks to keep cash on deposit).<br />
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<b>Bottom line</b>: It seems within the realm of possibility that interest rates in Canada would rise the 1.2% or so over five years that <a href="http://howtoinvestonline.blogspot.co.uk/2015/11/how-much-do-interest-rates-need-to-rise.html">we previously calculated</a> would make it worthwhile for a 60 year old man to defer buying an annuity till age 65. But the more likely outcome is for much less a rise. The strong forces of demographics and debt seem to be pushing in hard against a rise and they are not going to get better anytime soon. Looks like interest rates will continue to stay very low or at best rise slightly and slowly.<br />
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<span style="font-style: italic;">Disclaimer</span>:
This post is my opinion only and should not be construed as investment
advice. Readers should be aware that the above comparisons are not an
investment recommendation. They rest on other sources, whose accuracy is
not guaranteed and the article may not interpret such results
correctly. Do your homework before making any decisions and consider
consulting a professional advisor.<br />
<br />
Copyright 2015 Jean Lespérance All Rights Reserved<br />
CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-43878760953268197962015-11-05T04:08:00.002-05:002015-11-07T19:45:49.423-05:00How Much do Interest Rates Need to Rise for Deferral of Annuity Purchase to Make Sense?When interest rates are higher, annuity payouts are higher. The big question is, exactly how much would interest rates need to rise in order to justify deferring the purchase of an annuity? Not that much, is the answer, but there are some crucial differences according to age, sex and assumptions about portfolio returns. And there is a significant risk if interest rates do not rise but merely stay the same.<br />
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A 1.2% increase in interest rates over five years (i.e. 0.24% per year) could suffice to make it worthwhile for a man, taking money out of an RRSP or RRIF, to defer buying an annuity for five years from age 60 to 65.<br />
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The table below shows the results of our calculations. The base case of the assumptions we think most logical is shown in the left most column, along with other possible assumptions for male annuities and the base case for women in the right-most column.<br />
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In all cases our approach is simply to make the ultimate lifetime income the same, whether the annuity is bought immediately or deferred five years. While the deferral is under way, we assume the same amount is withdrawn every year from the investor's portfolio as the immediate annuity pays out. The later deferred purchase is then priced on whatever amount would remain after withdrawals and each year's portfolio return and, crucially, at the higher annuity payout rate the five year older person would get. The older you are, the more mortality credits boost the annuity payout, as we explained in <a href="http://howtoinvestonline.blogspot.co.uk/2015/07/is-it-worthwhile-to-wait-for-higher.html"><i>Is it Worthwhile to Wait for Higher Interest Rates to Buy an Annuity?</i></a>.<br />
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<i>(click on image to enlarge table)</i></div>
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Here are some other observations on the results:<br />
1) <b>The younger you are, the more worthwhile it is to defer</b> - At age 60, the required rise for a male annuity buyer is only 1.2%, but deferring from 70 to 75 would require a 2.4% rise. The same age pattern exists for women, it's only the numbers are different. The reason is that mortality credits (the money that comes from other annuitants dying) are much more important the older you are, so missing out by deferring makes less and less sense.<br />
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2) <b>It takes less of an interest rise to make deferral worthwhile for a woman than a man</b> - The right-most column for female annuity pricing shows that deferring from age 60 to 65 requires only a 0.95% rise in interest rates to gain higher annuity income. The reason again is mortality credits. Because women live longer than men, it is as if the whole age scale for mortality credits is shifted youngwards - women get fewer mortality credits than men of the same age. Note that single-sex, men vs women, annuity pricing, where the differing lifespans influence payouts, applies only to non-locked in registered retirement accounts, TFSAs and non-registered accounts. Locked-in retirement accounts are subject to unisex pricing rules that create payouts in between those of the single-sex prices, (Our table does not show those payouts)<br />
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3) <b>A high return in the investment portfolio during deferral can significantly reduce the required interest rise</b> - When we set the investment portfolio's annual return at 2.7%, matching the return embedded in the annuity, the required interest rise was only 0.3% for the 60 year old investor, versus the base case 1.2%. The required interest rise was much lower for the other two age groups as well. ... <b>however</b> ...<br />
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This raises a crucial point - what rate of return on the interim investment portfolio is most logical to assume. Our base case uses 1.0% per year, which is about the net return (yield to maturity of 1.26% minus the fund's MER of 0.28%) currently on the <a href="https://www.blackrock.com/ca/individual/en/products/239491/ishares-canadian-short-term-bond-index-etf">iShares Short Term Bond Index ETF</a> (TSX symbol: XSB). This ETF has very high credit quality and its duration of 2.79 years means that it will have limited exposure to capital value losses that would result from the very interest rate rises the investor is trying to take advantage of. As we discussed in <i><a href="http://howtoinvestonline.blogspot.co.uk/2013/07/what-happens-to-bond-etf-when-interest.html">What Happens to a Bond ETF When Interest Rates Rise?</a></i> duration also tells us how long it will take for the ETF to recover from capital losses as newer higher yielding bonds replace outgoing issues in the ETF portfolio. At the end of the deferral period, the investor wants to be sure to have enough money to buy the annuity. Investing in much more volatile longer duration higher yielding bond ETFs, or a stock bond portfolio, is taking on considerable exposure to volatility risk.<br />
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One thing that does not make much difference is how much of the interest rate increase is captured by the interim investment portfolio. The second column from the right shows the results when only half of the interest rise gets reflected in the interim portfolio. This might well be the case for the short term bond fund when the interest rise, which is the rise in the long term rate used to price the annuity, is not matched at the short term end.<br />
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4) <b><span style="color: red;">If interest rates stay the same, there is a big hit to the deferred annuity income</span></b> - The 60 year old man would be forever stuck with about 13.1% less yearly annuity income, the 65 year old 15% less and the 70 year old 18.7% less. There will be less of a hit to a woman but it will still be very noticeable as our table shows.<br />
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<b>Bottom Line</b>: Is it worth taking the chance? What are the chances of a rise in interest rates and by how much? We'll explore that question in the next post.<br />
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<b>How we came up with the calculations</b> - Note that this blogger is not an actuary or annuity pricing expert. Our calculations are rough (and rounded to the nearest 0.05%) but hopefully reasonable. First we followed the method for roughly pricing an annuity laid out by professional retirement researcher Wade Pfau in <i><a href="http://retirementresearcher.com/income-annuity-101/">Income Annuity 101</a></i>. Then we applied recent mortality tables from the Canadian Institute of Actuaries - <a href="http://www.cia-ica.ca/docs/default-source/2014/214013e.pdf">Canadian Pensioners' Mortality</a>, published in February 2014 - that contain data on pensioners of private plans (apparently public plan pensioners live longer!). Next we compared resulting actual <a href="http://www.globeinvestor.com/servlet/Page/document/v5/data/rates?pageType=annuity&guarantee_term=0&survey_type=SL&sex=M&fund_type=R&province_of_residence=ON">current prices of annuities as quoted in the Globe and Mail</a> to find what implicit interest rate is embedded in the current quotes. That's how we got the 2.7% rate to discount annuity payouts. The 2.7% discount rate also lines up pretty well with what a portfolio of highly secure investment grade long term bonds would yield nowadays i.e what the insurance companies would invest in to back up the annuities. For instance, a mix of federal ( holdings like BMO's Long Federal Bond ETF (TSX: ZFL) with a yield of 2.25%) and provincial (holdings like BMO's Long Provincial Bond ETF (TSX: ZPL) with a yield of 3.28% could average out to 2.7%.<br />
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There are other signs we are close to the mark in the calculations. First, retirement researcher Wade Pfau in his post <i><a href="http://retirementresearcher.com/annuity-pricing-sensitivity/">Annuity Pricing Sensitivity</a></i> also calculated the effect of interest rate changes on annuities based on annuity pricing principles. Historical Canadian data in this post came up with 0.58. The two approaches give us reassuringly close estimates that every 1% rise in interest rates will cause annuity payout rates to rise about 0.6% (Pfau gets 0.63 to 0.65% and my Canadian data shows 0.58). On our simple annuity model the figure is 0.61%.<br />
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Second, the TIAA-CREF Institute, a research offshoot of one of the largest retirement income providers in the world, looked at the general issues around possible deferral of an annuity purchase in <i><a href="https://www.tiaa-crefinstitute.org/public/pdf/institute/research/trends_issues/tr100106b.pdf">Annuities: Now, Later, Never?</a> </i>At unchanging interest rates they found that annuities always look better than deferring indefinitely and living off drawdowns from an investment portfolio.<br />
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However, they also showed that deferring in period of rising interest rates could be worthwhile. For instance, they calculated that if interest rates increased 0.25% a year for five years (i.e. 1.25% in total after five years), deferring the annuity purchase at age 65 by five years (and living off drawdowns from the portfolio in the meantime) would enable the purchase of an annuity with more than 7% higher income. The benefit tails off with a longer deferral. A 10-year deferral would produce only 3% higher income. A big caveat that they note is this result depends on the interest rate embedded in the annuity pricing (i.e. the interest rate the insurance companies receive from investing the lump sum premiums) being the same as the interest rate / return the portfolio could obtain. The interest rates won't be the same, if one is to construct a realistic apples to apples comparison. With the annuity, the insurance companies will invest in long term highly rated bonds while someone intending to defer five years would logically opt for much shorter term bonds as we argued above. So our results are more cautious than TIAA-CREF's though with the same patterns.<br />
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<span style="font-style: italic;">Disclaimer</span>: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.<br />
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Copyright 2015 Jean Lespérance All Rights ReservedCanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-16257761785479238942015-10-13T05:14:00.000-04:002016-10-05T09:44:26.067-04:00Surprise! Equities can Outdo Bonds for Cash Distribution Attractiveness<div>
<b>October 2016 Update: </b>Little has changed since last year and since the original 2013 post. The various equity ETFs continue to power ahead of bonds, both in terms of total returns and of cash distributions. Thankfully, all the ETFs, including bonds, are handily beating inflation. Many would think of bonds as sources of steady cash but ironically, the positive return for the bond ETF (symbol XBB in the graphs) has come from capital gains. Financials still rule, far outstripping the other types of ETFs and the average market in cumulative total return over the past five years. Energy has continued to be a severe disappointment for investors, not even managing to outdo inflation.<br />
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The updated charts are as follows:<br />
1) ETFs with the longest history back to 2002<br />
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<i><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFTQOWMqMX2uuGHVmvcBJbyGEudSl-vcFisRL5PdeWCnnBE6vLj7genjYtLMcGcW74oocGXNWOPMjrhxWvw-76IFnsAuokfmvqyIBogqwGba-tqtQuWgr5c4jJ97VnQ1M9jQX6-z9OOpbG/s1600/Screenshot+from+2016-10-05+14%253A35%253A31.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="193" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFTQOWMqMX2uuGHVmvcBJbyGEudSl-vcFisRL5PdeWCnnBE6vLj7genjYtLMcGcW74oocGXNWOPMjrhxWvw-76IFnsAuokfmvqyIBogqwGba-tqtQuWgr5c4jJ97VnQ1M9jQX6-z9OOpbG/s320/Screenshot+from+2016-10-05+14%253A35%253A31.png" width="320" /></a></i></div>
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2) ETFs with a shorter history back to 2007, such as dividend and fundamentally weighted ETFs<br />
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<i><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi98rgTTkoJULp9lEr-mSC1F6c8YGwJGPSkIlz3YY4t3zD5v3TEaNhRPZsdWRiyM1UlyJiCKhd6rNEBrIQFeJMwhR-tX4jyKWY7c_Xv7vhLBC8zfqcAxciFsdA-85Jeii1ScV75ASqBAb_6/s1600/Screenshot+from+2016-10-05+14%253A36%253A27.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi98rgTTkoJULp9lEr-mSC1F6c8YGwJGPSkIlz3YY4t3zD5v3TEaNhRPZsdWRiyM1UlyJiCKhd6rNEBrIQFeJMwhR-tX4jyKWY7c_Xv7vhLBC8zfqcAxciFsdA-85Jeii1ScV75ASqBAb_6/s320/Screenshot+from+2016-10-05+14%253A36%253A27.png" width="320" /></a></i></div>
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3) Returns and table of cash distributions<br />
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<b> </b><i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUKF0s2tOoGvpp1exa3dFJeThfG23IF4QY0HFX8o6glAUrSA7v4xO4aRlZNrudF2mtrcRx_4b1pRMSYPsFJiGX6CiVM8ml0vu9kXLOE3zHuz43wUFczEZx38EMk-LLc1wDje49Wd9wpQqe/s1600/Screenshot+from+2016-10-05+14%253A41%253A43.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="118" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUKF0s2tOoGvpp1exa3dFJeThfG23IF4QY0HFX8o6glAUrSA7v4xO4aRlZNrudF2mtrcRx_4b1pRMSYPsFJiGX6CiVM8ml0vu9kXLOE3zHuz43wUFczEZx38EMk-LLc1wDje49Wd9wpQqe/s320/Screenshot+from+2016-10-05+14%253A41%253A43.png" width="320" /></a></div>
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<b> </b><br />
<b>October 2015 Update</b>: The same pattern described in the original article below has continued. Equity distributions have continued to rise while bond distributions in the XBB ETF are still falling. A few of the charts updated to include 2014 distributions demonstrate how <b><span style="color: #38761d;">cash distributions from various types of equity ETFs have continued on a steady upward path</span></b>. The big exception is the highly volatile energy ETF XEG, whose distributions have been way up and have now fallen back considerably. After the big fall in 2009, REIT distributions have maintained an upward path. All the equity ETFs have far outstripped inflation.<br />
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1) ETFs with the longest history back to 2002<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2AQnuN4jIuMvdg2iFXrfaD9vtcZBX8lu1bm9D4WjpWa8Whxh23rdI-YSzM_lUDdgYSukDSbpuHzUgiOw2GqND7dTaxobokA81YsZaUT4q94VSoG1_dHHEWQXUZC7ZICLokuEmvNjnWt5x/s1600/Cash-distrib-Dec2002-2014.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2AQnuN4jIuMvdg2iFXrfaD9vtcZBX8lu1bm9D4WjpWa8Whxh23rdI-YSzM_lUDdgYSukDSbpuHzUgiOw2GqND7dTaxobokA81YsZaUT4q94VSoG1_dHHEWQXUZC7ZICLokuEmvNjnWt5x/s320/Cash-distrib-Dec2002-2014.JPG" width="320" /></a></div>
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2) ETFs with a shorter history back to 2007, such as dividend and fundamentally weighted ETFs<br />
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<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzgtRLfrKs3Si8dZb06pf4ZBTJvWVKDhtNrrkkr75fVkHEVC3GGSxQMgZE-i4S-PINeqzmGR82lzpI-bs-JcBOHwxzQZY1iik3icS0b-7bJOiYZ_tJwXT_xeQyiwFp6mjAThjVSZ8BQnMU/s1600/Cash-distrib-Cdn-ETFs2006-2014.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="161" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzgtRLfrKs3Si8dZb06pf4ZBTJvWVKDhtNrrkkr75fVkHEVC3GGSxQMgZE-i4S-PINeqzmGR82lzpI-bs-JcBOHwxzQZY1iik3icS0b-7bJOiYZ_tJwXT_xeQyiwFp6mjAThjVSZ8BQnMU/s320/Cash-distrib-Cdn-ETFs2006-2014.JPG" width="320" /></a></div>
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Returns matter too ... and that changes the overall picture. The table below for the same ETFs shows the overall change in cash distributions along with the annual compounded total return (distributions plus capital gain or loss) for the five years up to 30 Sept 2015 for these ETFs. </div>
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(click to enlarge)</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgp914hShoCawf7q29Nxvbhv7MUQdQeYHHJqjUKhiTec5hxRoLeO5tjr1ihAqt80fZav37y3bxIDZKJ7AGiUDCW3AYVTNL0aBAa3Az0NaZUeK_tAc_hY0goh_2wfkMni1GrzRmpVs6yAw3Q/s1600/Cash-distrib-rtns-ETFs2007-2014.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="91" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgp914hShoCawf7q29Nxvbhv7MUQdQeYHHJqjUKhiTec5hxRoLeO5tjr1ihAqt80fZav37y3bxIDZKJ7AGiUDCW3AYVTNL0aBAa3Az0NaZUeK_tAc_hY0goh_2wfkMni1GrzRmpVs6yAw3Q/s320/Cash-distrib-rtns-ETFs2007-2014.png" width="320" /></a></div>
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First, we note that <span style="color: blue; font-weight: normal;">XBB's results are not all bad - its total return has been positive</span> despite falling cash distributions. Next, we see that <span style="color: red; font-weight: normal;">XEG's returns have been strongly negative</span> to go along with the fall in distributions. Energy has been a very poor investment. It has done worse than inflation, unlike every other ETF, both bonds and equities. Ironically, one ETF with weak growth in cash distributions - CDZ - is the one explicitly targeting companies that have shown strong dividend growth. The ETF seems to pick up companies after they have had a burst of increases, a fine example of past results not necessarily being indicative of the future. Neverheless CDZ's total return has been very strong, second best overall. The <span style="color: #38761d;"><b>clear overall winner has been the financials - the XFN ETF has had both healthy cash distribution rises and excellent capital appreciation</b></span> to produce an outstanding total return of 9.3% per year compounded.</div>
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<b>The Original article</b> ...<br />
Back in January (2013) <a href="http://howtoinvestonline.blogspot.ca/2013/01/the-crucial-difference-between-equity.html">we looked at the cash distributions of a few mainstream Canadian equity ETFs</a> and made the pleasant discovery that such income was quite stable from year to year in recent times despite the often gut-wrenching moves of the ETF's price in the market. That is very pleasing to know for long term buy and hold investors who are seeking income, such as those in retirement. It was doubly pleasing to see that the equity ETF distributions were as stable as those of a broad market bond fund. A third attractive feature was that the distributions of the equity ETF had risen appreciably during the 2000s decade while that of the bond fund had declined as interest rates fell continually through the period. Today we return to this theme to find out more - how specific industry sectors like financials, energy and real estate (REITs) have fared and what the longer term history of dividends can suggest about the likely future.<br />
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<b>Equity ETF cash distributions generally rose ....</b><br />
The chart below shows how distributions per unit / share have evolved from the inception of each of the following ETFs. <br />
<ul>
<li><a href="http://ca.ishares.com/product_info/fund/overview/XIU.htm?fundSearch=true&qt=XIU">iShares S&P TSX 60 Index ETF</a> (TSX symbol: XIU) - the bellwether original equity index ETF with the 60 biggest companies in Canada</li>
<li><a href="http://ca.ishares.com/product_info/fund/overview/XFN.htm?fundSearch=true&qt=XFN">iShares S&P TSX Capped Financial Index Fund</a> (XFN) - all the big Canadian banks and insurance companies</li>
<li><a href="http://ca.ishares.com/product_info/fund/overview/XEG.htm?fundSearch=true&qt=XEG">iShares S&P / TSX Capped Energy Index Fund</a> (XEG) - major Canadian oil and gas companies</li>
<li><a href="http://ca.ishares.com/product_info/fund/overview/XRE.htm?fundSearch=true&qt=XRE">iShares S&P / TSX Capped REIT Index Fund</a> (XRE) - the largest REITs in Canada</li>
<li><a href="http://ca.ishares.com/product_info/fund/overview/XBB.htm?fundSearch=true&qt=XBB">iShares DEX Universe Bond Index Fund</a> (XBB) - the broad bond index, a mix of the vast array of Canadian government and corporate bonds of all maturities</li>
</ul>
Immediately we notice that <b style="color: #bf9000;">the gap between per share payouts on the bond ETF, the <span style="background-color: #f3f3f3;">yellow line</span>, and the
various equity funds has narrowed considerably over the years</b>. <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu9bNOdtZQ1mdmjqQiDZD_yIBrmLcmWrbdxN5w07W1MPsKQD_R7qLVucduDqyR7VXbYL7MlZhurMt0VOUjWbOafL-49v2PdywPpCRReG8RRnjD02n02SwHTmCicQ4w92LXJk5b1thcefPK/s704/Distrib-ETF-per-unit.png" style="margin-left: 1em; margin-right: 1em;"><span style="background-color: #f3f3f3;"></span><img border="0" height="205" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu9bNOdtZQ1mdmjqQiDZD_yIBrmLcmWrbdxN5w07W1MPsKQD_R7qLVucduDqyR7VXbYL7MlZhurMt0VOUjWbOafL-49v2PdywPpCRReG8RRnjD02n02SwHTmCicQ4w92LXJk5b1thcefPK/s320/Distrib-ETF-per-unit.png" width="320" /> </a></div>
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<b>... but the progression has been uneven amongst sectors</b></div>
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The orange line of the <b><i>energy ETF XEG</i></b> is up over the long term but it has seen wild upward then drastic downward movement, not very attractive to anyone seeking steady cash income. </div>
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The dark red of the <b><i>REITs XRE</i></b> started quite high but there was a big drop during the financial crisis with some recovery since but the overall income level is slightly down from its 2003 start year. That's a surprise for a sector that is often portrayed as a steady high-income investment. We explore more why this happened below. </div>
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The mid-blue line of the <i><b>financials in XFN</b></i> is the best performer of the lot. Another surprise is that it took the least hit during the financial crisis. The big banks merely held their dividends steady for a few years then started boosting dividends again. Now the sector has recovered all the lost ground and is at a new peak. </div>
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The <b><i>broad TSX 60 XIU</i></b> fund, which contains a large dose of financials and energy as well as other sectors like mining, industrials and utilities for which we do not have data, has gone steadily but slower ahead overall. <b style="color: #38761d;">The ETF with the broadest diversification across economic sectors has had the steadiest payout record.</b></div>
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<b>Equities look even better on a total income basis</b></div>
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Another way to look at the past distribution performance is to pretend we had invested a large lump sum ($100k) at the end of the year 2002 and simply collected the cash payouts. We ignore total return and do not calculate any re-investment of the distributions. The distributions are real cash in the investor's hand, net of any management and administrative fees. The chart below shows what would have happened.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdp-wM61CgdUBO6Z35vyciZhFqLVFnwfHv-iH0R7ux7-nhEi6Bbl-6la0CoAvwR246tBt9f3j0-t1Namvo3_HJPDuqf6qIYa4jsiHnOM7nbFiMKg3Gmjhcwq0i_QLdNEfGIIavsLuAsdLP/s744/Distrib-ETF-100k-invest.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="191" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdp-wM61CgdUBO6Z35vyciZhFqLVFnwfHv-iH0R7ux7-nhEi6Bbl-6la0CoAvwR246tBt9f3j0-t1Namvo3_HJPDuqf6qIYa4jsiHnOM7nbFiMKg3Gmjhcwq0i_QLdNEfGIIavsLuAsdLP/s320/Distrib-ETF-100k-invest.png" width="320" /></a></div>
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The REIT fund XRE started well ahead of the pack and is still way ahead after 10 years but its lead has narrowed considerably. And it has lost ground to inflation (shown by the purple line), as has XBB, due to falling total distributions (NB again that we are only considering the cash distribution part not the total return of the fund where capital gains might have made up for the declining income). <b style="color: red;">From second highest total cash received in 2003, the bond fund XBB would now trail all the equity funds</b>. </div>
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The erratic path of XEG might have caused many investors heartburn even though overall the net increase in distributions since 2003 has far outstripped inflation. The financials XFN and the mixed equity XIU have followed quite a parallel path, though XFN has inched ahead.</div>
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<b>Why did REIT distributions fall so much?</b></div>
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The answer is that a few REITs with a heavy weight in XRE cut their distributions during the financial crisis, most notably H&R (HR.UN) and Chartwell (CSH.UN) while another, Dundee (D.UN) made no increase. All the other big REITs had increases, most of them quite healthy e.g. from 2003 to 2012 RioCan (REI.UN) +21% total increase in cash distributed, Canadian REIT (REF.UN) +20%, Calloway (CWT.UN) +35%, Cominar (CUF.UN) +25%, CAP REIT (CAR.UN) +2%, Boardwalk (BEI.UN) +52%. When we note that XRE contains only 14 REITs the influence of one or two holdings can be significant. Cuts in distributions are not typical of the sector. </div>
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For investors looking at direct holding of REIT units instead of a fund, the past history is a reminder to closely consider the sustainability of the REIT payout - is the REIT distributing more cash than it earns? Chartwell is still having big problems with large net losses. H&R seems to have steadied the ship somewhat and has increased distributions since 2009 but the 2012 payout was still 10% below that of 2003 and it has more debt and lower return on equity than the other major REITs.</div>
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<b>Will the equity ETFs continue to outgrow bond ETF cash distributions?</b></div>
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The investing landscape has been changing fast recently as interest rates, long kept at record low levels by central banks, have started to rise dramatically (see <a href="http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/">Bank of Canada's charts of various benchmark bond rates</a>). As a result, bond prices have fallen and it is now much cheaper to buy into XBB. Anyone buying in at the current price (as of 26 June 2013) with a lump sum, such as we pretended to do in 2002 would get a 3.23% cash distribution yield from XBB according to <a href="http://ca.ishares.com/product_info/fund/overview/XBB.htm">its iShares webpage</a>. By fluke, it so happens that XIU's current cash distribution is exactly the same 3.23%. </div>
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As of June 26th, the investor would get exactly the same cash distribution from XIU and XBB. But as time passes, the cash distributions for each will change and diverge driven by different factors.</div>
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<i>XBB distributions will evolve with interest rates </i></div>
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There has not been a huge absolute shift in interest rates - around 0.7 to 0.9% or so for medium to long term government bonds - though the relative shift - about a 30% increase in the rate - in the last month has been dramatic. XBB's 2.7% yield to maturity is still below the cash distribution yield of 3.23% which means that if interest rates never changed again from today the existing bonds with higher coupon rates of bonds issued long ago at times of much higher interest rates, would eventually get replaced with lower coupon (around 2.7%) bonds and cash distributions would still fall. If interest rates keep rising, and it would not be too surprising if they do since we are still at the very low end of rates historically speaking e.g. see <a href="http://www.ritholtz.com/blog/wp-content/uploads/2012/01/Long-Term.png">this Barry Ritholz chart</a> for US rates going back to 1790 then after another 0.5% or so of rise, XBB distributions will level off. If interest rates rise above 3.23%, distributions will gradually start to rise as the higher coupon bonds gradually replace maturing lower coupon bonds. The slow downward creep of distributions that we see in our charts above would be become a slow upward creep.</div>
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<i>XIU distributions will evolve with economic growth and earnings growth</i></div>
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Equity ETF distributions are driven by the dividends paid by companies held within the funds. There is good historical evidence, some of which we linked to in our first post back in January, that dividends on broad market indexes do rise over time and do also handily outstrip inflation. Unless economic growth stops entirely, companies no longer grow earnings and dividends cannot grow too, we do not believe cash distributions of funds like XIU will stop rising. For example, Thornburg Capital's <a href="http://www.thornburginvestments.com/literature/fund_literature/TH1731_DividendStory.pdf"><i>The Benefits of Dividend Paying Stocks</i></a> shows much the same exercise as our pretend investment of $100k in 2002 but for the USA's S&P 500 going back to 1970. The results in their chart, copied below, look very similar overall, though we notice that there was a much bigger hit to dividends from the 2008 financial crisis. The results of sectors may vary but the overall market should grow over the years.</div>
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<b>Bottom Line</b>: Equities, especially broad-based ETFs such as XIU (and there are multiple others from other providers such as BMO, Powershares, Vanguard) present the income-seeking investor with an attractive combination of cash distribution stability and long term growth.<br />
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<span style="font-style: italic;">Disclaimer</span>: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.<br />
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Copyright 2015 Jean Lespérance All Rights Reserved</div>
CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-9100204178767146392015-07-06T11:05:00.003-04:002015-07-06T11:05:34.218-04:00Is it Worthwhile to Wait for Higher Interest Rates to Buy an Annuity? Payouts on annuities are at all-time lows these days. The same lump sum payment buys a much smaller lifetime income than it did ten or fifteen years ago. The main culprit is the steady fall in interest rates in the last few decades. Money that the insurance companies receive from investors and then invest themselves in highly secure bonds to back up the annuities yield a lot less so the insurance companies can offer less.<br />
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That situation may cause some people to wait for higher interest rates to get a higher payout on an annuity. How worthwhile is this? In our last post on annuity buying tips, <i><a href="http://howtoinvestonline.blogspot.co.uk/2015/06/buying-life-annuity-tips.html">Annuitize now, or wait?</a></i>, in tip #7 we concluded that the basic answer is that if you need to start taking income, it doesn't make sense to wait. It is tough to beat the return required to beat the annuity. But that assumed that interest rates stay as they are. Suppose they rise, as has been expected for years now, though it has not happened yet.<br />
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<b>Annuity payout rates will rise much more slowly than interest rates</b><br />
Using the actual data from 2000 to 2013 on the <a href="http://www.ifid.ca/">Individual Finance and Insurance Decisions Centre</a> in the <i><a href="http://www.ifid.ca/payout.htm">Payout Annuity Index</a></i>, we can see the steady drop in actual payouts on annuities as interest rates fell from around 6% on Government of Canada 10-year bonds to the 1.77% available as of 26 June 2015. Payouts on the way down can give us a good rough idea of what would happen on the way up. We found the payout for every 0.25% or so interest rate level and came up with the following graph.<br />
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The annuity payout rate is simply the yearly income you get divided by the lump sum you pay over to the insurance company, e.g. on 26 June 2015, a 65 year old male RRIF single sex priced monthly income annuity averaged over the five highest insurance company quotations for a $100,000 lump sum came to $6,150 income per year, a 6.15% payout. In contrast the payout rate on 19 July 2000 when the 6% GOC rate prevailed was 8.83%, or $8,830. That's a substantial $2,700 more income per year.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQmC5G8dq_SIS3KcHekBbCSfzyrC9lC0imU70izSHMfDzQAbyhDoYvZKq3SMZ3q_vTju5dJQc6ZMatVu96LKxqDJ3PPTkIKZ_FQI53reo_KieJ8NSJmwDBE7FpxgT-sqSGatfue6bYjWXp/s1600/Annuity-histor-payout-vs-interest.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="173" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQmC5G8dq_SIS3KcHekBbCSfzyrC9lC0imU70izSHMfDzQAbyhDoYvZKq3SMZ3q_vTju5dJQc6ZMatVu96LKxqDJ3PPTkIKZ_FQI53reo_KieJ8NSJmwDBE7FpxgT-sqSGatfue6bYjWXp/s320/Annuity-histor-payout-vs-interest.png" width="320" /></a></div>
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The graph shows how gradual the change in annuity payouts is compared to interest rates. A 4% difference in interest rates from 2% to 6% - a three times increase - produces only half that amount of change in payout, just over 2.3% from 6.5% to 8.8%.<br />
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Mortality credits, the return from people dying younger to those dying older, strongly influences the gentle slope of the graph points. As we noted in our previous post, interest return drives only part of the annuity income. Mortality credits are another large chunk. The 1.7% difference in payout rate between ages 65 and 75 also shows the powerful effect of mortality credits. It is much more worthwhile to look at getting older as a source of higher income than rising interest rates. And unlike interest rates, we definitely know which direction we are going in terms of age!<br />
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<b>Continued rising life expectancy means the slope will be more gradual than the historical graph</b><br />
The above graph over-states the steepness of the slope of changes to the annuity payout rate in response to interest rates. The reason is that life expectancy has continued to increase in the 15 years since 2000. The extra three or so years gained in longevity since 2000 means the insurance companies have to pay out for longer and so they offer lower monthly income. In addition, the insurance companies know about the actuarial projections which forecast a continuation of rising life expectancy. Since the oldest data and the higher interest rates are at the right end of the graph, that's where the greatest change in life expectancy has occurred and the payouts would be most reduced. The slope of the line is consequently reduced.<br />
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<b>The relative attractiveness of annuities is greater at low interest rates than high interest rates</b><br />
The higher are interest rates, the greater is the interest rate component of the annuity return versus the mortality credit component. The following chart shows the compression of the gap between annuity payout rates and interest rates / GOC 10 year bond rates the higher the GOC 10 rate.<br />
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At the highest interest rates, other safe investments like the GOC 10s are much more competitive with annuity payouts. The payout rate for a 65 year old man when GOC 10 interest rates were 6% was only 8.8%, a gap of only 2.8% but the gap today at current 1.77% GOC 10 interest rates is 4.4%.<br />
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<b>The investment funds that will be used to buy the annuity may be reduced by rising interest rates</b><br />
If you as the investor waiting to buy an annuity hold a diversified portfolio of stocks and bonds, consider the reaction of those holdings to a rise in interest rates. For bonds, the answer is straightforward. They will fall in value. <a href="http://www.investopedia.com/ask/answers/04/031904.asp">Investopedia explains how this works</a>. The Duration metric indicates the sensitivity of a bond or bond fund to interest rate changes - e.g. as of 6 July 2015, the broad market Canadian bond ETF from BlackRock, the <a href="https://www.blackrock.com/ca/individual/en/products/239493/ishares-canadian-universe-bond-index-etf">iShares Canadian Universe Bond Index ETF</a> (TSX symbol: XBB) has a duration of 7.35 years. Thus, if interest rates were to rise 1%, XBB's value would fall about 7.35%. $100k of annuity money would drop to about $92,650. To recover that capital loss in XBB would require staying invested for the 7.35 year Duration (we described how this works <a href="http://howtoinvestonline.blogspot.co.uk/2013/07/what-happens-to-bond-etf-when-interest.html">in this post</a>). Meantime, for the annuity, that interest rate rise, judging roughly by the graph above, might bring about a 0.5 to 0.6% higher income payout. That's a much smaller gain than the XBB loss. In addition, XBB's return, aka yield, is only 1.65% net of fund expenses (1.98% portfolio yield minus 0.33% MER).<br />
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There are many shorter Duration, less interest-sensitive funds around, such as BlackRock's ETF with trading symbol XSB, but returns are even lower, such as the 0.8% net of expenses for XSB.<br />
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Stocks are usually also hurt by rising interest rates, especially in the short term, though in the long term, the businesses do adjust and stocks do ok. The price reaction of stocks and stock funds is much less predictable and more variable than for bonds, <a href="http://howtoinvestonline.blogspot.co.uk/2011/08/investing-risk-harmful-effect-of-rising.html">as we previously described</a>. The investor is left with considerable uncertainty and the annuity purchase becomes very dependent on market conditions for the best annuity purchase timing.<br />
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Perhaps the best alternative waiting time investment is cash, whose value is completely insensitive and oblivious to interest rate changes. A High Interest Savings Account today can earn up to 1.95% (though the deposit protection may be less than the best, which is CDIC's). HISAs at major institutions with <a href="http://www.cdic.ca/WhereInsured/Pages/default.aspx">CDIC deposit insurance coverage</a> currently earn about 1.0%. Nevertheless, while interest rates are steady, the opportunity cost metric <a href="http://howtoinvestonline.blogspot.co.uk/2015/06/buying-life-annuity-tips.html">Implied Longevity Yield, which we described last post</a>, handily beats that return.<br />
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<b>How long can you wait?</b></div>
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The final element to think about is how patient you can manage to be. In our <a href="http://howtoinvestonline.blogspot.co.uk/2010/11/which-bond-etfs-are-most-vulnerable-to.html">previous post on which bond ETFs are most susceptible to interest rate changes</a>, we wrote "<i>Interest rates will inevitably rise when conditions improve, the only question being how soon that will happen. Be ready!</i>". That was in 2010 - almost five years ago! It's a long time to hold one's breath. In the interim, the annuity payout rate for a female single life 10-year guaranteed RRIF-funded annuity fell from 6.7% to 5.7% as interest rates fell, instead of going up.</div>
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In short, waiting for rising interest rates likely is not worth it. Waiting while you get older is a better way to think about it. But if you need to draw income and you can cover you can cover basic needs with an annuity even at today's low rates, it's likely not worth waiting at all.</div>
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<span style="font-style: italic;">Disclaimer</span>: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.<br />
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Copyright 2015 Jean Lespérance All Rights ReservedCanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-6618326188994700732015-06-21T10:52:00.000-04:002015-07-06T09:00:08.802-04:00Buying a Life Annuity - TipsWhen buying a Life Annuity it is especially important to get the best deal since it is a one-time decision that lasts a lifetime. Here are some points to consider in making the purchase.<br />
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1) <b>Shop around, use a broker</b><br />
Make sure you cover all the life insurance companies that sell annuities. As the listing of current rates on the <a href="http://www.globeinvestor.com/servlet/Page/document/v5/data/rates?pageType=annuity">Globe and Mail annuity table</a> and our comparison table below show, the company offering the highest income usually differs according to your sex and age. The highest quoting company also change constantly. The best way to shop around is by using a good broker who deals with all the companies, such as <a href="http://www.lifeannuities.com/?home">LifeAnnuities.com</a> (Ivon Hughes) and <a href="http://www.annuitybrokers.ca/index.html">Canadian Annuity Broker Services</a> (John Beaton).<br />
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There is a wide range between the highest and the lowest income quotes - anywhere from 3% to almost 30%. The range widens the longer the deferral period between purchase and income start date e.g. hi-lo quotes in our table below on the eight and a half year deferral to age 71 for a 62 year old span more than 20% for all types of life annuities for both men and women.<br />
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2) <b>Mind which account you use to buy the annuity</b><br />
Men should buy with RRSP/RRIF funds first, and locked-in funds (LIRA/LIF/LRIF) funds second, for pension money regulated in all provinces except Quebec and Newfoundland & Labrador. Women should do the opposite and buy with locked-in funds first and RRSP/RRIF funds second.<br />
That will obtain the most annuity income for both men and women. The reason is legislated mandatory unisex rates, which came into effect during the 1980s and which apply to all locked in pension money but not to RRSP/RRRIF funds. Under unisex rates, insurance companies are not allowed to price annuities differently for men and women, which would entail paying higher amounts to men and lower amounts to women in recognition of the fact that men die sooner than women and thus do not collect their lifetime annuity for as long.<br />
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The result, as our table shows, is that unisex-rated income lies somewhere in between the single sex-priced income for men and women, anywhere from 3% to 8% above - for women - or below - for men - the single sex income level. Men lose and women gain with unisex. Quebec still requires, and Newfoundland & Labrador still allows, single-sex annuity pricing in locked-in accounts. <a href="https://www.standardlife.ca/pdf/ge10129.pdf">Standard Life has created a detailed table on pension legislation</a>, part of which covers sex discrimination provisions across Canadian jurisdictions.<br />
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Most online sources of current annuity quotes seem to publish only the single-sex prices so getting unisex quotes for locked-in money will require contacting a broker.<br />
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3) <b>Men - Unlock to get more income</b><br />
Men should take advantage of unlocking privileges to be able to use single-sex pricing. Locked-in pension savings may be moved to unlocked accounts, like an RRSP or RRIF under certain conditions, including becoming non-resident, financial hardship, small remaining balances and reduced life expectancy as TaxTips.ca explains on <i><a href="http://www.taxtips.ca/pensions/rpp/unlockingrpp.htm">Unlocking Your Locked-in Pension Accounts</a></i>. The most generous provisions are under Federal (see <a href="http://www.osfi-bsif.gc.ca/Eng/pp-rr/faq/Pages/ulk-dbc.aspx">FAQ here</a>), Alberta and Manitoba jurisdictions, which allow a one-time unlocking of up to 50% of account value upon moving the funds from a LIRA or LRSP into a LIF or LRIF. Once inside the RRSP/RRIF the funds can be used to buy higher income single-sex annuities instead of unisex annuities. The same amount of original locked-in money will buy higher income.<br />
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4) <b>Check out a short guarantee period</b><br />
Choosing a guaranteed payment period of 5 or 10 years may offer higher income than a no guarantee period. This is a bit of a surprise. It would normally be expected that when the deal is that the insurance company stops paying out an annuity immediately upon the annuitant's death instead of guaranteeing to continue paying (into the estate after death), it would offer higher income. But due to the segmentation of the annuity market and the choice of some providers to offer only products with or without the guarantee, it seems to happen regularly that the highest income comes with a guarantee. For example, in the upper left area of our table, the unisex rate offered by Equitable Life with a 10-year guarantee is $5796 per year while the best no-guarantee rate is from Desjardins at $5760. The Equitable annuity would ensure getting back at least $57,960 of the $100k premium. It's an easy choice to buy from Equitable instead of Desjardins. Checking both guarantee and no-guarantee options at the time of purchase is worth it.<br />
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5) <b>Check out the return of premium option </b><br />
Choosing the option that offers return of premium (to your estate) when you die before the income start date may offer higher income than no return of premium. Again, it is a quirk of the market segmentation but in many of the quotes in our table as highlighted in red text and numbers, the income from return of premium insurers was higher than the no-return offers. This is especially valuable for the long-deferred-annuities, where the income may start eight years or more down the road. Dying before the income start date without receiving a penny for the large premium handed over would be galling. Of course, the insurance company does not lose out by making the guarantee since it only hands back the premium whose value diminishes from inflation and in the meantime it is able to use the capital to invest and gain returns for itself.<br />
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6) <b>Index income to offset inflation?</b><br />
Indexation of income to try to match inflation seems to be of dubious value. Our first table above shows much lower income compared to non-indexed annuities from annuities indexed to rise by 2% a year to match the current best guess rate of many economists, which also happens to be the official target rate of the Bank of Canada.<br />
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To judge whether this is worth it, we calculated how long it would take for the indexed income to reach the same level as the non-indexed annuity. As our second table shows, it takes eleven years, till age 73, before the 2% indexed annuity reaches equality for a man buying today aged 62. With rising age of annuity purchase the levelling off happens sooner and sooner but then you have many fewer years of life expectancy to worry about inflation eating away at purchasing power. We believe <a href="http://retailinvestor.org/annuity.html#inflation">RetailInvestor.org's method for offsetting actual inflation</a>, in which you set aside and reinvest a portion of the annuity income each year, offers a better solution. Instead of a one-time forever guess at inflation, you reinvest depending on actual inflation.<br />
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7) <b>Annuitize now, or wait?</b><br />
It's almost surely not worth waiting to annuitize if you have retired and need to start taking income. Whether to wait or not is a trade-off between the investment return from a portfolio less withdrawals and the certain, steady income from an annuity. Annuity expert <a href="http://milevsky.info.yorku.ca/">Professor Moshe Milevsky</a> of York University has developed a formula to guide the choice. The formula is called Implied Longevity Yield (ILY). It measures what rate of return a portfolio or other investment would have to achieve to beat the annuity while withdrawing the same income as the annuity. ILY takes into account the fact that deferring purchase means you will be able to pay less later for the same annuity income because your remaining life expectancy will be lower. ILY also assumes interest rates remain the same as today. Below is a table of ILY calculations from CANNEX.com as of June 2015.<br />
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Even at relatively young ages in the 60s, it is hard to beat an annuity. Certainly, investments with the same rock solid triple A equivalent rating, like term deposits or Government of Canada bonds, can provide nowhere near the same return. Even broadly diversified portfolios of stocks and bonds, which can and do fluctuate and have no guarantee of producing a return, would be hard pressed to beat the ILYs in the above table. These days especially, <a href="http://howtoinvestonline.blogspot.co.uk/2014/06/long-term-stock-and-bond-return.html">expected future portfolio returns are likely to be muted</a> compared to historical actuals i.e. not likely to exceed the ILYs of age 70+. We must remember that if interest rates were to move up and more attractive returns from investments were to be available, the annuity payouts would rise too and thus the ILY as well. Back in June 2000 interest rates were much higher - Government of Canada 10-Year bonds yielded 5.9%, but the ILY for a 65 year-old male at 6.9% and a 65 year old female at 6.4% both beat that per Milevsky's <a href="http://www.ifid.ca/payout00.htm">IFID research centre table</a>.<br />
<br />
The underlying reason why life annuities will always be very competitive with any type of portfolio investments is that annuities have the additional source of return from the forefeited funds of those annuitants who die sooner than expected, the so-called mortality credits. The following chart from Sun Life in the document <i><a href="https://www.sunnet.sunlife.com/files/advisor/english/PDF/810-3865.pdf">Payout Annuity - Overcoming Objections</a></i>. shows how large the mortality credits, which it calls insurance credits, become the older you get.<br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKQGo065CyujFH6g0WwH-WX3kSF3DGpP4MvhOIDXLZSihTKM9hL_xqj5Tgd5vKAVUKm_yiisGgsqKA7G9y-UjgB26hs0SxgDE1vN8Di12UO2XTpefsgBwKj6LJQRmKN6Utn2RUn32onIYU/s1600/Mortality-credits-Sun+Life-chart.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="161" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKQGo065CyujFH6g0WwH-WX3kSF3DGpP4MvhOIDXLZSihTKM9hL_xqj5Tgd5vKAVUKm_yiisGgsqKA7G9y-UjgB26hs0SxgDE1vN8Di12UO2XTpefsgBwKj6LJQRmKN6Utn2RUn32onIYU/s320/Mortality-credits-Sun+Life-chart.jpg" width="320" /></a></div>
<br />
<br />
Unfortunately, the latest ILY figures are available only from CANNEX and thus by contacting an insurance broker. RetailInvestor.org shows <a href="http://retailinvestor.org/annuity.html#delay">on this webpage</a> how to do a simplified "good enough" approximation.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.<br />
<br />
Copyright 2015 Jean Lespérance All Rights ReservedCanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-70352518108205043022015-06-10T15:40:00.001-04:002015-06-20T12:40:29.641-04:00Retirement Investing - How an Annuity Complements an Equity-Fixed Income PortfolioRetired investors face a challenging set of financial and investing risks. Several are not faced by those in the accumulation stage of life and are unique to the retirement withdrawal phase. Traditional portfolios of equities and fixed income, such as systematic withdrawal plans like the 4% rule (see posts <a href="http://howtoinvestonline.blogspot.co.uk/2009/11/sustainable-portfolio-withdrawal-rate-4.html">here</a> and <a href="http://howtoinvestonline.blogspot.co.uk/2014/09/refining-4-retirement-withdrawal-rate.html">here</a>), can succeed in the face of such challenges. But they can do so more easily if combined with guaranteed lifetime income sources such as defined benefit pension plans, Canada Pension Plan (& OAS) and lifetime annuities.<br />
<br />
<b>Complementary Roles - Systematic Withdrawal Plan vs Lifetime Guaranteed Income</b><br />
The table below shows how the two categories of income sources complement each other very well. Against most of the risks and the beneficial features, where one falls short with a NO, the other copes well with a YES. Only for inflation and tax minimization does neither type provide an ideal mechanism.<br />
<div style="text-align: center;">
<i>(click on image to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQ_4vXt0ekKcaZoCdOr-p7BcnrElehcOLw56yg-O0WHUuOzXikWVz9_Qat2RSA36Me-9LrZu1c48WiB3T5LzLOhr8Pznc6QydeN-3wtWPxjC_d5W0mVghwRWgLU0I9xM0qp_-PE0nuxLFU/s1600/retire-annuity-tbl.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="253" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQ_4vXt0ekKcaZoCdOr-p7BcnrElehcOLw56yg-O0WHUuOzXikWVz9_Qat2RSA36Me-9LrZu1c48WiB3T5LzLOhr8Pznc6QydeN-3wtWPxjC_d5W0mVghwRWgLU0I9xM0qp_-PE0nuxLFU/s1600/retire-annuity-tbl.png" width="320" /></a></div>
<br />
<br />
<b>Annuities fill a gap for retirees without a DB pension</b><br />
Most retirees will get CPP and OAS but they max out at $12,780 and $6,765 (2015 figures) respectively, which probably is not enough to meet basic living expenses. Since fewer and fewer Canadians have defined benefit pensions and are saving in RRSPs, TFSAs or defined contribution retirement savings plans, all of which consist of equity-fixed income portfolios, the annuity can fill a significant gap.<br />
<br />
One of the worst dangers of retirement, when money is being taken out of a investment portfolio for living expenses, is that withdrawals may be too high and the portfolio expires before the retiree, leaving the unfortunate person high and dry, usually at an advanced age when going back to work to make a shortfall is no longer possible.<br />
<br />
An annuity is an investment income insurance product in which an investor hands over a lump sum to an insurance company and then receives a fixed, guaranteed, regular (monthly, quarterly, semi-annually or annually) income for life. In the plain vanilla version, the income continues only as long as the person lives (or the second of a couple to die, in the case of a joint annuity) and there is no return of principal at death.<br />
<br />
Since many people balk at the idea of losing the whole principal if they live only a short time after the annuity starts paying - imagine handing over $100,000 of your lifetime savings to the insurance company and living only long enough to receive the first monthly cheque of $530 or so (per the <a href="http://www.globeinvestor.com/servlet/Page/document/v5/data/rates?pageType=annuity&guarantee_term=0&survey_type=SL&sex=M&fund_type=R&province_of_residence=ON">Globe and Mail's table</a> for single life 65 year old male as of June 10, 2015). Being dead you wouldn't be upset, but your heirs might be! The annuity purchase is irreversible. Consequently, insurance companies offer options to guarantee payments to the estate or a beneficiary for 5, 10 or even 20 years. Such guarantee options do come with the downside of lower payments. <br />
<br />
Contrary to what some may imagine, the insurance company does not keep all the money of investors who buy a plain no-payout-guarantee annuity and then die early. The insurance company does keep some of the money of those who die early for its costs and profit margins, but this is kept in check by the fact that the annuity market is competitive amongst insurance companies. Given the guarantee of income provided by <a href="http://www.assuris.ca/Client/Assuris/Assuris_LP4W_LND_WebStation.nsf/page/Individual+Payout+Annuity">Assuris</a> in Canada, most investors can safely opt for the best quote aka highest income so the companies are unable to profiteer. Instead, the bonus money, called mortality or insurance credits, goes to other investors who live a long time. The insurance company is able to calculate very accurately the average remaining lifespan for a population of retirees (and even that of retirees who buy annuities, which happens to be longer than retirees as a whole), which enable it to price out a payment level for everyone based on the average and to offer it for as long as you might happen to live. Live long <a href="http://www.ctvnews.ca/canada/rip-merle-barwis-canada-s-oldest-person-dies-at-113-1.2123896">like Merle Barwis</a>, you win!<br />
<br />
<b>Research shows the annuity - SWP combination enhances retirement success > more income and less chance of running out</b><br />
Economists are constantly puzzled by the relatively low rate of uptake of annuities because they are beneficial to retiree investors. Researcher Wade Pfau, Professor of Retirement Income at the American College of Financial Services on <a href="http://retirementresearcher.com/reading/">his blog</a> has posted papers detailing the benefits of <a href="http://www.advisorperspectives.com/newsletters13/Breaking_Free_from_the_Safe_Withdrawal_Rate_Paradigm.php">immediate</a> and <a href="http://www.advisorperspectives.com/newsletters13/Why_Retirees_Should_Choose_DIAs_over_SPIAs.php">deferred</a> annuities. Professor Mark Warshawsky of George Mason University compared life annuities head-to-head with the classic 4% portfolio withdrawal rule using US historical data in <i><a href="http://mercatus.org/sites/default/files/Warshawsky-Annuities-Rules.pdf">Government Policy on Distribution Methods for Assets in Individual Accounts for Retirees</a></i> and found that annuities generally performed somewhat better for providing lifetime income during retirement. Canadian Associate Professor of Finance at York University Moshe Milevsky explains annuities in detail in the free 150 page <a href="http://www.cfapubs.org/doi/pdf/10.2470/rf.v2013.n1.1"><i>Life Annuities: An Optimal Product for Retirement Income</i></a>. He and co-author Alexandra Macqueen put forth a popularized exhortation to include annuities within a retirement income mix in the book <a href="http://eu.wiley.com/WileyCDA/WileyTitle/productCd-0470680997.html"><i>Pensionize Your Nest Egg</i></a>. David Blanchett, Head of Retirement Research at Morningstar in his <a href="http://corporate.morningstar.com/US/documents/ResearchPapers/Allocating-to-DIAs-in-a-DC-Plan.pdf"><i>Allocating to a Deferred Income Annuity in a Defined Contribution Plan</i></a> even cites a source that found that investors with annuitized incomes were happiest! If money can't buy happiness, can it buy an annuity which can buy happiness?<br />
<br />
<b>Where to buy</b>: Annuities are only available from insurance companies, so interested investors need to contact either a life insurance agent, who represents only one company, or better, a licensed broker who can source quotes from the whole market and get the best currently-available deal, which varies constantly amongst the various insurance companies. Specialized annuity brokers in Canada with an online presence are sparse - two we found (whose licensing claims check out as of June 2015) are <a href="http://www.lifeannuities.com/?home">LifeAnnuities.com</a> (Ivon Hughes) and <a href="http://www.annuitybrokers.ca/index.html">Canadian Annuity Broker Services</a> (John Beaton).<br />
<br />
Buying an annuity involves handing over a big chunk of money, so check that the agent or broker is licensed in your province:<br />
- <a href="http://www5.fsco.gov.on.ca/alias2a/agents.aspx">Financial Services Commission of Ontario</a><br />
- <a href="http://www.lautorite.qc.ca/en/registre-entreprise-individu-en-conso.html">Autorité des marchés financiers</a> (Québec)<br />
- <a href="http://public.abcouncil.ab.ca/agentsearch/agentlookupfrm.jsp">Alberta Insurance Council</a><br />
- <a href="https://w5p1.gov.ns.ca/insurance/agent-search.jsp">Nova Scotia Superintendent of Insurance</a><br />
- <a href="https://www.insurancecouncilofbc.com/PublicWeb/SearchLicensee.aspx">Insurance Council of British Columbia</a><br />
- <a href="https://www.skcouncil.sk.ca/search/searchind.asp">Insurance Councils of Saskatchewan</a><br />
- <a href="http://www.icm.mb.ca/agent-agency-search">Insurance Council of Manitoba</a><br />
- <a href="http://fcnb.ca/search-the-insurance-licence-database.html">Financial and Consumer Services Commission of New Brunswick</a><br />
- <a href="http://www.gov.pe.ca/insurance_agent_search/index.php">Government of Prince Edward Island</a><br />
- <a href="http://www.servicenl.gov.nl.ca/insurance/licenses_valid.html">Newfoundland and Labrador</a><br />
- <a href="http://www.gov.nu.ca/finance/information/insurance-licences">Government of Nunavut</a><br />
- <a href="http://www.community.gov.yk.ca/consumer/">Yukon Government</a><br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.<br />
<br />
Copyright 2015 Jean Lespérance All Rights Reserved CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com1tag:blogger.com,1999:blog-4751610667110065763.post-61074325035781293582015-02-02T10:09:00.000-05:002015-02-02T10:58:40.104-05:00Best and Worst Canadian CEO Pay from the Investor ViewpointThe recently released <a href="https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2014/01/All_in_a_Days_Work_CEO_%20Pay.pdf"><i>All in a Day's Work? - CEO Pay in Canada</i></a> by Hugh Mackenzie questioned whether CEOs should be paid so much, especially in relation to the pay of an average worker. Others like <a href="http://www.iedm.org/52195-mei-why-ceos-deserve-the-paychecks-they-re-getting-vincent-geloso">Vincent Geloso of the Montreal Economic Institute came to the defense of high CEO pay</a>, saying that CEOs live an ever-shortening and very risky existence. In between the blanket condemnation, or approval, sits the investor, merely trying to figure out whether individual CEOs are earning their pay in order to pick good investments. As might be expected, some CEOs and companies (since the Board of Directors are mandated to control CEO pay) have been plain terrible, while others are shining examples of superb performance for very reasonable pay. Let's see who sits where.<br />
<br />
<b>The Globe and Mail CEO Pay Tool</b><br />
When we did this last year, naming the <a href="http://howtoinvestonline.blogspot.co.uk/2014/01/canadian-ceo-pay-update-who-earned.html">best performers</a> and the <a href="http://howtoinvestonline.blogspot.co.uk/2014/01/top-100-canadian-ceos-update-who-is.html">most over-paid</a>, we had to do our own data collection. Fortunately for us and all investors, in June 2014, the Globe and Mail posted the excellent (and free!) <span style="background-color: lime;"><b><a href="http://www.theglobeandmail.com/report-on-business/careers/management/executive-compensation/ceo-pay-for-performance/article18912840/?ord=1"><i>Interactive Pay-for-Performance</i></a></b></span> graphic display tool created by Global Governance Advisors. It shows CEO pay for the 100 largest companies in Canada relative to other companies and to a series of seven key measures useful to an investor, starting with total shareholder return. It can also break down the various pieces of CEO compensation and show results of each company's Say-on-Pay shareholder voting. The screenshot below shows the possible selections and part of the output display.<br />
<div style="text-align: center;">
<i>(click to enlarge image)</i> </div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIJ6tAIwxbe13KKG_ZmbV_zIUm4_muOy8Y28oqi2w96VZ-aw4vweUUmPq2UqpEasei4A-jkSRAyzuJ3UQQvPQN0HT-pIl1NL-5uk2nwhzi1k76Mok3Mwxx14NOR_wvgL4CDlTGCNveCS1k/s1600/CEP-tool.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIJ6tAIwxbe13KKG_ZmbV_zIUm4_muOy8Y28oqi2w96VZ-aw4vweUUmPq2UqpEasei4A-jkSRAyzuJ3UQQvPQN0HT-pIl1NL-5uk2nwhzi1k76Mok3Mwxx14NOR_wvgL4CDlTGCNveCS1k/s1600/CEP-tool.png" height="298" width="320" /></a></div>
<br />
<br />
We've played around with the tool to find the most consistently good or bad CEOs / companies across industries, across time from 2010 to 2014 (year-by-year vs averages) and across the various performance metrics. Our logic is that if a company always looks good, no matter the time frame, industry or market cap group comparison, or the measure of performance, that company's CEO pay must be well-aligned to investor interests, and a positive indicator that the company is well-managed. Clicking on the various options and watching the CEO dots move around gives an impression of evolution and sensitivity of results. It's fun to do!<br />
<br />
The best performers are those furthest away from the diagonal line that shows where company performance and CEO pay are in perfect balance. We are looking for those in the bottom right quadrant where company performance is above average while CEO pay is below average - the best investor bang per CEO buck. The worst performers are those in the top left quadrant where high CEO pay is matched with below average performance - when investors are being taken for a ride by the CEO. In general, below the line is favourable for the investor, above it not so.<br />
<br />
<b><span style="color: #38761d;">Best CEO Performers - "Great performance, modest (relative to other CEOs) pay"</span></b><br />
It's hard to choose between the first three below, they have all been consistently superb:<br />
<ul>
<li><b><span style="color: #38761d;">Constellation Software</span></b> (TSX: CSU) - CEO Mark Leonard 2013 pay $2.7 million. The company is currently 62nd largest by market cap in the TSX Composite yet the CEO's pay was not even close to making it into the top 100 list of Mackenzie, where 100th place garnered $3.9 million. Screenshots below are taken from the tool.</li>
</ul>
<div style="text-align: center;">
<i>(click on image to enlarge)</i></div>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4KftEB6sPNjfdjO9lLTb8MfVg0TZG1sT41iQ3eMlbs21smphddJzghOTS-gUUAlrBhUes6JsI5h6lAsQNaW_nD7k1FBZzJSbMfrKlymaYoF71lr-m7LQ8QxVaRYTBev_y55t9nOSgA8x8/s1600/CSU2.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4KftEB6sPNjfdjO9lLTb8MfVg0TZG1sT41iQ3eMlbs21smphddJzghOTS-gUUAlrBhUes6JsI5h6lAsQNaW_nD7k1FBZzJSbMfrKlymaYoF71lr-m7LQ8QxVaRYTBev_y55t9nOSgA8x8/s1600/CSU2.png" height="320" width="308" /></a><br />
<ul>
<li>The <span style="color: #38761d;"><b>Jean Coutu Group Inc</b></span> (TSX: PJC.A) - CEO Francois Coutu 2013 pay $2.0 million. It is a smaller company at $2.1 billion market cap but look at the outstanding relative performance metrics below, which makes a clear leader amongst consumer staples companies.</li>
</ul>
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRIExUoNef1JKHktFR5NybTaHNCTrnR_Ti-o540xxSSMulRI_xV82_2x7F6lbqbP39zhGMRkQ6sZeaU9SbWWLytHopJ-O-wn8Tij4kyxfNdcZeODB2gbzOVY6GOCOLnkLj1EP2bEbNdPyN/s1600/PJC2.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRIExUoNef1JKHktFR5NybTaHNCTrnR_Ti-o540xxSSMulRI_xV82_2x7F6lbqbP39zhGMRkQ6sZeaU9SbWWLytHopJ-O-wn8Tij4kyxfNdcZeODB2gbzOVY6GOCOLnkLj1EP2bEbNdPyN/s1600/PJC2.png" height="320" width="307" /></a><br />
<ul>
<li><span style="color: #38761d;"><b>Canfor Corp</b></span> (TSX: CFP) - CEO Don Kayne 2013 pay $1.4 million, which is the other company in the extreme bottom right corner.</li>
</ul>
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjhMd49uOOZtqmofj96ExEWOVMIdlThgvNhoGONKYRfLaFfxmMBgek4UiSpkX6NozMeeP3TWEkDt6v_tjHjs_aZ3yrIgsW5tbhhkgsmJjjPM1azZGMRck9C09FYlWkQvVFQZ5_izoZBIaQ/s1600/CFP2.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjhMd49uOOZtqmofj96ExEWOVMIdlThgvNhoGONKYRfLaFfxmMBgek4UiSpkX6NozMeeP3TWEkDt6v_tjHjs_aZ3yrIgsW5tbhhkgsmJjjPM1azZGMRck9C09FYlWkQvVFQZ5_izoZBIaQ/s1600/CFP2.png" height="320" width="315" /></a><br />
<br />
Using the same approach, here are fifteen other companies a good distance from the diagonal in the bottom right quadrant with a very investor-friendly link between CEO pay and company performance:<br />
<br />
Consumer Discretionary <br />
<ul>
<li><span style="color: #38761d;"><b>Dollarama</b></span> (TSX: DOL) - CEO Larry Rossy 2013 pay $3.7 million</li>
</ul>
Consumer Staples<br />
<ul>
<li><span style="color: #38761d;"><b>Alimentation Couche-Tard</b></span> (TSX: ATD.B) CEO Alain Bouchard 2013 pay $7.2 million</li>
<li><span style="color: #38761d;"><b>Saputo Inc</b></span> (TSX: SAP) CEO Lino Saputo Jr 2013 pay $3.3 million</li>
<li><span style="color: #38761d;"><b>Metro Inc</b></span> (TSX: MRU) CEO Eric R. La Flèche 2013 pay $2.7 million</li>
</ul>
Energy<br />
<ul>
<li><span style="color: #38761d;"><b>Vermilion Energy</b></span> (TSX: VET) CEO Lorenzo Donadeo 2013 pay $3.6 million</li>
<li><span style="color: #38761d;"><b>Keyera Corp</b></span> (TSX: KEY) CEO James Bertram 2013 pay $2.4 million</li>
<li><b><span style="color: #38761d;">Peyto Exploration</span></b> (TSX: PEY) CEO Darren Gee 2013 pay $2.5 million</li>
<li><span style="color: #38761d;"><b>Tourmaline Oil Corp.</b></span> (TSX: TOU) CEO Michael Rose 2013 pay $2.5 million</li>
</ul>
Financials<br />
<ul>
<li><span style="color: #38761d;"><b>CI Financial</b></span> (TSX: CIX) CEO Stephen MacPhail 2013 pay $4.6 million</li>
<li><span style="color: #38761d;"><b>Intact Financial</b></span> (TSX: IFC) CEO Charles Brindamour 2013 pay $4.2 million</li>
<li><span style="color: #38761d;"><b>First Capital Realty</b></span> (TSX: FCR) CEO Dori Segal $2.0 million</li>
</ul>
Industrials<br />
<ul>
<li><span style="color: #38761d;"><b>Westjet Airlines Ltd</b></span> (TSX: WJA) CEO Gregg Saretsky 2013 pay $3.1 million</li>
<li><span style="color: #38761d;"><b>Finning International Inc.</b></span> (TSX: FTT) CEO Scott Thompson 2013 pay $4.6 million </li>
</ul>
Materials<br />
<ul>
<li><b><span style="color: #38761d;">West Fraser Timber Co. Ltd.</span></b> (TSX: WFT) CEO Ted Seraphim 2013 pay $2.4 million</li>
</ul>
Utilities<br />
<ul>
<li><span style="color: #38761d;"><b>ATCO Ltd.</b></span> (TSX: ACO.X) CEO Nancy Southern 2013 pay $1.5 million</li>
</ul>
<b><span style="color: red;">Worst CEO Performers - "High pay, lousy performance"</span></b><br />
This set of companies look more like the CEOs are getting rich at the expense of investors.<br />
<br />
The top culprits here are:<br />
<ul>
<li><span style="color: red;">Talisman Energy</span> (TSX: TLM) CEO Harold Kvisle 2013 pay $9.5 million. The accounting metrics are as bad as they get and <span style="color: red;">shareholder return has been a negative 9.6% per year</span> over the past five years. There was no sign of improvement from 2010 to 2014 either.</li>
</ul>
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkB7ZB-TCkPD2pHMwX1Uk5bdCOWpH83InmPzwOGI1kT3LKBN8hbRkPJvEk1djcIZjWIQ8jS75hNvo7T3rKuv0IsLZ06EkOzw8CE0Du02FhgadoAytGW6WuoW12ROEa1OrFaqfIHTDmXMYz/s1600/TLM3.png" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkB7ZB-TCkPD2pHMwX1Uk5bdCOWpH83InmPzwOGI1kT3LKBN8hbRkPJvEk1djcIZjWIQ8jS75hNvo7T3rKuv0IsLZ06EkOzw8CE0Du02FhgadoAytGW6WuoW12ROEa1OrFaqfIHTDmXMYz/s1600/TLM3.png" height="320" width="279" /></a><br />
<ul>
<li><span style="color: red;">Onex Corporation</span> (TSX: OCX) CEO Gerald Schwartz) 2013 pay <span style="color: red;"><b>$87.9 million</b></span>, the most by far of any Canadian CEO (Mackenzie's $13.3 million figure appears to be for 2012). It's astounding pay yet results are insipid. </li>
<li><span style="color: red;">EnCana</span> (TSX: ECA) CEO Doug Suttles 2013 pay $12.8 million. The shareholder return is awful at -9.4% per year for the last five years, as are the accounting metrics. Suttles was named as CEO in mid 2013 to clean up the previous mess, so the pay figure is a handsome welcome package. ECA is the green dot above Talisman in the previous chart. It is even
further away from the diagonal in the 4-year average view we have used.But in 2013, when Suttles came on board, the dot moves a lot closer to the line, which is improvement. Nevertheless, should the company / shareholders pay in advance for performance?</li>
</ul>
<span style="color: red;"><b>Gold mining CEOs</b></span> - The price of gold may rise and it may fall but the CEOs of the gold miners are making buckets of money no matter what happens to the company or shareholders. Click on the Materials drop down selection and see the top left quadrant is filled with gold stocks and CEOs:<br />
<ul>
<li><span style="color: red;">Agnico-Eagle Mines</span> (TSX: AEM) CEO Sean Boyd 2013 pay $9.3 million</li>
<li><span style="color: red;">Yamana Gold Inc.</span> (TSX: YRI) CEO Peter Marrone 2013 pay $9.9 million</li>
<li><span style="color: red;">Goldcorp</span> (TSX: G) CEO Charles Jeannes 2013 pay $9.7 million</li>
<li><span style="color: red;">Barrick Gold</span> (TSX: ABX) Jamie Sokalsky 2013 pay $7.5 million</li>
<li><span style="color: red;">Eldorado Gold</span> (TSX: ELD) Paul Wright 2013 pay $7.4 million</li>
<li><span style="color: red;">Kinross Gold</span> (TSX: K) CEO Paul Rollinson 2013 pay $8.2 million</li>
</ul>
Other "heads I win, tails you lose" CEOs ....<br />
<br />
Materials<br />
<ul>
<li><span style="color: red;">Teck Resources</span> (TSX: TCK.B) CEO Donald Lindsay 2013 pay $9.0 million</li>
</ul>
Consumer Discretionary<br />
<ul>
<li><span style="color: red;">Thomson Reuters Corp</span> (TSX: TRI) CEO James Smith 2013 pay $8.4 million. What's puzzling is that with well below average performance, this decidedly above average CEO's pay garnered a 98% approval rating from shareholders in a Say-on-Pay vote.</li>
</ul>
Healthcare<br />
<ul>
<li><span style="color: red;">Valeant Pharmaceuticals</span> (TSX: VRX) CEO Michael Pearson 2013 pay $6.7 million. The metrics are very inconsistent - shareholder return has been great, but accounting metrics like Return on Equity and Earnings per Share growth very poor. Are stock speculators over-enthusiastic?</li>
</ul>
This best vs worst list can be a help to company and stock analysis in determining which are well or poorly controlled by the Board of Directors. We have only discussed what we think are the best and the worst. The rest are somewhere in between. Being close to the median diagonal means a company CEO is being paid fairly, relative to peer performance.<br />
<br />
Whether CEOs as a whole on average are too-highly paid is another matter (e.g. see the thought-provoking <a href="https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBoe1yul9uERnfCmQoglFl9k5qwJSfHx8w%2fWCnFLmEb2MC9GoFnZVlslR5NzCRY1ajgn503icBv67VQg%2fNVUMWsYvi3A2%2fL%2bS28A7Pthjp7LmOfLYQfHMJc"><i>The World's Dumbest Idea</i></a> paper by author James Montier, who argues long-term excessive CEO pay rises worldwide, not just in Canada, are a manifestation of the shareholder value maximization philosophy that serves investors and the economy poorly) and for consideration another day.<br />
<br />
<i>Disclosure</i>: This blogger directly owns shares of TCK.B, IFC, MRU and FCR.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-89843056722198614762015-01-23T19:42:00.000-05:002015-01-23T19:42:50.157-05:00Taxes 2015: Links & Resources for Canadians Filing 2014 Income Tax ReturnTax season is starting. The Canada Revenue Agency will soon open up the <a href="http://www.netfile.gc.ca/bt-eng.html">NETFILE</a>
online electronic tax filing service to receive returns electronically.
It's time for Canadian
investors to start getting ready for filing their 2014 income tax
return. There can be a multitude of slips and receipts to assemble, not
to mention older records to dig up and preliminary calculations to do in
order to be ready in time for filing on or before the deadline of April
30. We therefore present a collection of resources that should cover
the tax information and tools needs of Canadian online investors. <br />
<br />
<span style="font-weight: bold;">Tax-specific Websites</span><br />
<ul>
<li><span style="color: red;"><a href="http://www.cra-arc.gc.ca/tx/ndvdls/menu-eng.html">Canada Revenue Agency</a> - the official source</span>, with forms, bulletins, guides, helpful videos like a <a href="http://www.cra-arc.gc.ca/gncy/t1gtrdy/menu-eng.html">primer</a><a href="http://www.cra-arc.gc.ca/gncy/t1gtrdy/menu-eng.html#flngddts"> on the filing process</a>, <a href="http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ll-dts/frms-eng.html">due dates</a>, <a href="http://www.cra-arc.gc.ca/gncy/txnf/menu-eng.html">info on tax credits and deductions</a> and <a href="http://www.cra-arc.gc.ca/nwsrm/txtps/2014/tt141208-eng.html">what is new in 2014</a>, to keep in mind when preparing a return, instructions on <a href="http://www.netfile.gc.ca/menu-eng.html">NETFILE</a> to submit a return electronically with list of approved software; good search tools, FAQs and topic directories </li>
<li><a href="http://taxtips.ca/">Taxtips.ca</a> - rules, tips, tax rates, federal/provincial budgets, accounts (RRSP, RRIF, TFSA etc), glossary, calculators, tax professionals</li>
</ul>
<br />
<b>Key Dates</b> - see complete <a href="http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ll-dts/menu-eng.html">CRA list of dates for individuals</a><br />
<br />
<table border="0" cellspacing="0" cols="2" frame="VOID" rules="NONE">
<colgroup><col width="223"></col><col width="565"></col></colgroup>
<tbody>
<tr>
<td align="CENTER" height="40" style="border-top: 1px solid #000000;" valign="TOP" width="223"><span style="font-family: Bitstream Charter;">January - mid</span></td>
<td align="LEFT" style="border-top: 1px solid #000000;" valign="TOP" width="565"><span style="font-family: Bitstream Charter;">CRA <a href="http://www.cra-arc.gc.ca/formspubs/t1gnrl/menu-eng.html">pdf tax forms</a> for all tax years 1985-2014 available to download and print</span></td>
</tr>
<tr>
<td align="CENTER" height="40" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">February - 9</span></td>
<td align="LEFT" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">CRA online filing service NETFILE starts accepting 2014 tax returns; last day is January 16, 2016</span></td>
</tr>
<tr>
<td align="CENTER" height="21" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">March - 2</span></td>
<td align="LEFT" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RRSP contribution – last day for making contribution applicable to 2014 tax year</span></td>
</tr>
<tr>
<td align="CENTER" height="21" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">April - 30</span></td>
<td align="LEFT" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">CRA – last day to file 2014 return and pay amounts owing to avoid penalties</span></td>
</tr>
<tr>
<td align="CENTER" height="40" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">June - 15</span></td>
<td align="LEFT" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">CRA – last day to file 2014 return for self-employed though amounts owing deadline is still April 30</span></td>
</tr>
<tr>
<td align="CENTER" height="21" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">December - 31</span></td>
<td align="LEFT" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RRSP – last day for making an RRSP contribution in the year you turn 71</span></td></tr>
<tr><td align="CENTER" height="19" valign="TOP"><br /></td>
<td align="LEFT" valign="TOP"><br /></td>
</tr>
<tr>
<td align="CENTER" height="21" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">continual</span></td>
<td align="LEFT" style="border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">CRA issues tax refunds, often within days, if return is filed electronically</span><br />
<span style="font-family: Bitstream Charter;">TFSA contributions anytime during year for 2015 or missed past years since 2009 </span></td>
</tr>
</tbody>
</table>
<br br="" />
<span class="blsp-spelling-error" id="SPELLING_ERROR_2">CRA</span>
dates are rigid; be late even by a day and you will miss out or
suffer penalties. On the other hand the tax documents below relating to
the 2014 tax year flood in progressively from mid-January to the end of
March. There can be weeks or more
of variation amongst companies that issue the slips and receipts.<br />
<br />
<b>Checklist and guide for interest, dividends and capital gains</b><br />
<br />
<table border="0" cellspacing="0" cols="3" frame="VOID" rules="NONE">
<colgroup><col width="223"></col><col width="223"></col><col width="565"></col></colgroup>
<tbody>
<tr>
<td align="LEFT" height="19" valign="TOP" width="223"><b><i><span style="font-family: Bitstream Charter;">If your investing involves … </span></i></b></td>
<td align="LEFT" valign="TOP" width="223"><b><i><span style="font-family: Bitstream Charter;">look for these documents … </span></i></b></td>
<td align="LEFT" valign="TOP" width="565"><b><i><span style="font-family: Bitstream Charter;">from these organisations .... </span></i></b></td>
</tr>
<tr>
<td align="LEFT" height="17" valign="TOP"><br /></td>
<td align="LEFT" valign="TOP"><br /></td>
<td align="LEFT" valign="TOP"><br /></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Borrowed money to invest</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Investment interest expense </span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">on statements from broker for margin, or bank for loan</span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Canada Savings Bond interest</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T5 slip (min $50 interest)</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">from broker if held in a broker account or from Bank of Canada if bought directly from BOC; </span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">GIC interest</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T5 slip (min $50 interest)</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">from broker if held in a broker account or from bank or trust company if bought directly</span></td>
</tr>
<tr>
<td align="LEFT" height="103" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T-Bill and Stripped Bond interest</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Annual summary of security transactions</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Interest = redemption/sale amount – purchase cost; for details see <a href="http://howtoinvestonline.blogspot.co.uk/2011/03/how-to-calculate-interest-and-capital.html">http://howtoinvestonline.blogspot.co.uk/2011/03/how-to-calculate-interest-and-capital.html</a><br /><br />T5 does NOT show it, even when over $50 e.g. <a href="http://www.rbcds.com/TaxReporting/tax-information-checklist.html">http://www.rbcds.com/TaxReporting/tax-information-checklist.html</a> </span></td>
</tr>
<tr>
<td align="LEFT" height="36" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Mutual fund distributions</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T3/T5 slips</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">mailed directly by Mutual fund companies, NOT brokers, even when fund is held in a brokerage account</span></td>
</tr>
<tr>
<td align="LEFT" height="36" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Mutual fund capital gains (sales)</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Annual summary of security transactions</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">from broker if held in a broker account </span><br />
<span style="font-family: Bitstream Charter;">or, </span><br />
<span style="font-family: Bitstream Charter;">from mutual fund company if held directly with the mutual fund company click on links to fund companies at <a href="http://www.fundlibrary.com/funds/companies.asp">FundLibrary.com</a> and then look for tax or Distribution info</span><br />
<br />
<span style="font-family: Bitstream Charter;">see <a href="http://howtoinvestonline.blogspot.co.uk/2009/01/etfs-and-mutual-funds-calculating.html">http://howtoinvestonline.blogspot.co.uk/2009/01/etfs-and-mutual-funds-calculating.html</a></span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Bond interest</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T5 slip (min $50 income)</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">broker</span></td>
</tr>
<tr>
<td align="LEFT" height="53" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Bond capital gain or loss (sale or maturity)</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Annual summary of security transactions</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">broker provides statement at purchase year and at maturity or sale; for how to calculate see <a href="http://howtoinvestonline.blogspot.co.uk/2011/03/how-to-calculate-interest-and-capital.html">http://howtoinvestonline.blogspot.co.uk/2011/03/how-to-calculate-interest-and-capital.html</a> </span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Stock dividends</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T5 slip (min $50 income)</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">broker</span></td>
</tr>
<tr>
<td align="LEFT" height="36" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Stock capital gain or loss (sale)</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Annual summary of security transactions</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">broker provides statement at purchase and at maturity or sale</span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">ETF and REIT distributions</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T3/T5 slips</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">broker </span></td>
</tr>
<tr>
<td align="LEFT" height="137" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">ETF, REIT, Income Trust, Closed End Fund capital gain or loss (sale)</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Annual summary of security transactions + own records</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">broker for trading transaction summary<br /><br />Investor must track own adjusted cost base – see <a href="http://howtoinvestonline.blogspot.com/2009/01/etfs-and-mutual-funds-calculating.html">http://howtoinvestonline.blogspot.com/2009/01/etfs-and-mutual-funds-calculating.html</a><br /><br />ETF providers publish tax breakdown of distributions on their website. ETF providers in Canada list and links at <a href="http://www.tmxmoney.com/en/sector_profiles/exchange_traded_funds/funds/funds.html">http://www.tmxmoney.com/en/sector_profiles/exchange_traded_funds/funds/funds.html</a></span><br />
<br />
<span style="font-family: Bitstream Charter;">CDS Innovations database of free downloadable spreadsheets by year at <a href="http://services.cds.ca/applications/taxforms/taxforms.nsf/Pages/-EN-LimitedPartnershipsandIncomeTrusts?Open">http://services.cds.ca/applications/taxforms/taxforms.nsf/Pages/-EN-LimitedPartnershipsandIncomeTrusts?Open</a> </span><br />
<br />
<span style="font-family: Bitstream Charter;">Income Trusts and Closed-End Funds - <a href="http://www.acbtracking.ca/"><span class="blsp-spelling-error" id="SPELLING_ERROR_6">ACB</span> Tracking Inc</a> has a pay service that simplifies the tracking </span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Split Corporation income</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T5</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">broker</span></td>
</tr>
</tbody>
</table>
<table cellpadding="2" cellspacing="0"><tbody>
<tr valign="top"><td height="18" style="border-bottom: 1px solid #000000; border-left: none; border-right: none; border-top: none; padding-bottom: 0.05cm; padding-left: 0cm; padding-right: 0cm; padding-top: 0cm;" width="145"><div align="left">
<span style="font-family: Bitstream Charter;">Limited
Partnerships</span></div>
</td><td style="border-bottom: 1px solid #000000; border-left: none; border-right: none; border-top: none; padding-bottom: 0.05cm; padding-left: 0cm; padding-right: 0cm; padding-top: 0cm;" width="144"><div align="left">
<span style="font-family: Bitstream Charter;">T5013</span></div>
</td><td style="border-bottom: 1px solid #000000; border-left: none; border-right: none; border-top: none; padding-bottom: 0.05cm; padding-left: 0cm; padding-right: 0cm; padding-top: 0cm;" width="342"><div align="left">
<span style="font-family: Bitstream Charter;">broker </span></div>
</td></tr>
</tbody></table>
<table cellpadding="2" cellspacing="0"><tbody>
<tr valign="top"><td height="19" style="border-bottom: 1px solid #000000; border-left: none; border-right: none; border-top: 1px solid #000000; padding: 0.05cm 0cm;" width="145"><div align="left">
<span style="font-family: Bitstream Charter;">Foreign income,
capital gains or assets</span></div>
</td><td style="border-bottom: 1px solid #000000; border-left: none; border-right: none; border-top: 1px solid #000000; padding: 0.05cm 0cm;" width="144"><div align="left">
<span style="font-family: Bitstream Charter;">Exchange rate to
Canadian dollar</span></div>
</td><td style="border-bottom: 1px solid #000000; border-left: none; border-right: none; border-top: 1px solid #000000; padding: 0.05cm 0cm;" width="342"><div align="left" style="margin-bottom: 0.5cm;">
<span style="font-family: Bitstream Charter;">Bank
of Canada average rate for 2014 e.g. USD to CAD multiply CAD by
1.1044664, or rate on the particular day, per
<a href="http://www.bankofcanada.ca/rates/exchange/">http://www.bankofcanada.ca/rates/exchange/</a>;</span></div>
<div align="left" style="margin-bottom: 0.5cm;">
<span style="font-family: Bitstream Charter;">for
T1135 Foreign Income Verification Statement, use rate on day of
purchase</span></div>
<div align="left">
<span style="font-family: Bitstream Charter;">for capital gains,
use rates on day of purchase and of sale</span></div>
</td></tr>
</tbody></table>
Note: Quebec residents receive a T5 and relevé3, or T3 plus relevé 16, or T5013 plus relevé 15.<br />
<br />
<b>Checklist and guide for account withdrawals, contributions</b><br />
<br />
<table border="0" cellspacing="0" cols="3" frame="VOID" rules="NONE">
<colgroup><col width="223"></col><col width="223"></col><col width="565"></col></colgroup>
<tbody>
<tr>
<td align="LEFT" height="19" valign="TOP" width="223"><b><i><span style="font-family: Bitstream Charter;">If your investing involves … </span></i></b></td>
<td align="LEFT" valign="TOP" width="223"><b><i><span style="font-family: Bitstream Charter;">look for these documents … </span></i></b></td>
<td align="LEFT" valign="TOP" width="565"><b><i><span style="font-family: Bitstream Charter;">from these organisations .... </span></i></b></td>
</tr>
<tr>
<td align="LEFT" height="17" valign="TOP"><b><i><span style="font-family: Bitstream Charter;"><br /></span></i></b></td>
<td align="LEFT" valign="TOP"><b><i><span style="font-family: Bitstream Charter;"><br /></span></i></b></td>
<td align="LEFT" valign="TOP"><b><i><span style="font-family: Bitstream Charter;"><br /></span></i></b></td>
</tr>
<tr>
<td align="LEFT" height="36" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RRSP contributions</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RSP Contribution Receipt</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RRSP account trustee, be it broker, bank, mutual fund company</span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RRSP contribution room</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">various</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Canada Revenue Agency - <a href="http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/lmts-eng.html">http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/lmts-eng.html</a> </span></td>
</tr>
<tr>
<td align="LEFT" height="36" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RRSP / RRIF / LIF / LRIF withdrawals</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T4 RRSP / RRIF slip</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RRSP/ RRIF account trustee</span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RRIF / LIF / LRIF withdrawal limits</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Evaluation letter or phone call</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">broker </span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Annuity payouts</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T4A and T5 slips</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">mailed by insurance companies, both for registered or non-registered annuities</span></td>
</tr>
<tr>
<td align="LEFT" height="36" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">RESP withdrawals</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">T4A Educational Assistance Payment or Accumulated Income Payment slip</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">brokers or financial institution where RESP is held</span></td>
</tr>
<tr>
<td align="LEFT" height="19" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Non-resident taxpayer</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">NR4 slip</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">broker</span></td>
</tr>
<tr>
<td align="LEFT" height="36" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">TFSA interest, dividends, capital gains, contributions and withdrawals</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">none</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">None – happy days! No tax reporting to do</span></td>
</tr>
<tr>
<td align="LEFT" height="36" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">TFSA contribution room and contribution or withdrawal history</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">phone call or online</span></td>
<td align="LEFT" style="border-bottom: 1px solid #000000; border-top: 1px solid #000000;" valign="TOP"><span style="font-family: Bitstream Charter;">Canada Revenue Agency – see <a href="http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/cntrbtn-eng.html">http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/cntrbtn-eng.html</a> </span></td>
</tr>
</tbody>
</table>
Note: Quebec residents receive above T4s and relevé 2.<br />
<br />
<span style="font-weight: bold;">Tax News, Tips and Blogs</span>
- to remind us of the latest developments, the implications, the
gotchas and possible strategies to legitimately minimize what we pay<br />
<ul>
<li><a href="http://www.grantthornton.ca/services/tax/domestic_tax">Grant Thornton Domestic Tax Service</a> - accounting firm provides tax news with tips for individuals </li>
<li><a href="http://www.ey.com/CA/en/Services/Tax/Managing-Your-Personal-Taxes">Ernst & Young Managing Your Personal Taxes 2014-15</a> - includes a section on investing, covering basics plus investing offshore, US tax for Canadians, Canadian tax for non-residents</li>
<li>Journalists/ Authors - <a href="http://www.theglobeandmail.com/search/?q=tim+cestnick">Tim Cestnick</a>, an accountant, author and columnist at the Globe and Mail, who did a series of tax planning videos on YouTube starting with <a href="http://www.youtube.com/watch?v=iWO3Fg43ivY">episode 1</a>, <a href="http://www.moneysense.ca/author/jon-chevreau">Jonathan Chevreau</a> (MoneySense), <a href="http://www.canadianbusiness.com/author/larry_macdonald/">Larry MacDonald</a> (Canadian Business), <a href="http://www.nationalpost.com/search/index.html?q=jamie+golombek">Jamie Golombek</a>, also an accountant author and columnist at the Financial Post, <a href="http://canadiancouchpotato.com/">Canadian Couch Potato</a>, <a href="http://retirehappy.ca/">Jim Yih</a> (Retire Happy, <a href="http://www.tmxmoney.com/en/knowledge/tax/index.html">Evelyn Jacks</a> on TMX Money </li>
<li>Accountants / Lawyers - <a href="http://blog.taxresource.ca/">Canadian Tax Resource</a>, <a href="http://www.thebluntbeancounter.com/">The Blunt Bean Counter</a>, <a href="http://www.hullandhull.com/">Hull & Hull</a>, <a href="http://www.estatedebate.com/">Estate Debate</a></li>
</ul>
<b>Books</b> - buy them online, read them offline at leisure <br />
<ul>
<li><a href="http://www.carswell.com/product-detail/tax-planning-for-you-and-your-family-2015/"><span style="font-style: italic;">Tax Planning for You and Your Family 2015</span></a>
by KPMG accounting professionals from Carswell Publishers -
intermediate level; about a third of the book deals with
investment-related topics</li>
<li><a href="http://www.carswell.com/product-detail/personal-tax-return-guide-2014-taxation-year-softcover/"><i>Personal Tax Return Guide, 2014 Taxation Year</i></a>, Paula Ideias - advanced level, as 1230 page bulk suggests, but its only $59 </li>
<li><i><a href="http://www.carswell.com/product-detail/tax-guide-for-investment-advisors-2015-edition/">Tax Guide for Investment Advisors, 2015 Edition</a></i>
by John R. Mott, also from Carswell - advanced level, dense and
detailed; everything most investors would want or need to know, short of
becoming an accountant</li>
<li>Many starter-level titles are available at <a href="http://www.chapters.indigo.ca/books/taxation/529886-cat.html#page=0&pid=978077985565">Indigo</a> or <a href="http://www.amazon.ca/s/ref=nb_sb_noss?url=node%3D935522&field-keywords=tax&rh=n%3A916520%2Cn%3A935522%2Ck%3Atax">Amazon</a></li>
<li><a href="http://www.carswell.com/product-detail/canadians-resident-abroad-2015/"><i>Canadians Resident Abroad 2015</i></a>
by Gary Duncan, from Carswell - investments are among tax topics
covered for non-residents or the many Canadians who have interests in
the USA </li>
<li><a href="http://www.carswell.com/product-detail/the-boomers-retire-a-guide-for-financial-advisors-and-their-clients-4th-edition/"><i>The Boomers Retire - A Guide for Financial Advisors and Their Clients</i></a>, 4th ed., Lynn Biscott </li>
</ul>
<br />
<span style="font-weight: bold;">Software</span> - to prepare and NETFILE income taxes electronically; the best packages guide you and make suggestions to optimize your taxes<br />
<ul>
<li><a href="http://www.netfile.gc.ca/sftwr-eng.html">List of CRA-certified programs</a> with links to the companies - old list from last year as of date of posting; certification is on-going through January and February, so check the link to each provider to see if it is certified yet. </li>
<li><a href="http://en.wikipedia.org/wiki/Canadian_tax_preparation_software_for_personal_use">Wikipedia</a> - basic details on costs, versions, price, limitations, freebies </li>
</ul>
<br />
<b>HowToInvestOnline Tax-related Posts</b> - our most popular and presumably most useful tax posts<br />
<ul>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2011/03/how-to-calculate-interest-and-capital.html">How to Calculate Interest and Capital Gains for Tax on Bonds, T-Bills, GICs, CSBs</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2012/02/save-tax-by-income-splitting-with-rrsp.html">Save Tax by Income Splitting with RRSP, TFSA, Loans and Pension Income</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2012/11/etf-and-mutual-fund-distributions.html">ETF and Mutual Fund Distributions Explained</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2009/01/etfs-and-mutual-funds-calculating.html">ETFs and Mutual Funds - Calculating Capital Gains</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2014/04/light-at-end-of-acb-tracking-tunnel-for.html">Light
at the end of the ACB Tracking Tunnel for ETFs?</a> </li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2009/07/income-trust-tax-issues-for-investors.html">Income Trust Tax Issues for Investors</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2009/11/taxes-on-foreign-investments.html">Taxes on Foreign Investments</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2009/12/tax-loss-selling-explained-what-why-and.html">Tax Loss Selling Explained: What, Why and How</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2010/01/annual-investment-review-part-2-tax.html">The Annual Investment Review: Part 2 - Tax Matters</a> (tax planning ideas)</li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2010/04/five-tax-tips-for-investor-couples-and.html">Five Tax Tips for Investor Couples and Families</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2010/04/five-tax-tips-for-investors-capital.html">Five Tax Tips for Investors: Capital Gains, Foreign Investments and Charity</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2011/04/five-last-minute-tax-reducers-for.html">Five Last Minute Tax Reducers for Investors</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2011/04/how-your-province-income-level-and.html">How Your Province, Income Level and Investment Choices Affect Your Income Tax</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2009/01/mystery-of-fund-capital-gains-in-2008.html">The
Mystery of Fund Capital Gains in 2008 Explained</a> </li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2011/11/etf-asset-allocation-across-rrsp-tfsa.html">ETF Asset Allocation across RRSP, TFSA and Taxable Accounts</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2012/03/how-to-calculate-capital-gains-and.html">How to Calculate Capital Gains and Other Income Taxes on ETFs</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2012/04/comparing-tax-characteristics-of-us.html">Comparing Tax Characteristics of US Equity ETFs</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2012/05/income-tax-on-dividends-how-to-cope.html">Income Tax on Dividends: How to Cope with the Myths and the Realities</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2012/11/tax-adjusted-asset-allocation.html">Tax-Adjusted Asset Allocation</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2013/03/return-of-capital-examples-of-good-and.html">Return of Capital - Examples of Good and Bad among ETFs</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2013/04/foreign-income-assets-avoid-nasty-t1135.html">Foreign Income & Assets - Avoid Nasty T1135 Trouble</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2013/06/saving-taxes-on-investments-at-death.html">Saving Taxes on Investments at Death</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2014/01/tax-planning-for-investors-in-or-near.html">Tax Planning for Investors in or near Retirement: Age Credits and OAS Clawbacks</a></li>
<li><a href="http://howtoinvestonline.blogspot.co.uk/2014/03/tax-efficient-fixed-income-for-non.html">Tax-efficient
Fixed Income for Non-registered Taxable Accounts</a> </li>
</ul>
<br />
<span style="font-weight: bold;">Tax Calculators</span> - for tax planning, what if scenarios and estimation<br />
<ul>
<li><a href="http://www.taxtips.ca/calculators.htm">Taxtips.ca Canadian Tax Calculators</a> - a <a href="http://www.taxtips.ca/calculator/basic_calculator.htm">Basic version</a>, an <a href="http://www.taxtips.ca/calculator/cdncalculator.htm">Detailed version</a> for all provinces except Quebec, <a href="http://www.taxtips.ca/calculator/qccalculator.htm">one for Quebec</a>, with all the tax credits and a special <a href="http://www.taxtips.ca/calculator/investment-income-tax.htm">Investment Income version</a> that compares different types of income, especially useful for retirees. </li>
<li><a href="http://www.ey.com/CA/en/Services/Tax/Tax-Calculators">Ernst & Young</a>
- ultra-simple, enter your taxable income and it shows you by province total tax
(using the basic personal tax credit only) as
well as marginal rates on ordinary income/interest, capital gains and
dividends; very handy when you have a
taxable and tax-sheltered investment accounts to see which types of
securities should go in which account</li>
<li><a href="http://www.fimetrics.com/index.html"><span class="blsp-spelling-error" id="SPELLING_ERROR_36">RRIFMetic</span></a>
- sophisticated tool (not free, costs $99) for planning and
optimizing for retirement income including taxes on types of accounts
(taxable, <span class="blsp-spelling-error" id="SPELLING_ERROR_37">RRIF</span>, <span class="blsp-spelling-error" id="SPELLING_ERROR_38">LIF</span>, <span class="blsp-spelling-error" id="SPELLING_ERROR_39">TFSA</span>,
RESP) and types of income (dividends, interest, capital gains) plus
factors in non-investment cash flows; helps decide how much to take from
which account during retirement.</li>
</ul>
<span style="font-weight: bold;">Tax Discussions</span> - read
what other people are grappling with and learn from their experience or
register and you can take part, ask questions and perhaps get good
answers<br />
<ul>
<li><a href="http://www.financialwebring.org/forum/viewforum.php?f=32&sid=a0deb71e6c435e20aa2e25b16381e85c">Financial <span class="blsp-spelling-error" id="SPELLING_ERROR_43">Webring</span> Tax Forum</a> - active contributors have banded together to produce <i><a href="http://www.finiki.org/wiki/Main_Page">finiki</a></i>, a Canadian financial wiki, which covers tax issues amongst financial and investment planning topics</li>
<li><a href="http://www.canadianmoneyforum.com/forumdisplay.php?s=9f3255ff4cfbebd200fd600b7d14eea5&f=6">Canadian Money Forum Tax Thread</a> </li>
</ul>
These
resources will make it easier to pay your taxes quickly with minimal frustration at the very least and
probably to pay less as well.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>:
this post is my opinion only and should not be construed as investment
or tax advice. Readers should be aware that the above comments are not an
investment recommendation. They rest on other sources, whose accuracy is
not guaranteed and the article may not interpret such results
correctly. Do your homework before making any decisions and consider
consulting a professional advisor.<br />
<br />CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-5594739293511452872015-01-16T19:15:00.001-05:002015-01-17T09:18:19.664-05:00Model Portfolios - 2014 Return and Risk Performance2014 was a good year for investors holding any one of a selection of balanced, diversified model portfolios (<a href="http://howtoinvestonline.blogspot.co.uk/2011/02/one-stop-investing-for-your-rrsp.html">One-Stop</a>, <a href="http://howtoinvestonline.blogspot.co.uk/2014/06/the-reluctant-investors-lifelong.html">Lifelong</a>, <a href="http://howtoinvestonline.blogspot.co.uk/2009/11/simple-portfolios-compared.html">Simple and Couch Potato</a>, <a href="http://howtoinvestonline.blogspot.co.uk/2013/05/portfolio-volatility-of-swensen-seven.html">Swensen Seven and Smart Beta</a>, <a href="http://howtoinvestonline.blogspot.co.uk/2014/04/the-permanent-portfolio-pros-and-cons.html">Permanent Portfolio</a>). The lowest return of any portfolio started at 7.5%. But the range extended to more than double, with a 16.0% return in one portfolio. Why the big range and what lessons can we draw, especially considering that all of the portfolios hold a roughly similar breakdown of 40% to 50% fixed income with the remainder equity?<br />
<br />
<b>Return vs Risk</b> - The first thing to consider is how much risk the portfolio took on to achieve the return. We computed (using the <a href="http://www.investspy.com/">InvestSpy.com calculator</a>, which uses Yahoo! Finance data or Morningstar Canada price data e.g. <a href="http://quote.morningstar.ca/QuickTakes/fund/f_ca.aspx?t=TDB965&region=CAN&culture=en-CA">TD Balanced Index Fund</a>, for the portfolio funds) two risk measures for each portfolio: 1) volatility (standard deviation) of daily returns for the year and, 2) maximum drawdown of fund value from a peak to a trough during the year. These metrics are a kind of "anxiety quotient". The less of each the better. To compare the portfolios, we calculated how much return the portfolio delivered per unit of volatility or drawdown - the higher the ratio, the better.<br />
<br />
<b>The Results Table</b> - The best three funds for return, volatility and drawdown are shown in <b><span style="color: #38761d;">green numbers</span></b>. <br />
<div style="text-align: center;">
<i>(click on images to enlarge)</i></div>
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<br />
<i>Portfolio Return vs Volatility</i><br />
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<br />
<i>Portfolio Return vs Maximum Drawdown</i><br />
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<b>Lesson 1) Fund weighting scheme matters as much as asset allocation</b> - <span style="color: #38761d;"><b>The Smart Beta Portfolio delivered the best return by far</b></span>. It's 16.0% return was 3% ahead of the next best Swensen Seven. The Volatility and Drawdown charts show the Smart Beta to be among the three best on those measures too (the top left corner is the best place to be where the most return for the least volatility or drawdown is achieved). The Swensen Seven differs from the Smart Beta in the choice of ETFs for each asset class - instead of the traditional cap-weighted funds of the Swensen Seven, the Smart Beta uses low volatility, equal-weighted and fundamentally-weighted funds. Compared to the cap-weighted benchmark Canadian equity <a href="https://www.blackrock.com/ca/individual/en/products/239837/?referrer=tickerSearch">TSX Composite ETF with symbol XIC</a>, the <span style="color: red;">red-highlighted</span> 2014 return of the <a href="https://www.invesco.ca/publicPortal/portal/retail.portal?_nfpb=true&_nfxr=false&_pageLabel=product_powerSharesETFs_page_label#page1">fundamentally-weighted fund PXC</a> fell significantly short, but the <a href="http://www.etfs.bmo.com/bmo-etfs/glance?fundId=86812">low volatility fund ZLB</a> more than compensated with its vast out-performance.<br />
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In a similar vein, the choice of long term federal government bonds (ZFL's 17.4%) and real return bonds (ZRR's 13.1%) in the Smart Beta, Swensen and Permanent portfolios provided a big return advantage over the broad market bond ETFs such as XBB (8.3%) in all the cap-weighted portfolios.<br />
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One year does make an investment lifetime and next year might not see the same all-round out-performance by the Smart Beta ... but it is the result that the research on long term data says to expect, as <a href="http://howtoinvestonline.blogspot.co.uk/2013/03/new-improved-model-portfolio-smart-beta.html">we reviewed in this post</a>.<br />
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Canadian Couch Potato <a href="http://canadiancouchpotato.com/2015/01/09/couch-potato-portfolio-returns-for-2014/">recently reported 2014 returns</a> of a series of cap-weighted model portfolios. This similarity of construction of those portfolios resulted in a much narrower range of returns, only 9.8% to 10.8%. Investors who choose portfolios with different types of ETFs, like the Smart Beta, or others such as the Permanent Portfolio, with its 25% allocation to gold, should expect to diverge appreciably in returns year-to-year.<br />
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<b>Lesson 2) Adjusting portfolio weights for volatility looks to be beneficial</b> - Both the Swensen Seven and the Smart Beta, whose weights <a href="http://howtoinvestonline.blogspot.co.uk/2013/05/portfolio-volatility-of-swensen-seven.html">we adjusted for volatility</a>, had higher returns and good to excellent return vs risk ratios.<br />
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The one-stop <span style="color: #38761d;"><b><a href="http://www.tangerine.ca/en/investing/investment-funds/investment-fund/index.html">Tangerine Balanced Fund</a> (mutual fund symbol INI220) and <a href="http://www.mawer.com/mutual-funds/fund-profiles/mawer-balanced-fund/">Mawer Balanced Fund</a> (MAW104) performed as well as the Smart Beta on the return vs riskiness measures</b></span>. The latter is especially interesting since it is actively managed, rather than a passive index fund. It's long term returns look excellent too. Perhaps this is one of the rare actively-managed funds that can and will do better than passive averages. But the passive Tangerine fund has done close to as well in 2014.<br />
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<b>Lesson 3) Currency hedging matters</b> - In 2014, when the Canadian dollar fell vs the US dollar, hedging hurt results. The <span style="color: red;"><b>currency-hedged Simple Recipe was clearly the worst on both return-vs-riskiness measures</b></span>. The unhedged version of the Simple Recipe had a slightly higher return and lower volatility and maximum drawdown. The <span style="color: #0b5394;">blue outlined</span> cells in the table show the returns boost to the US-traded and USD-denominated funds in the Smart Beta portfolio. The fall in the Canadian dollar aka rise in USD vs CAD from the start to the end of 2014 provided 9.1% extra return to the three funds with symbols RSP, EFAV and PXH. In the case of PXH, currency turned a net loss in USD into a net gain in CAD. Most of the other portfolios do not hedge their US or international holdings and thus they also received the same returns boost.<br />
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Of course, when CAD appreciates, the opposite happens - unhedged foreign holdings' returns are lessened. In the long run, the indications are that hedging does not make a difference without considering costs and in the practical sense, where hedging costs enter the picture, hedging is likely a net negative to returns, as we have discussed in a number of posts under part 6 Asset Allocation and Portfolio Construction of our <a href="http://howtoinvestonline.blogspot.co.uk/2014/05/howtoinvestonline-guide-to-self.html"><i>Guide to Self-Directed Investing</i></a>.<br />
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<b>Lesson 4) Bonds can contribute healthy returns even in a low interest rate environment</b> - The bond component of all the portfolios contributed to the overall attractive portfolio returns as the prevailing low interest rates actually managed to fall (see the <a href="http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/">charts of various benchmark rates at the Bank of Canada website</a>). When rates fall, bond prices rise and the funds holding the bonds gain in value in addition to receiving the bond interest.<br />
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<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-39787205241222461512015-01-09T17:13:00.000-05:002015-01-09T17:13:57.552-05:00Which Canadian Companies are Earnings Steamrollers?Earnings, i.e. profit, is the lifeblood of companies. It is what sooner or later drives stock prices and enables dividends. As in everything else in life, some companies perform better than others. Inspired by the discovery that <a href="http://web.tmxmoney.com/marketsca.php?locale=EN">TMX Money</a> has begun publishing historical quarterly earnings results (under the <a href="http://web.tmxmoney.com/earnings.php?qm_symbol=HCG">Research tab for a company's stock quote e.g. Home Capital Group</a> (TSX: HCG)) going back as far as 1994, we decided to find which Canadian companies can boast of being earnings steamrollers - those with steady, long-term growth of quarterly profits.<br />
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We uncovered thirteen companies (there may be more since there seems to be no handy stock screener that will quickly spotlight them - we had to find them by trial and error) with an amazing record of growth -<br />
<ul>
<li>10% or greater annual compound increase in earnings per share (EPS) </li>
<li>through 15 or more years, </li>
<li>in a quite predictable pattern, and </li>
<li>no more than one quarter showing a net loss in that time. </li>
</ul>
Through thick and thin of financial crises and economic recessions, such companies have powered ahead seemingly oblivious to obstacles, flattening them like a proverbial steamroller.<br />
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<b><span style="color: #38761d;">The Canadian Earnings Steamrollers</span></b><br />
Surprising perhaps to some, it is a diverse group, with a mix of well-known and not-so-famous names, across a number of industry sectors. Our comparison table below shows the not-lucky-but-good thirteen.<br />
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<i>EPS data</i>: In <span style="color: blue;">blue text columns are the start year of the quarterly EPS data and the compound annual growth rate</span>. In some cases the percentages come from directly calculating the growth from the earliest to latest EPS. In other cases, where there is evident seasonal fluctuation, an estimate from an exponential curve fitted to the data looked more appropriate.<br />
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<i>Dividend data</i>: For three companies we show the progression of dividends to illustrate how dividends go up with earnings. All companies but CGI Group pay dividends. Other columns contain data from various free online sources (see table footnotes) that we refer to in our discussion below.<br />
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<i>Data warning</i>: Readers should note that the TMX data contains many gaps and some errors, usually because adjustments for past stock splits have not been made. In those cases we have had to go back to the original authoritative online source for such data, <a href="http://www.sedar.com/homepage_en.htm">Sedar.com</a>, where the companies are required by regulation to file all their financial statements. Sedar filings go back to 1997.<br />
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<div style="text-align: center;">
<i>(click on table image to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMziZWqLUw0EHOGSerH-Em0olIb54MvcPK3wP7z4sy4UjWE48fETUP8R3-Bh9kEaEJA4E3ATgD0iMVmnIKtEpVo-A_O9G-gVRTGLsMlI0wSuO48Ufg1gaIIIHp55W4HqBtWjJM5KSMFE52/s1600/EPS-table.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMziZWqLUw0EHOGSerH-Em0olIb54MvcPK3wP7z4sy4UjWE48fETUP8R3-Bh9kEaEJA4E3ATgD0iMVmnIKtEpVo-A_O9G-gVRTGLsMlI0wSuO48Ufg1gaIIIHp55W4HqBtWjJM5KSMFE52/s1600/EPS-table.png" height="131" width="320" /></a></div>
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Here are the graphs for individual companies showing their quarterly EPS progression.<br />
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=HCG">Home Capital Group</a> (TSX: HCG)</b><br />
The <span style="color: #0b5394;"><b>dark blue line</b></span> is EPS. The <span style="color: #b45f06;"><b>orange line</b></span> is dividends.<br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkDtre5Kn3hS4s2vGy149X7rn2kzuR5dNEcZOwC6Wv9XmfGedcimzJAPucNKCkilPgIULLJqN6mZWDoSmFxCkKzzzKGw5pwc9uqp8og-RPppBfxs78vG-ERE3bmC50SjlKLK1zuwVYedfN/s1600/HCG.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkDtre5Kn3hS4s2vGy149X7rn2kzuR5dNEcZOwC6Wv9XmfGedcimzJAPucNKCkilPgIULLJqN6mZWDoSmFxCkKzzzKGw5pwc9uqp8og-RPppBfxs78vG-ERE3bmC50SjlKLK1zuwVYedfN/s1600/HCG.png" height="203" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=gib.a">CGI Group</a> (TSX: GIB.A)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0uU_GDOgOrgjJ6u-c7guH7dohO0Soh2TjzHWd0nyb4qWuwpRyWbgxppbiR493Ymr_77-vLfZ2NSonfEuPPmSy5Dei2PgxSjA47Tqx6htdIaK5DyDhI98oehKUxiJ-2cei2p74ApqZvkLl/s1600/GIB-A.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0uU_GDOgOrgjJ6u-c7guH7dohO0Soh2TjzHWd0nyb4qWuwpRyWbgxppbiR493Ymr_77-vLfZ2NSonfEuPPmSy5Dei2PgxSjA47Tqx6htdIaK5DyDhI98oehKUxiJ-2cei2p74ApqZvkLl/s1600/GIB-A.png" height="141" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=stn">Stantec</a> (TSX: STN)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh27EM4ZPDmfaA7DY316z3eWMpjPr_FTtj-RyoHuGUz12JLupmoB9My4YE6McgmlUd-A6GPEbfgf3MlzthpVwqmYbf8oKtRUS8xwu4y8gcx0ZRLvUQ8_M-ZgckgX-AxdBcl6hU8LMcqrxod/s1600/STN.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh27EM4ZPDmfaA7DY316z3eWMpjPr_FTtj-RyoHuGUz12JLupmoB9My4YE6McgmlUd-A6GPEbfgf3MlzthpVwqmYbf8oKtRUS8xwu4y8gcx0ZRLvUQ8_M-ZgckgX-AxdBcl6hU8LMcqrxod/s1600/STN.png" height="192" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=sap">Saputo</a> (TSX: SAP)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQdrS_rThKh4jyqQxkqha71dKtkUMSSgUTRIXmnW1gcRFg9N8GmM4Q7te784mRmflxFJDEhl0bpNttAAfTBQi5RLLQESSXlcycRhYsHjDrY8Tuzk6jGmvWSWZo0prb2u80bWoOfqr-3jmh/s1600/SAP.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQdrS_rThKh4jyqQxkqha71dKtkUMSSgUTRIXmnW1gcRFg9N8GmM4Q7te784mRmflxFJDEhl0bpNttAAfTBQi5RLLQESSXlcycRhYsHjDrY8Tuzk6jGmvWSWZo0prb2u80bWoOfqr-3jmh/s1600/SAP.png" height="195" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=su">Suncor</a> (TSX: SU)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixGoIdc4YbjZ5YBLc194_WlbwTnTrtofQ6u1cs8Q55nygb7n9Wm3Vqt5ZmirYaVPS06ztSfi23_vMFsypF8y6UiQJXFeyAXgo4YgIH-E5W82gRZe4O03ba4LdX5pL7ZwIGQegH3JRpGeWF/s1600/SU.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixGoIdc4YbjZ5YBLc194_WlbwTnTrtofQ6u1cs8Q55nygb7n9Wm3Vqt5ZmirYaVPS06ztSfi23_vMFsypF8y6UiQJXFeyAXgo4YgIH-E5W82gRZe4O03ba4LdX5pL7ZwIGQegH3JRpGeWF/s1600/SU.png" height="172" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=cnr">Canadian National Railway</a> (TSX: CNR)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXZ20unxGHlIGLxnmLb6se03nO6a_UbxA9I6d-BDJfOvwbyI6Flc9pDFWPbCtEAhIBE-dnDZMcVJjfitcs7tA7TYCGrLVfHZO8uix48iiQg6uq6e2y7kFQzE1amz6HYNRsUKb2dSfYS6gZ/s1600/CNR.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXZ20unxGHlIGLxnmLb6se03nO6a_UbxA9I6d-BDJfOvwbyI6Flc9pDFWPbCtEAhIBE-dnDZMcVJjfitcs7tA7TYCGrLVfHZO8uix48iiQg6uq6e2y7kFQzE1amz6HYNRsUKb2dSfYS6gZ/s1600/CNR.png" height="191" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=mru">Metro Inc</a> (TSX: MRU)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOPZFkL49zmBjBQc-KlbLDG8Td6mmcuMpo4rCGBG54ourEZplrD0huMC3Hzwoh7NOZ64XAsS9z7qJ424bnBRWnz3_wXlAsXlqx8ks__yNU82tpPHLLhzsj7IU0uhRw4QHo8QNoYiLr38Cy/s1600/MRU.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOPZFkL49zmBjBQc-KlbLDG8Td6mmcuMpo4rCGBG54ourEZplrD0huMC3Hzwoh7NOZ64XAsS9z7qJ424bnBRWnz3_wXlAsXlqx8ks__yNU82tpPHLLhzsj7IU0uhRw4QHo8QNoYiLr38Cy/s1600/MRU.png" height="180" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=pwf">Power Financial Corp</a> (TSX: PWF)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAszSvlM_auFKYBELSWNifwfFABqJsB53ogOmy_e3169GeGt1Z3FavRUY6xFz5D_JPW3sWI4biQZkOWYaWds5rQqVzQbdz25ewH2cQ5xDGoFNGNgBXiblAeKBRzg1ASud1-oUYlJ0KPmqr/s1600/PRF.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAszSvlM_auFKYBELSWNifwfFABqJsB53ogOmy_e3169GeGt1Z3FavRUY6xFz5D_JPW3sWI4biQZkOWYaWds5rQqVzQbdz25ewH2cQ5xDGoFNGNgBXiblAeKBRzg1ASud1-oUYlJ0KPmqr/s1600/PRF.png" height="192" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=cwb">Canadian Western Bank</a> (TSX: CWB)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimM76YgRDwOZeEpGCGAx14u1qpvj3teRByE0pW70YaAzg7IPUlmvF-EUwjCbMCGtlf9qouujqFXJgBgDIAdLscM8wqcYtfG7kDPFKXWd-gZieNEUrSrUuLZUaHrfqFImF-XsZd1jGzB574/s1600/CWB.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimM76YgRDwOZeEpGCGAx14u1qpvj3teRByE0pW70YaAzg7IPUlmvF-EUwjCbMCGtlf9qouujqFXJgBgDIAdLscM8wqcYtfG7kDPFKXWd-gZieNEUrSrUuLZUaHrfqFImF-XsZd1jGzB574/s1600/CWB.png" height="166" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=aco.x">ATCO Ltd</a> (TSX: ACO.X)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_5sOtfc2FOe3iXgUxqcE6A9LaS-qyBD9aPy0pS9a1qxjuqhKZGxlHUyEK2MrKdGbMsuy_zgU3kAZIT2I-tx2Oe2Y3w7mIBtxujqdseaRyw6QrvuxHoqOmKKkzyFqBsn_uFxb_pJP7ujun/s1600/ACO-X.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_5sOtfc2FOe3iXgUxqcE6A9LaS-qyBD9aPy0pS9a1qxjuqhKZGxlHUyEK2MrKdGbMsuy_zgU3kAZIT2I-tx2Oe2Y3w7mIBtxujqdseaRyw6QrvuxHoqOmKKkzyFqBsn_uFxb_pJP7ujun/s1600/ACO-X.png" height="181" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=emp.a">Empire Company</a> (TSX: EMP.A)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizIRHrwSYoIKHQZBwizMDTVZzzi6rY_WigyPs3oBdtAxytcuEUnVjGOFuq117WF8d3n1soGI9Gt3YQLyiXRRVxrCdjw_4hBk-Sp3mI597nkPSRdy-xnb6NKu4qSgHQNE702odVHXLaAVhV/s1600/EMP-A.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizIRHrwSYoIKHQZBwizMDTVZzzi6rY_WigyPs3oBdtAxytcuEUnVjGOFuq117WF8d3n1soGI9Gt3YQLyiXRRVxrCdjw_4hBk-Sp3mI597nkPSRdy-xnb6NKu4qSgHQNE702odVHXLaAVhV/s1600/EMP-A.png" height="163" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=na">National Bank</a> (TSX: NA)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2gV890bsslcwFVy1s-wPenz7sG_zpzaGBrZ_6bm-gq_uT_9QBeY2HW0cKkWxFhC3FXsV4kT2LbpfDT-2T5JBVu1uqal9Y9MLQIYh0yoFs_r7w40ZZcqB7bdIKSQ41P1_Q7SWkzN9_T58W/s1600/NA.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2gV890bsslcwFVy1s-wPenz7sG_zpzaGBrZ_6bm-gq_uT_9QBeY2HW0cKkWxFhC3FXsV4kT2LbpfDT-2T5JBVu1uqal9Y9MLQIYh0yoFs_r7w40ZZcqB7bdIKSQ41P1_Q7SWkzN9_T58W/s1600/NA.png" height="167" width="320" /></a></div>
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<b><a href="http://web.tmxmoney.com/company.php?qm_symbol=ry">Royal Bank</a> (TSX: RY)</b><br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<br />
What else can we glean from our data?<br />
<br />
1) <b>Strong consistent EPS growth is possible in many sectors</b> - Our list includes some expected sectors like banks, financials and utilities , but also an industrial, an oil and gas company, a food manufacturer, an information technology company, a consulting firm and grocery retailers. Though none of these companies is tiny, several are quite small, as the range of market caps shows.<br />
<br />
Perhaps more surprising is that Canada's largest company, the Royal Bank, has managed to grow its EPS at such a fast pace for so long. The 2008-2009 financial crisis caused considerable turbulence in its results but the steadier and rapid growth seems to have resumed.<br />
<br />
2) <b>The stock of most EPS steamrollers is more volatile (see Beta in our table above) than the market average (Beta of 1.0)</b>; some have quite high volatility, like HCG and Suncor. Investors and speculators in the market are obviously constantly guessing whether the amazing past growth will continue. We only have to read the media to see the kind of speculation about the future as daily events unfold with the current hot topic being the effects of the enormous drop in oil prices.<br />
<br />
3) <b><span style="color: #38761d;">Total stock return in the long term, such as 15 years in our table, has reflected the EPS growth and it has far outstripped the TSX Composite average</span></b>. But the shorter the term, the more variable the return, as the 1- and 5-year total return columns show. On a 1-year basis, five of our EPS powerhouses have lagged the TSX Composite. This reflects a major caveat of our results - no matter what the past, the future is not assured and market prices reflect expectations of the future. In the course of our search, we did find companies that for years were on the EPS growth trajectory and then lost their way.<br />
<br />
4) <b>High EPS growth doesn't only happen at high dividend payers</b>. Some in our list pay a healthy dividend, some have a low yield, though their dividends have grown strongly over time e.g. our top dog HCG only pays a 1.8% yield but has increased its dividend 2.37% annually since 2004, when it started paying a dividend. CGI Group pays no dividend at all, reinvesting all the earnings to grow the company. Investors who have held shares since 1998 probably aren't complaining.<br />
<br />
It is interesting that some companies with a high dividend policy like REITs do not figure in our list at all. We looked at two leading REITs, Canada's largest, RioCan (TSX: REI.UN) and H&R (TSX: HR.UN) but both have had uninspiring long term EPS growth of around 3% only. Similarly, telecomms companies like BCE (4.3% annual EPS growth since 2002) and Telus (4.6% since 1994) were not near the top achievers.<br />
<br />
5) <b>Poor 1-year returns and lower Price-to-Earnings (PE) figures suggest some potential buying opportunities to investigate</b> - CGI Group, Stantec, Power Financial and Canadian Western Bank in particular. When the PE is less than the EPS growth rate and/or the 5-tear average PE, it is a positive sign. Morningstar.ca has an excellent graphical 10-year display of PE and other valuation measures benchmarked against the TSX Composite under the Valuations tab for a company stock quote (e.g. <a href="http://quote.morningstar.ca/Quicktakes/Valuation/stockvaluation.aspx?t=HCG&region=CAN&culture=en-CA&ops=clear">for HCG here</a>).<br />
<br />
There is a group of <b><span style="color: #38761d;">worthy runners-up with EPS growth rates of 6% to almost 10%</span></b>. The following companies often showed more erratic growth; some had more quarterly net losses.<br />
<br />
<ul>
<li>Scotiabank (TSX: BNS) - 9.8% annual compound EPS growth since 1994</li>
<li>TD Bank (TSX: TD) - 9.7% since 1994</li>
<li>Canadian Tire Corp (TSX: CTC.A) - 9.7% since 1994</li>
<li>Enbridge (TSX: ENB) - 9.4% since 1995</li>
<li>Fortis Inc (TSX: FTS) - 9.0% since 1994</li>
<li>Industrial Alliance Insurance (TSX: IAG) - 8.8% since 2000</li>
<li>Canadian Utilities Ltd (TSX: CU) - 8.0% since 1996</li>
<li>Great West Life (TSX: GWO) - 7.9% since 1994</li>
<li>Bank of Montreal (TSX: BMO) - 6.1% since 1994</li>
<li>TransCanada Corp (TSX: TRP) - 6.0% since 1999</li>
</ul>
<br />
All in all, there is a good range of companies from which to form a portfolio. Some may falter or have temporary problems but as a group, the track record suggests most will continue to steamroll onwards and upwards for investors' benefit.<br />
<br />
<i>Disclosure</i>: This blogger, as well as indirectly owning all these companies through broad market ETFs, directly won shares of stock symbols SU, CNR, MRU, ACO.X, EMP.A, NA, RY, BNS, FTS, CU, BMO, TRP and BCE, as well as REI.UN and HR.UN.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.<br />
<br />CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-91654923318015776462015-01-05T16:31:00.000-05:002015-01-05T16:31:54.915-05:00Investing Advice from Astronaut Chris Hadfield's Guide to Life on EarthWe'll admit it straight off. In his excellent book <a href="http://www.amazon.co.uk/An-Astronauts-Guide-Life-Earth/dp/1447257103/ref=cm_cr_pr_product_top"><i>An Astronaut's Guide to Life on Earth</i></a>, Canadian astronaut Chris Hadfield gives absolutely no direct advice about investing. What follows is our own interpretation of his general advice that resonates strongly for the investor. Hadfield's tremendous success suggests it is worth heeding what he says, which is based on his experience and life story.<br />
<br />
<b>Outstanding success comes from a modicum of talent plus many years of sustained, focused effort towards a goal</b> - As Hadfield puts it, astronauts are not born, they are made. People do not become astronauts by accident - "<i>I didn't walk into JSC a good astronaut. No one does.</i>" In a <a href="http://www.canadianbusiness.com/lists-and-rankings/best-jobs/chris-hadfield-tells-us-the-biggest-misconception-about-astronauts/">Canadian Business interview</a> in 2014, he added, " ... <span class="entry-content" itemprop="articleBody"><i>you are the result of
your own decisions. If you want to become somebody else then start
making some different decisions, and whittle yourself like some sort of
perpetually shifting sculpture into who you want to be</i>". </span><br />
<span class="entry-content" itemprop="articleBody"><br /></span>
<span class="entry-content" itemprop="articleBody">Investors are not born good either. The first thing we note is that talent is the lesser element. The very wealthy investor <a href="http://eu.wiley.com/WileyCDA/Section/id-817935.html">Warren Buffett rates the talent portion even lower for investing</a> - "</span><i>You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ</i>." You don't even need to be as smart as an astronaut!<br />
<br />
The second idea to note is that getting to the top of the heap does require huge amounts of effort. But not everyone needs or wants to be a superstar. Those who are not prepared to do so are better off doing <a href="http://www.marketwatch.com/story/warren-buffett-to-heirs-put-my-estate-in-index-funds-2014-03-13">what Buffett recommends to his heirs</a> - low cost index funds that track the market.<br />
<br />
<b>Risk taken should be outweighed by the reward</b> - Hadfield puts it thus: "... <i>the only good reason to take a risk is that there's a decent possibility of a reward that outweighs the hazard</i>". Taking risk does not automatically lead to reward. In the case of astronauts, thrill-seeking risk-taking is not done since the probable result is quick death. Whereas investors are only likely to see their money disappear, the desirable principle is the same. A critical task is to understand, manage and reduce risks. It is the reason we have often written about risk in our <a href="http://howtoinvestonline.blogspot.co.uk/2014/05/howtoinvestonline-guide-to-self.html"><i>Guide to Self-Directed Investing</i></a>.<br />
<br />
<b>The power of negative thinking</b>, Hadfield's inversion of the famous <a href="http://www.amazon.co.uk/Power-Positive-Thinking-Norman-Vincent/dp/0091906385">book title and philosophy of Norman Vincent Peale</a>, <b>tells us to focus on avoiding the downside</b>. Anticipating and avoiding problems that can cause loss of life is astronaut mantra. The investing version is to focus on not losing money, as espoused by <a href="http://www.forbes.com/2009/02/06/graham-buffett-value-personal-finance-investing-ideas_0206_benjamin_graham.html">legendary investor Benjamin Graham in his classic book <i>The Intelligent Investor</i> and by value investors</a> to this day.<br />
<br />
<b>Sweat the small stuff</b> - This next reversal of a popular saying by Hadfield refers to the fact that small defects can be deadly, perhaps the most famous example being the <a href="http://en.wikipedia.org/wiki/Space_Shuttle_Challenger_disaster">defective O-ring that was at the root of the Challenger disaster</a>. For investors a parallel can be found in the seemingly innocuous management expense ratio fees of mutual and exchange traded funds. A 2% or even a 1% difference doesn't seem like much but the effect compounds mightily over years and decades, causing disastrously lower returns for investors as <a href="http://howtoinvestonline.blogspot.co.uk/2011/07/investing-risk-ouch-from-management.html">we wrote about in 2011</a>. Investors must pay attention to costs.<br />
<br />
<b>Prepare a plan and stick to it</b> - We would be tempted to say that this idea is so simple that it "isn't rocket science". Except it is! Every space launch is preceded by years of meticulous planning. Every step is written down, including especially what to do in case of malfunctions and when to stop a launch. And the astronaut launchers follow it very strictly, despite the disappointment and frustration at delay and having to start over. Similarly, investors are wise to have a <a href="http://howtoinvestonline.blogspot.co.uk/2008/07/written-investment-policy-dont-invest.html">written investment policy</a> that lays out how the portfolio will be constructed and managed, including <a href="http://howtoinvestonline.blogspot.co.uk/2009/10/portfolio-rebalancing-what-why-and-how.html">rebalancing</a>. One big challenge for investors is to actually follow the plan at critical highly stressful moments, such as during the autumn of 2008 when stocks were plummeting. That was the key moment to rebalance from bonds, which <a href="http://howtoinvestonline.blogspot.co.uk/2009/10/2008-crash-case-study-in.html">kept their value much more</a>, to stocks.<br />
<br />
<b>A thirst and willingness to keep learning forever is essential</b> - No matter how experienced the astronauts, they must always be honing their skills and knowledge. Much of the learning comes from noting and analyzing mistakes and deciding how to do differently and better. The investor can profitably do the same.<br />
<br />
Hadfield notes that early success is a terrible teacher - "... <i>you have to be competent ... before you can be extraordinary. There are no shortcuts, unfortunately.</i>" Astronauts, like everyone, tend to think they know it all if they succeed right off the bat. Investors who have a big winner right away think it's their own savvy whereas it's probably just luck. Investor Buffett puts the point thus: "<a href="http://writetodone.com/12-life-lessons-from-warren-buffett-to-being-a-more-compassionate-writer/"><i>No one has succeeded without going through their own failures at some point.</i></a>"<br />
<br />
<b>Overcoming fear is possible</b> - Supreme irony for an astronaut, Hadfield tells us he has a very strong natural fear of heights and falling! Yet, he has managed to control and overcome this, through a mix of knowledge about how things actually work that gives him confidence they and he won't fall, and of the huge number of simulations the astronauts do. As he points out, anyone would be terrified if they went straight into the launch seat in a rocket. The fear from a feeling of helpless lack of control was more or less eliminated through figuring multitudes of possible things that could go wrong and what actions they would take along with countless hours of practice and simulation that de-sensitized the astronauts to the cramped capsule and the movements.<br />
<br />
The fear parallel for investors is the anxiety during extreme market downs. Unfortunately, there are no investing simulators, so it is only years as an investor that allows us to absorb the sensory experience of crashes. But the other elements can be implemented - developing knowledge of the history of market movements (e.g. our post on <a href="http://howtoinvestonline.blogspot.co.uk/2011/07/investing-risk-historical-worst.html"><i>Investing Risk: Historical Worst Volatility, Business Cycles, Crashes and Crises</i></a>) and having a plan that tells us exactly what we should do under the various possible circumstances.<br />
<br />
<b>Good and bad luck will still happen for reasons we can never control so we should enjoy the ride and be happy with ourselves</b> - Hadfield never knew for sure that he could actually realize his life dream to fly in space. He determined to enjoy the preparation itself, no matter what eventually happened. As he says and others have said before, outside circumstances and events are beyond our control, just as financial markets are for all investors, but we can decide how we want to react and be happy nevertheless. We can do our best and be satisfied with our own effort. That seems a good outlook to adopt.<br />
<br />
<i>Further viewing just for fun</i>: The <a href="https://www.youtube.com/watch?v=zrHHsP8BACg">Space Oddity music video performed by Chris Hadfield</a> on the International Space Station.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-30476951636808681882014-12-22T21:39:00.000-05:002014-12-22T21:40:20.633-05:00Last Chance in 2014 to Avoid Large Potential Tax Hit on Reinvested Distributions in ETFsAt the end of last week the Canadian ETF providers were announcing the expected reinvested distributions on their ETFs for 2014. This year, there seem to be a lot of very high amounts, which <span style="color: red;">could cause large unexpected income tax bills for investors holding the affected ETFs in taxable accounts</span>. (This does not affect ETFs inside tax-free or -deferred accounts like a TFSA, RRSP, RESP, RRIF, LIRA etc.)<br />
<br />
<b>Reinvested distributions</b> - John Heinzl of the Globe and Mail earlier this year <a href="http://www.theglobeandmail.com/globe-investor/investor-education/haunted-by-phantom-etf-distributions/article18225076/">described them as a phantom menace</a>. You don't see the cash but if held in a taxable account they will be included on T3 slips in your income and you are therefore liable to pay tax. We also wrote about this back in 2008 in <a href="http://howtoinvestonline.blogspot.co.uk/2009/01/mystery-of-fund-capital-gains-in-2008.html"><i>The Mystery of Fund Capital Gains Explained</i></a>, when gains had to be reported despite the market having dropped enormously that year.<br />
<br />
Most of the distributions arise from capital gains realized internally by the ETFs when they trade stocks to follow their index, though sometimes the CAD-hedging activities of hedged funds can cause it too. It's not something that we investors can control or foresee. Nor is the presence of high reinvested distributions inherent to certain ETFs, or a mark of poor management by the ETF manager. No one's to blame but it can still hurt.<br />
<br />
<b>ETFs with High Reinvested Distributions in 2014</b> - The final official figures will only be available in early 2015, which means some ETFs below will not come in exactly as shown. But by then it will be too late to do anything.<br />
<br />
<b><i>iShares </i></b>- The December 18th press release from manager BlackRock with the <a href="http://www.marketwatch.com/story/blackrockr-announces-estimated-annual-reinvested-capital-gains-distributions-for-the-isharesr-funds-2014-12-18-161733130">figures for all their Canadian ETFs is here</a>. Expressing the distribution as a percent of each ETF's current Net Asset Value per share tells us the relative impact of the amount. The three highest are:<br />
<ul>
<li>7.23% of NAV - iShares Advantaged U.S. High Yield Bond Index ETF (CAD-Hedged) (TSX symbol: CHB)</li>
<li>5.04% - iShares Canadian Fundamental Index Fund (CRQ) </li>
<li>4.84% - iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ)</li>
</ul>
There is a raft of other iShares ETFs whose reinvested distributions exceed 3.0% of NAV - TSX trading symbols XCV, CUD, XEI, CIF, CSD, XEF, XEH, XHD, XMU and XMV. <br />
<br />
<i><b>BMO </b></i>- Its <a href="http://newsroom.bmo.com/press-releases/bmo-asset-management-inc-announces-annual-reinves-tsx-bmo-201412170984565001">press release is here</a>. Only one of its ETFs will have reinvested distributions over 3%:<br />
<ul>
<li>3.61% - BMO MSCI Europe High Quality Hedged to CAD Index ETF (ZEQ)</li>
</ul>
<i><b>Invesco Powershares</b></i> - <a href="https://www.invesco.ca/publicPortal/ShowDoc?nodePath=/BEA%20Repository/common/document/pdf/pr_2014/pr_distributionETF_yearend_2014_final.pdf">Press release here</a>.Two ETFs have estimated reinvested distributions over 3%:<br />
<ul>
<li>4.33% - PowerShares S&P/TSX Composite Low Volatility Index ETF (TLV)</li>
<li>3.26% - PowerShares Canadian Dividend Index ETF (PDC)</li>
</ul>
<i><b>RBC Asset Management</b></i> has none of its ETFs with reinvested distributions over 3% for 2014 according to <a href="http://www.prnewswire.com/news-releases/rbc-global-asset-management-inc-announces-annual-reinvested-capital-gains-distributions-for-rbc-etfs-286263981.html">its press release</a>, nor does <i><b>Vanguard Canada</b></i> <a href="http://www.businesswire.com/news/home/20141219006233/en/Vanguard-Announces-Revised-2014-Annual-Capital-Gains#.VJeNZv8Kg8">per its press release</a>.<br />
<br />
The income tax pain that the reinvested distributions will cause stands in contrast to what many investors may be experiencing when looking at their account holding. The Yahoo Finance chart below shows the price action of the highest reinvested distribution ETFs cited above. An investor who had bought any of these ETFs around the beginning of September would be looking at a capital loss position. Yet the reinvested distributions would make them liable for considerable taxable capital gains.<br />
<div style="text-align: center;">
<i>(click on image to enlarge)</i> </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZ3o3q4m2v3SHtn38CLSIuETjqk0_i9HI5-UBaHNKJVaveBAm9ZaMWs-gS_O0ffU6FLYIUBuRK_sQCu98P1_juVHiWRmiF_ga1GIRn0nEZPrqA7gPZfjkQ275e_FH5TJZMFl2CFPYLh9FV/s1600/High-reinvested-distrib2014.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZ3o3q4m2v3SHtn38CLSIuETjqk0_i9HI5-UBaHNKJVaveBAm9ZaMWs-gS_O0ffU6FLYIUBuRK_sQCu98P1_juVHiWRmiF_ga1GIRn0nEZPrqA7gPZfjkQ275e_FH5TJZMFl2CFPYLh9FV/s1600/High-reinvested-distrib2014.jpg" height="222" width="320" /></a> </div>
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To alleviate a potential cash flow problem for the investor to come up with the tax owing, <i><b>First Asset </b></i><a href="http://www.firstasset.com/fr/medias/communiques.php?id=3173">has announced that it is paying out 25% of the special year end distribution on its ETFs in cash</a>. </div>
<br />
<b>To avoid, trade before <a href="http://www.tmx.com/newsroom/press-releases?id=227&year=2014">1pm close of market December 24th</a></b> - Shareholders of record as of December 30th or 31st, depending on the provider, will be liable. To avoid being a shareholder of record for both these dates, taking account of holidays, it is necessary to have sold a position in the ETFs before the TSX closes on December 24th.<br />
<br />
<b>Substitute a similar ETF</b> - The way to stay invested in an intended portfolio allocation, after selling the offending ETF, is to buy a similar ETF, but not one that is identical, to avoid problems with the Canada Revenue Agency superficial loss tax rule that invalidates claims when buying the same property back within 30 days (see <a href="http://www.taxtips.ca/personaltax/investing/taxtreatment/shares.htm">TaxTips explanation</a>).<br />
<br />
Examples:<br />
<ul>
<li>US High-Yield Bonds (CAD-hedged) - Sell CHB and buy BMO's ZHY, which has zero reinvested distribution in 2014</li>
<li>Canadian Dividend Stocks - Sell CDZ or PDC and buy BMO's ZDV, which has a very low reinvested distribution of 0.29% of NAV </li>
</ul>
<span style="color: orange;"><b>Beware buying in till after December 24th </b></span>- Anyone buying these ETFs today and holding past December 24th
will incur a large gain to report. Though the reinvested distribution
amount can and should be added to the Adjusted Cost Base of the
investment, which reduces future capital gains to report upon eventual
sale, the requirement to report the gain on the 2014 tax return means paying tax in
advance before the investor realizes any gain. Needless to say, if you presently have no position in the high reinvested distribution ETFs, but want to buy in, wait till after December 24th to do so, in order to not be tagged with the tax liability.<br />
<br />
Merry Christmas to all blog readers!<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-54033656899126273852014-12-19T07:00:00.000-05:002014-12-20T22:39:05.544-05:00Which Large Cap TSX Stocks are Most Dangerous or Most Attractive? - Use Short Interest with VolatilityUnlike stock analysts or media pundits (bloggers included!) who only take a hit to their credibility when their stock recommendations go wrong, short sellers (see <a href="http://www.investopedia.com/terms/s/shortsale.asp">short sale definition on Investopedia</a>) have their money where their mouth is. And perhaps due to that fact, short sellers are often right (that doesn't mean they always make money, it's a win-big, lose-big stock market trading strategy).<br />
<br />
The recently published <i>The Long and Short of the Vol Anomaly</i> by Bradford Jordan and Timothy Riley (<a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2442902">free download on SSRN</a>) studied the inter-action of stock price volatility and the amount of short interest on stocks in the USA from 1991 to 2012. The authors discovered the intriguing relationship that though low volatility stocks outperformed the market and high volatility stocks on average, if the high vol stocks are subdivided into those the short sellers are leaving alone from those they are attacking, there is a huge and consistent gap in performance. This graph from their study shows the enormous difference in long term performance.<br />
<div style="text-align: center;">
<i>(click on image to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcJrjHYAmM36ZabBk3Fk68s2WR8v4XCGtnwx4flP9-330zx_ALMKw2AkRsr5DOaPmLRHWhmjP-n2FT9qQPxMj_iKdN6keilrPbPt279LEdzVhdSXrBH_i81XQd_06DyDjgumubg1lRIpLo/s1600/Short-vs-Vol-chart.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcJrjHYAmM36ZabBk3Fk68s2WR8v4XCGtnwx4flP9-330zx_ALMKw2AkRsr5DOaPmLRHWhmjP-n2FT9qQPxMj_iKdN6keilrPbPt279LEdzVhdSXrBH_i81XQd_06DyDjgumubg1lRIpLo/s1600/Short-vs-Vol-chart.png" height="223" width="320" /></a></div>
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The <span style="background-color: white;"><span style="color: red;">high vol - <u>high </u>short stocks are real dogs</span></span> (<span style="color: red;">red line</span> in graph) and the <span style="color: cyan;"><b><span style="background-color: white;">high vol - <u>low </u>short stocks are real winners</span></b></span> (<b><span style="color: cyan;">light blue</span></b> <b><span style="color: cyan;">line</span></b>)! In between, but still much better than the <b><span style="color: purple;">market index of the dotted purple line</span></b>, are the <b><span style="color: #38761d;">significantly out-performing low vol - low short interest stocks</span></b> (<span style="color: #38761d;"><b>green line</b></span>).<br />
<br />
Those results look intriguing. We decided to to apply the idea to the large cap ($2 billion plus market cap) TSX stocks.<br />
<br />
<b>Finding the Short Interest and Volatility of TSX Stocks</b> <br />
<a href="http://web.tmxmoney.com/screener.php?qm_page=66538">TMX Money seems to offer the only free stock screener</a> to find stocks with our desired combination of beta / volatility and short interest.<br />
<br />
The <b>Short Interest Ratio</b> (see <a href="http://en.wikipedia.org/wiki/Short_interest_ratio">Wikipedia definition</a>) is the number of shares sold short currently outstanding divided by the average daily share trading volume averaged over the past 30 trading days.<br />
<br />
Note that lists like the <a href="http://www.financialpost.com/markets/data/market-short_pos.html">Financial Post's Largest Short Positions</a> show the companies with the most shorts sold shares outstanding but when the large companies like the banks with huge numbers of shares on the market are on the list, it is not necessarily indicative of large market price risk, especially as the authors found that the huge gains or losses were associated with very volatile stocks, which our Canadian banks are not. For instance, TD Bank currently has a very large short position plus a high short interest ratio of about 20.4x but its beta is only 0.81, well below the TSX market average of 1. Though many short sellers are expecting TD to go down (making us think that those who would want to buy TD likely won't lose out by waiting), TD doesn't make our list below of high risk & high potential reward / loss due to its low beta.<br />
<br />
The screen capture image below shows how to filter in TMX Money based on short interest, though we could also start filtering with the beta, which is under the <i>Trading and Volume</i> criteria drop down menu. We found by trial and error that <span style="color: purple;">a beta of over 2</span> (i.e. twice as volatile as the TSX overall) was sufficient to bring up a small list of stocks, most of which are highly shorted but a few of which are very lightly shorted.<br />
<br />
<div style="text-align: center;">
<i>(click on image to enlarge)</i> </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgM5z5U-mid8AXZPMTGd3qwV8OrIzhC7myCHkCcEWXy4yyRPO3AnpaWmooXfxYG1PW1rChf6sYQDOxaWqqojflz2CEYiEnj3uTzQVPJoki1tJbfs3z9aKIKe1wW0ppxoc5zpssiOiQ_HtUC/s1600/Short-stock-screener.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgM5z5U-mid8AXZPMTGd3qwV8OrIzhC7myCHkCcEWXy4yyRPO3AnpaWmooXfxYG1PW1rChf6sYQDOxaWqqojflz2CEYiEnj3uTzQVPJoki1tJbfs3z9aKIKe1wW0ppxoc5zpssiOiQ_HtUC/s1600/Short-stock-screener.png" height="262" width="320" /></a></div>
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<br />
Once the filter is applied the results do not automatically show the short interest and the beta - it is necessary to click on <i>Edit Columns</i> then <i>View More Selections</i> to select the Short Interest Ratio and 60 Mth Beta columns for display. TMX provides beta for computed over the past 60 months only (unfortunately, the 36 Mth Beta doesn't bring up anything), so we cross checked with the 36 month trailing beta from <a href="http://www.theglobeandmail.com/globe-investor/my-watchlist/">GlobeInvestor's WatchList tool</a> by entering the stocks into a new portfolio.<br />
<br />
<b>The Stocks</b><br />
Our comparison table below shows what we found, colour coded to match the graph from Jordan and Riley - <span style="color: red;">red the dangerous highly volatile and highly shorted</span>, <span style="color: cyan;"><b>blue the potentially very attractive highly volatile but lightly shorted</b></span> and <b><span style="color: #38761d;">green the safest least volatile - least shorted combination</span></b>. For added interest we've thrown in data on the Analyst recommendations and Analyst EPS dispersion, along with which of these stocks happen to be held by some popular ETFs.<br />
<div style="text-align: center;">
<i>(click on image to enlarge)</i> </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0VGkPSNogY4MUbQ0GfXWgXz-7ALvy3uIJmEIgv-Xa3AN4lWPD8bP55MqrhpPPseAghpV664ws3_k31Qcl_rHbR8qoku4fUZyRrX7IUi-lDrwDD1JpY1rGJNgFyxenBnJ0bAwK4sHnMYE-/s1600/Short-2014Dec-table.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0VGkPSNogY4MUbQ0GfXWgXz-7ALvy3uIJmEIgv-Xa3AN4lWPD8bP55MqrhpPPseAghpV664ws3_k31Qcl_rHbR8qoku4fUZyRrX7IUi-lDrwDD1JpY1rGJNgFyxenBnJ0bAwK4sHnMYE-/s1600/Short-2014Dec-table.png" height="208" width="320" /></a></div>
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<br />
<span style="color: red;"><b>The dangerous highly volatile and highly shorted</b> - <span style="color: black;">Little surprise, every one of these companies is either <b>from the energy or the materials sectors</b>, which have been taking the brunt of recent market declines. All of them also display a high dispersion between high and low Analyst EPS estimates, which <a href="http://howtoinvestonline.blogspot.co.uk/2014/11/how-effective-is-using-dispersion-of.html">we have found</a> to be a characteristic of stocks with more downside than upside potential. This blogger won't be buying any <span style="color: red;">Tahoe Resources</span>, <span style="color: red;">Lundin Mining or MEG Energy</span> in the near future, no matter what Analyst recommends them as a Buy!</span></span><br />
<br />
<span style="color: cyan;"><b>A handful of potentially highly rewarding </b></span><span style="color: red;"><span style="color: black;"><span style="color: cyan;"><b>highly volatile but lightly shorted stocks</b></span> - A big surprise here, three of four are energy related - </span></span><br />
<ul>
<li><span style="color: red;"><span style="color: black;">Precision Drilling (TSX: PSK) and </span></span></li>
<li><span style="color: red;"><span style="color: black;">OANDO Energy resources (TSX: OER) - or materials - </span></span></li>
<li><span style="color: red;"><span style="color: black;">PrairieSky Royalty (TSX: PSK). </span></span></li>
<li><span style="color: red;"><span style="color: black;">The other is Air Canada (TSX: AC).</span></span></li>
</ul>
<br />
<span style="color: red;"><span style="color: black;">Surprise! There are <span style="color: #38761d;"><b>energy and materials companies amongst our dozen safe-looking </b></span></span></span><span style="color: red;"><span style="color: black;"><span style="color: #38761d;"><b><b><span style="color: #38761d;">least volatile - least shorted</span></b> stocks</b></span> - For example:</span></span><br />
<ul>
<li><span style="color: red;"><span style="color: black;">Whitecap Resources (TSX: WCP), </span></span></li>
<li><span style="color: red;"><span style="color: black;">Keyera Corp (TSX: KEY), </span></span></li>
<li><span style="color: red;"><span style="color: black;">Peyto Exploration (TSX: PEY), </span></span></li>
<li><span style="color: red;"><span style="color: black;">Domtar (TSX: UFS) and </span></span></li>
<li><span style="color: red;"><span style="color: black;">Franco-Nevada (TSX: FNV). </span></span></li>
</ul>
<span style="color: red;"><span style="color: black;">No surprise, the safe-group stocks' EPS dispersion numbers mostly fall within the lowest or middle riskiness category of that measure.</span></span><span style="color: red;"><span style="color: black;"></span></span><br />
<span style="color: red;"><span style="color: black;"><br /></span></span>
<span style="color: red;"><span style="color: black;"><span style="color: orange;"><b>Short Sellers do NOT at all have the same opinions about the stocks as the Analyst consensus</b></span> - to say the least! None of the red group is rated a Sell by Analysts, two are Holds and most - 8 of 12 - are Moderate Buys. Who would you rather believe, those who have their money at stake, or who will suffer only a dent in their reputation? As <a href="http://howtoinvestonline.blogspot.co.uk/2010/07/stock-market-analyst-forecasts-add-salt.html">we wrote back in 2010</a>, take Analyst recommendations with a large grain of salt. Now we can add, the short sellers are that grain of salt.</span></span><br />
<span style="color: red;"><span style="color: black;"><br /></span></span>
<span style="color: red;"><span style="color: black;"><span style="color: blue;"><b>ETF holdings differ dramatically</b></span> - The benchmark market cap ETF from iShares, the <a href="http://www.blackrock.com/ca/individual/en/products/239832/?referrer=tickerSearch">S&P / TSX 60 Index fund</a> (TSX: XIU) has a bunch of the short-sellers' targets but none of the stocks in the least-risky list. Meantime, <a href="http://www.etfs.bmo.com/bmo-etfs/glance?fundId=86812">BMO's Low Volatility Canadian Equity ETF</a> (TSX: ZLB) has none of the short sellers' favorites and several of the least-risky group. The fundamentally weighted <a href="https://www.invesco.ca/publicPortal/portal/retail.portal?_nfpb=true&_nfxr=false&_pageLabel=product_powerSharesETFs_page_label#page3">PowerShares FTSE RAFI Canadian Fundamental Index ETF</a> (TSX: PXC) is a mix of the two. There are plenty of other stocks in these ETFs so performance will not be determined only by what happens to the 10% or so of the holdings which appear in our lists of this post. But look at the price performance of the three ETFs over the last six months in this Google Finance chart. XIU and PXC are down considerably, while ZLB is up!</span></span><br />
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<i>(click on image to enlarge)</i></div>
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<span style="color: red;"><span style="color: black;"><br /></span></span>
<span style="color: red;"><span style="color: black;"><br /></span></span>
<span style="color: red;"><span style="color: black;"><b>More investigation is required before buying any individual stock</b> - No doubt some of the stocks in the respective groups will do as the research suggests - gangbusters up or down. The short seller signal is not a certainty for each and every stock. Some will do the opposite of the overall pattern. The research took baskets of stocks - much larger than the groups above - and averaged their performance, in addition to doing so over years. It's a statistical result that looks to be quite robust based on all the tests and checks the authors performed but common sense should warn us that it won't work in every case. </span></span><br />
<span style="color: red;"><span style="color: black;"><br /></span></span>
<span style="color: red;"><span style="color: black;">As it happens, the Globe and Mail recently published the article <a href="http://www.theglobeandmail.com/globe-investor/investment-ideas/number-cruncher/digging-for-value-in-the-oil-sands/article22094451/"><i>Ten oil patch stocks that can weather the downdraft</i></a>, which contains Canadian Oils Sands (TSX: COS), one of our red danger stocks. The article presents some data to support a positive assessment of COS. Maybe the short sellers are wrong and it could be a good buy after all. But the short selling interest data we have presented is, we believe, a useful element to the analysis of the company.</span></span><br />
<span style="color: red;"><span style="color: black;"><br /></span></span>
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-82681187501444788992014-12-15T18:18:00.000-05:002014-12-15T18:18:08.123-05:00Liability-Driven Investing during Retirement for the IndividualTraditional investing strategy seeks to maximize returns considering the risk involved. Asset classes are selected and weighted according to how well they fit together, for the amount of diversification they provide along with their risk and return relative to the risk tolerance of the investor. The time horizon of expected withdrawals shapes the asset allocations but the overall goal of the portfolio is to provide an adequate total return. This investing approach in retirement leads to the determination of a safe withdrawal rate that protects the portfolio from depletion before death, epitomized by the standard 4% rule (see <a href="http://howtoinvestonline.blogspot.co.uk/2009/11/sustainable-portfolio-withdrawal-rate-4.html">our original here</a> and a <a href="http://howtoinvestonline.blogspot.co.uk/2014/09/refining-4-retirement-withdrawal-rate.html">recent update</a>). A portfolio may not even change at all between the savings phase of life and retirement, as we discovered when we wrote about a feasible <a href="http://howtoinvestonline.blogspot.co.uk/2014/06/the-reluctant-investors-lifelong.html">Lifelong Portfolio</a> consisting of a 50-50% stock-bond mix.<br />
<br />
<a href="http://en.wikipedia.org/wiki/Liability-driven_investment_strategy">Liability-driven investing</a> (LDI) takes a completely opposite tack. The goal of the portfolio is to meet future cash spending. As we remarked last week, defined benefit pension plans like the <a href="http://hoopp.com/">Healthcare of Ontario Pension Plan</a> (HOOPP) are prime exponents since their sole purpose is to provide pension income as promised. The idea of LDI is to match the portfolio cash flows to the required spending - the liabilities - in terms of dollar amounts, timing and risk. We work backwards from the spending to the portfolio.<br />
<br />
In terms of retirement income planning, the 4% rule and LDI are the ends of a spectrum of possibilities, recently brilliantly described and impartially assessed by Wade Pfau and Jeremy Cooper in <a href="http://www.republicast.com/publications/6a490775ca994e50a54ca9ac68b550c3/#p=1&c=0&v=1" target="_blank">The Yin and Yang of Retirement Income Philosophies.</a> It is well worth reading for the non-technical discussion of the practical pros and cons of the gamut of income and investing strategies.<br />
<br />
The best way to show the differences is with some examples.<br />
<br />
<b>Test Case</b><br />
- 65 year old man or woman,<br />
- starting retirement, no part-time job<br />
- portfolio worth $1 million, <br />
- eligible for full <a href="http://www.servicecanada.gc.ca/eng/services/pensions/payments-2014.shtml">Canada Pension Plan ($12,450/yr) and Old Age Security ($6765/yr), a total of $19,215 per year</a><br />
- portfolio in a RRSSP/RRIF or other registered account, so it is all income subject to taxation (thus the portfolio allocation between dividends or capital gains from stocks vs interest from bonds doesn't matter)<br />
- basic needs require $50,000 annual income, i.e. $30,785 after CPP & OAS, plus<br />
- wants or discretionary luxury spending<br />
<br />
<b>The 4% Rule</b><br />
$1,000,000 x 0.04 = $40,000<br />
... for any and all spending needs to be adjusted upwards each year for the previous year's inflation so that spending power aka standard of living is maintained, hopefully as long as required, but historically the portfolio always lasted at least 30 years. In most historical instances, the portfolio ended up with a substantial balance, many times higher than at start of the retirement period.<br />
... total $59,215 including CPP & OAS, or<br />
... $9,215 above the basic needs<br />
<br />
The big disadvantage is that though it always worked out in the past, there is no guarantee. Since nowadays future returns don't look so rosy and since many countries haven't fared as well as the USA, on which the 4% rule was based, it might be more cautious to take out less, like only 3.5% per year:<br />
$1,000,000 x 0.035 = $35,000<br />
... total $54,215 or<br />
... $4,215 above basic needs<br />
<br />
<b>LDI Strategy</b><br />
To match spending with income, it is first necessary to distinguish really essential spending with discretionary luxury spending. An image from The Yin and Yang shows it thus:<br />
<div style="text-align: center;">
<i>(click image to enlarge)</i></div>
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The Age Pension layer is CPP and OAS. On top of that, to meet needs there must be regular, no-variation, inflation-adjusted, lifetime, no-default, no-reduction income. Above that, the luxury spending can depend on more volatile assets, in the probability-based blue zone.<br />
<br />
As a result, the portfolio gets divided between the Liability-Matching Portfolio (LMP) to meet needs and the Return-seeking risky portfolio (RP) to meet luxuries.<br />
<br />
<b>Option 1 - Buy an annuity to implement the LMP</b><br />
Using <a href="http://www.cannex.com/">Cannex</a>'s proprietary (pay-only access) website, to which this blogger has been graciously granted temporary access, we have obtained current rates for lifetime annuities. Professional planners and/or insurance agents normally would provide real quotes to investors. It's not a DIY online purchase possibility.<br />
<br />
<b>The Annuity</b> / <b>LMP</b>: <br />
- Single-premium,<br />
- No guaranteed period of payments if you die early, in order that the best value of lifetime income is gained through higher mortality credits aka the money of people who die earlier than you,<br />
- Single life, (income is lower for a couple that chooses joint life, where some or all of the annuity continues after the first spouse dies)<br />
- Lifetime so that there is no need or desire to guess how long you will live <br />
- Providing $30,785 income for needs spending<br />
- Rising 2% per year, the best estimate today of future inflation, since no Canadian annuity providers actually offer annuities that directly guarantee CPI-indexing. Here we have a small but potentially significant disadvantage if inflation should unexpectedly rise above 2% for an extended period a la 1970s.<br />
<br />
Highest income quotes (as of 12 December 2014):<br />
<ul>
<li><i>Male</i> - $6483 income per $100,000, or about $577,000 to buy $30,785 of total annual income</li>
<li><i>Female</i> - $4761 income per $100,000, or $647,000 (more expensive since women live longer than men)</li>
</ul>
<b>The RP portion</b><br />
The RP is the remaining difference after the lump sum to buy the annuity is taken from the portfolio. It can take the same return-risk optimizing structure as and be withdrawn according to the same 4% rule as for a normal portfolio.<br />
<ul>
<li><i>Male</i> - $1,000,000 - $577,000 = $423,000 x 0.04 = $16,900 more per year, i.e $66,900 in total. Looks pretty good especially since basic needs are covered by the most solid lifetime guarantees available. </li>
<li><i>Female</i> - same calculation gives $14,100 income extra from the RP and $64,100 in total</li>
</ul>
Readers who want to fairly accurately estimate what a quote for an indexed annuity would cost can do this by first getting un-indexed quotes from the free <a href="http://www.globeinvestor.com/servlet/Page/document/v5/data/rates?pageType=annuity_joint&guarantee_term=0&survey_type=JL&sex_of_joint=F&fund_type=R&province_of_residence=ON">Globe and Mail daily updated annuity rates table</a>, then apply an estimate for 30 years worth <a href="http://www.retailinvestor.org/annuity.html#inflation">do-it-yourself inflation protection as described by RetailInvestor.org</a>.<br />
<br />
Probably the biggest negative for this option is having to give up control, access to and ownership of the annuity lump sum. Once the annuity starts, there is no flexibility or way to back out. <br />
<br />
<b>Option 2 - Make your own annuity-like cashflow with Real Return Bonds in a ladder or an ETF</b> <br />
Real return bonds issued by the Government of Canada have the desired features for our needs - default-free AAA-rated, long term (with maturities out to 34 years from today, which handles almost all life expectancies for 65 year-olds), steady payment (twice a year like any bond) and inflation-indexed (unlike the above annuities, RRBs are linked directly to CPI increases). <br />
<br />
The <a href="http://www.blackrock.com/ca/individual/en/products/239490/?referrer=tickerSearch">iShares Canadian Real Return Bond Index ETF</a> (TSX symbol: XRB), or a selection of its holdings an investor could buy to create a bond ladder, can be used to create the LMP. XRB's Yield to Maturity is presently 2.33%. Reducing that gross amount by the fund's MER of 0.39%, we get a net expected yield, which if you simple buy and hold the ETF is what you will almost exactly get, of 1.94%.<br />
<br />
<b>The XRB Holding</b> - A holding that is to be consumed over 30 years with that return works out to $695,000 (it's an amortization problem - 1.94%, 30 years, payments of $30,785). For a 35 year retirement duration / life expectancy, e.g. for a woman instead of a man or an earlier retirement date, the sum to invest in XRB is $777,000.<br />
<br />
The uncertainty over life expectancy and the amount to invest is a disadvantage compared to a lifetime annuity but at least erring on the conservative side only results in more money being left in a legacy. As well, the funds remain under the control of, and accessible to, the investor at all times.<br />
<br />
<b>The RP portion</b><br />
The two life expectancies we have used give an RP and discretionary fund withdrawal at a 4% rate of:<br />
<ul>
<li>30 years - $305,000 capital value, $12,200 income, for a $62,200 total</li>
<li>35 years - $223,000 capital value, $8,900 income, for a total of $58,900</li>
</ul>
<b>Bottom Line</b>: The contrast between the 4% rule and the LDI approach presents a choice - the 4% rule allows the investor to retain complete control but no certainty of lifetime retirement income; the LDI approach allows higher and guaranteed income but loss of control over a big slice of assets. As the Yin and Yang document itself concludes, "<i>While neither a probability-based</i> [the 4% rule] <i>nor a safety-first approach</i> [LDI] <i>is definitively right or wrong, different people will align more easily with one or the other</i>".<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com2tag:blogger.com,1999:blog-4751610667110065763.post-3780912018918806632014-12-11T17:24:00.000-05:002014-12-11T17:24:34.703-05:00Investing Ideas from Two Highly Successful Pension Funds - Ontario Teachers' and Healthcare of OntarioThe <a href="http://www.otpp.com/">Ontario Teachers' Pension Plan</a> (OTPP), with ten-year annualized compound investment returns of 8.9% at 2013 year-end, has been recognized as the number one rated pension fund in the world, which it understandably <a href="http://www.otpp.com/investments/essentials">boasts about on its website</a>. At $140.8 billion in assets as of the end of 2013, it is also the largest in Canada according to the latest tally in the <a href="http://www.benefitscanada.com/wp-content/uploads/2014/06/06.14_Top100PensioPlans.pdf">June 2014 Benefits Canada review of the top 100 plans</a>. Another highly successful pension plan is the <a href="http://hoopp.com/">Healthcare of Ontario Pension Plan</a> (HOOPP) with $51.6 billion in pension assets and a 9.7% ten-year annualized return at the end of 2013. While most of us ordinary investors can only look with envy at such fully-funded plans that deliver substantial inflation-indexed lifetime income (OTPP says it has one retiree who has been collecting a pension for over 45 years!), we've delved into their websites to see how they do it and what good ideas we can apply to our own pre- and post-retirement investing.<br />
<br />
1) <b>Save more, get more pension income</b> - On the one hand, the 96th place <a href="http://www.peba.gov.sk.ca/MEPP/PDF/Highlights.pdf">Municipal Employees' Pension Plan of Saskatchewan (MEPP)</a> contribution rate of 8.15% each from employee and employer totalling 16.3% gives a combination 1.5% and 1.8% (two rates for different time periods) per years worked of salary non-indexed pension.<br />
<br />
Contrast that with <a href="http://www.otpp.com/members/your-working-years/contributions/contributions-q-as">OTPP's current 13.1% contribution rate</a> above the CPP limit and 11.5% up to the CPP limit (both also doubled by employer contributions) that gives a 2.0% per year of salary indexed pension, though the indexation is not guaranteed. HOOPP collects 6.9% up to the CPP limit from the employee and 9.2% above that and 1.26 times each from the employer for 15.6% and 20.8% in total. It pays out 2% per year, 75% indexed for inflation.<br />
<br />
An additional thought for an individual investor is that the automatic deduction of pension contributions from the paycheque no doubt makes it far easier to save. The money is never seen in the bank account and the temptation to spend it never arises (see <a href="http://howtoinvestonline.blogspot.co.uk/2010/08/exploiting-laziness-procrastination-and.html"><i>Exploiting Laziness, Procrastination and Conformity in Investing</i></a>)<br />
<br />
2) <b>Plan monitoring and flexibility is essential</b> - Despite being superbly managed, OTPP and HOPP must make adjustments like changing contribution rates, which affects current workers, or inflation-indexing, which affects retirees, to cope with evolving conditions. Factors that are putting pressure on these pension plans also affect us as individuals.<br />
<br />
Rising life expectancy is one - the average OTPP member works for 26 years and collects benefits for 31 years. Something, or a combination of things, must be changed to cope - higher savings, longer working career, part-time income, reduced pension withdrawals (like the inflation indexing).<br />
<br />
Expected investment returns is another - With 70 or 80% of the pension payout dollars at OTPP and HOOPP coming from investment profits, not from contributions, changes in future returns have a critical impact. <br />
<br />
For individuals, that's why we advocate the same kind of annual monitoring and adjustment - posts <a href="http://howtoinvestonline.blogspot.co.uk/2010/01/annual-investment-review-part-2-tax.html">part 1</a> and <a href="http://howtoinvestonline.blogspot.co.uk/2010/01/annual-investment-review-part-2-tax.html">part 2</a> - that pension plans constantly do.<br />
<br />
3) <b>Bond rate returns are lower and the conservatively-assessed cost of providing pension income is thereby higher</b>, while expected inflation remains about 2% - The pension plans assess the cost of providing a pension according to expected real / after-inflation return based on an ultra-safe long term (30+ year) bond rate. With that base a total rate of return is derived that would include an expectation for its higher return equity portfolio components. OTPP in its 2013 annual report used a real expected return of 2.85%, while HOOPP and MEPP used 4.0%.<br />
<br />
Individual investors can use this to ballpark a range of possible numbers to answer the "how much do I need to retire?" question. For a 30-year retirement to provide $40k annual income, these are the portfolio "nest-eggs" for the rates of return:<br />
<ul>
<li>2.85% - $799k</li>
<li>4.0% - $692k</li>
</ul>
and for a totally-safe portfolio consisting only of real-return Government of Canada bonds, at current rates (at the bottom of this <a href="http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/">Bank of Canada page with daily updated rates</a>):<br />
<ul>
<li>0.65% - $1087k</li>
</ul>
The pension plans all assume future inflation around 2%, which is also the middle of the <a href="http://www.bankofcanada.ca/core-functions/monetary-policy/inflation/">Bank of Canada 1 to 3% policy target range</a>, so that's the sensible assumption we investors should use too.<br />
<br />
4) <b>Asset allocation includes equity to boost returns</b> - The pension plans need the higher returns of equity to maintain their fully-funded sustainability while keeping contributions at reasonable levels. It's a trade-off that entails higher annual volatility and more uncertain long term returns. OTPP has about 36% of its portfolio in equities (if the effect of the negative allocation i.e. borrowing / leverage is removed). Non-Canadian equities are much larger than Canadian holdings and the foreign currency exposure is not hedged. HOOPP is more or less the same. Foreign equity provides diversification (volatility reduction) and a return boost.<span style="color: orange;"><b> Its approach on currency is opposite to OTPP's as HOOPP hedges its foreign currency exposure</b></span>. The foreign equity market exposure strategy is something individual investors can apply too by buying non-hedged Canadian funds or US funds. Conversely, many hedged funds are available for those who decide to take that tack.<br />
<br />
5) <b>Active management is alive, and seemingly quite well</b> - Rejecting the oft-repeated mantra directed at individual investors, the pension plans believe strongly in active management and the possibility of out-performance.<br />
<br />
OTPP's 2013 Annual Report on page 20 says that "<i>Active management is a cornerstone of the plan's investment success</i>". They don't do this willy-nilly, focusing especially on illiquid investments. The numbers seem to bear out their confidence, with their 8.9% ten year returns considerably ahead of the 7.2% figure for their benchmark.<br />
<br />
HOOPP takes a similar stance, touting a 2.09% contribution from active management to its total 2013 return of 8.55%.<br />
<br />
Whether an individual investor should be trying to do the same must be an individual choice and it should be based on having some sort of insight or advantage that the bulk of other investors do not have. We have previously written about circumstances where the individual investor could gain such an advantage - e.g. <a href="http://howtoinvestonline.blogspot.co.uk/2013/02/investing-in-illiquidity-where-small.html">small illiquid stocks</a> (which the pension funds will ignore because they are too small) and <a href="http://howtoinvestonline.blogspot.co.uk/2010/01/market-efficiency-implications-for.html">places where the market can be less efficient</a>.<br />
<br />
The other takeaway for investors who cannot copy the active investing success of the pension funds is that we should expect returns more akin to the passive benchmarks. Such benchmark returns are exemplified in broadly-diversified market-representative ETFs.<br />
<br />
6) <b>Assessing Environmental, Social and Governance (SRI / ESG) factors of potential investments is worthwhile but not decisive</b> - Both OTPP and HOOPP state quite emphatically that it is important and worthwhile to take ESG factors into account e.g. HOOPP Annual Report 2013 (p24) "<i>Our belief is that enterprises that effectively manage environmental, social and governance (ESG) risks will, over the longer term, generate better financial returns and reduce operating and financial risks.</i>" However, the ESG factors must be material - actually have an effect on the enterprise. And ESG factors are not on their own decisive in accepting or rejecting investments. We note in passing that the Canada Pension Plan Investment Board, which manages the investments that help sustain CPP for all Canadians, <a href="http://www.cppib.com/en/how-we-invest/sustainable-investing.html">says the same</a>.<br />
<br />
Doing ESG assessment sounds quite practical and sensible, and an approach that the individual investor can apply too, which is why we have written often about Canadian companies and the type of ESG factors that research confirms is material - see the series of posts in the Sustainable Investing section of our <span style="color: #38761d;"><b><a href="http://howtoinvestonline.blogspot.co.uk/2014/05/howtoinvestonline-guide-to-self.html"><i>Guide to Online Investing</i></a></b></span>.<br />
<br />
7) <b>Costs matter</b> - As organizations dedicated solely to providing pensions for members, the pension plans pay close attention to managing costs. Costs are one of their measured performance criteria. Despite the higher costs that active management inevitably entails, OTPP kept overall costs to 0.28% of assets in 2013, while HOOPP was at 0.31%.<br />
<br />
The individual investor can benefit from adopting a similar cost control philosophy. Where can costs be controlled?<br />
<ul>
<li>Finding ways to reduce foreign exchange conversion costs (e.g. <a href="http://www.taxtips.ca/stocksandbonds/washingtrades.htm">TaxTips's washing trades</a> and <a href="http://canadiancouchpotato.com/2013/12/03/norberts-gambit-the-complete-guide/">Norbert's Gambit guide for conversions between Canadian and US dollars on Canadian Couch Potato</a>)</li>
<li>Limiting trading by investing for the long term and using automatic free dividend reinvestment programs where available</li>
<li>Picking lower fee ETFs, or asking hard questions as to why a higher fee fund will perform better</li>
<li>Keeping income taxes in mind at all times (see the numerous posts in the Taxes section of our <a href="http://howtoinvestonline.blogspot.co.uk/2014/05/howtoinvestonline-guide-to-self.html"><i>Guide to Online Investing</i></a>)</li>
</ul>
8) <b>Portfolio construction and asset class selection are based on a specific role for each asset class</b> - The pension plans do not pick asset classes by holding a chunk of everything. Each asset class has a function and the overall mix is a balance between the positive characteristic each provides and its downside. Both OTPP and HOOPP seem to perceive the asset classes the same way:<br />
<ul>
<li>Equities - higher returns in the long term but higher volatility in the short term</li>
<li>Non-Canadian equities - higher returns plus reduction in volatility through diversification (i.e. a degree of non-correlation with Canadian equities)</li>
<li>Fixed income - lower volatility in the short term but lower returns in the long term</li>
<li>Corporate bonds - higher returns but more credit risk </li>
<li>Real return bonds - inflation protection but lower returns</li>
<li>Real assets (real estate, infrastructure) - long term assets for the plans' long term horizon with cash inflows providing inflation protection to match the expected pension cash outflows</li>
<li>Natural resources (commodities) - higher returns plus long term hedge for unexpected inflation but greater volatility in the short term</li>
</ul>
For an individual investor, this method of selecting the building blocks for a portfolio is quite feasible. We described a couple of portfolios based on such a principle - <a href="http://howtoinvestonline.blogspot.co.uk/2013/03/a-model-pre-retirement-portfolio-for.html">one inspired by our take of the ideas of Yale University endowment manager David Swensen</a> and <a href="http://howtoinvestonline.blogspot.co.uk/2013/03/new-improved-model-portfolio-smart-beta.html">another that embodies a form of active management through the use of Smart Beta funds</a>.<br />
<br />
9) <b>Risk means more than asset price volatility</b> - Market price volatility, so often presented as the only measure of risk to individual investors, is important to the pension funds. But other risks matter too, like:<br />
<ul>
<li>liquidity risk, the chance of not being able to have cash to pay out when promised or needed; </li>
<li>foreign currency variations on non-Canadian holdings, since that can affect the value of assets and returns as much or more than market price changes;</li>
<li>credit risk, the chance of default, which is higher when more yield is sought from bonds;</li>
<li>inflation, especially unexpected inflation not built into the prices and returns of bonds;</li>
<li>interest rate changes, which counter-intuitively work the opposite way to what many would expect - when interest rates go down, a pension plan's future liabilities for pensions it will have to pay out go up, and that pushes plans towards being under-funded; an interest rate rise lowers the current value of the bonds held but it lowers the value of the future liabilities even more, so the plan is net better off. One way for the individual investor to think about this is exemplified in point 3 above. If you buy a series of inflation-protected real return bonds that will exactly match your future cash flow needs you can entirely remove the interest rate and inflation risk. That is what is called a fully immunized financial situation. But as the cost for the totally-safe RRB portfolio above shows, it takes a lot more money. Most people, and pension plans, cannot save that much, so it is necessary to rely on higher investment returns to make up the gap. That's why OTPP says "<a href="http://www.otpp.com/investments/investment-strategy/our-beliefs"><i>Taking risk is necessary to earn the returns required to meet our pension obligations</i></a>".</li>
</ul>
We have discussed these risks, and potential counter-measures, in a number of posts listed in the Risk section of our<i> <a href="http://howtoinvestonline.blogspot.co.uk/2014/05/howtoinvestonline-guide-to-self.html">Guide to Online Investing</a></i>. <span style="color: #38761d;"><b>Diversification - across asset classes, geographies, time horizons and reaction to varying economic environments - is a key method of dealing with risk</b></span>, both for the pension funds and, we suggest, for the individual investor.<br />
<br />
Liability-driven investing (LDI) - For retirement investment, the idea of dealing with risk by tailoring the whole strategy around matching future obligations to assets is now very popular among pension funds, HOOPP being a prime exponent. In our next post, we'll explore how LDI can apply to the individual investor.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-775491974062883502014-11-27T18:42:00.002-05:002014-11-27T18:43:45.300-05:00Which Stocks and ETFs are Safe and Secure per the Dispersion of Analyst EPS EstimatesAs promised last week, today we review the stocks that look most or least attractive according to the degree of dispersion of professional analyst EPS estimates. The lower the dispersion between the highest and the lowest EPS estimate, the better; those are the most attractive stocks. We had previously <a href="http://howtoinvestonline.blogspot.co.uk/2012/12/using-wisdom-of-crowds-of-analysts-to.html">done this in 2012</a> and the results two years later have turned out quite good as we showed last week.<br />
<br />
<b>The method</b><br />
We use the same methods as in 2012. First, we gather a list of stocks by taking all the holdings of three popular Canadian equity ETFs with quite different strategies:<br />
<ul>
<li>the cap-weighted <a href="http://www.blackrock.com/ca/individual/en/products/239832/?referrer=tickerSearch">iShares S&P / TSX 60 Index ETF</a> (TSX symbol: XIU), </li>
<li>the fundamental (accounting) factor weighted <a href="https://www.invesco.ca/publicPortal/portal/retail.portal?_nfpb=true&_nfxr=false&_pageLabel=product_powerSharesETFs_page_label&_nfxr=true&_nfxr=false#page1">PowerShares FTSE RAFI Canadian Fundamental Index ETF</a> (TSX: PXC) and </li>
<li>the low beta (market sensitivity) selected <a href="http://www.etfs.bmo.com/bmo-etfs/glance?fundId=86812">BMO Low Volatility Canadian Equity ETF</a> (TSX: ZLB). </li>
</ul>
Not only does this give us a reasonably complete list of leading stocks, it also allows us to compare the ETFs in terms of analyst EPS dispersion.<br />
<br />
The second step is to find and calculate the percent difference between high and low EPS estimates for 2015 in <a href="https://ca.finance.yahoo.com/q/ae?s=RY.TO">Yahoo Finance - e.g. Royal Bank</a>. For a few companies not available on Yahoo (<span style="background-color: #fff2cc;">pale yellow cells</span> in the tables), we obtained the data in our broker <a href="https://www.bmoinvestorline.com/">BMO InvestorLine</a>'s website.<br />
<br />
Third, we add various bits of data that show stability, consistency and attractiveness, or the opposite:<br />
<ul>
<li>number of years of profits (positive earnings) in the last five from <a href="http://www2.morningstar.ca/homepage/h_ca.aspx?culture=en-CA">Morningstar.ca</a>; </li>
<li>profit surprise vs analyst estimate last quarter, return on equity, total stock return (dividends plus capital gains) for the trailing one- and five-years, price-to-earnings, price-to-book, all from <a href="http://www.theglobeandmail.com/globe-investor/my-watchlist/">Globe's WatchList</a>;</li>
<li>number of women directors, from <a href="http://howtoinvestonline.blogspot.co.uk/2014/11/women-on-boards-pleasing-progress.html">our recent post</a>;</li>
<li>place in our 2012 post EPS dispersion list - <b><span style="color: #38761d;">low (L)</span></b> EPS dispersion category; medium (M) dispersion category, or <span style="color: red;">high (H)</span> dispersion group.</li>
</ul>
<span style="color: #38761d;"><b>The attractive lowest dispersion stocks - More reward than risk</b></span><br />
<div style="text-align: center;">
<i>(click on image to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgE5rfzUfN1qE_YIk80RbsyXpR3_tX2TglpB199xhXyy92ZJPGOJeBk5wNOF-fGuo9JozF_JO9i2-uI0X78uDPbxDyKlLBWiR7-couzwaCFNgxROnSYZ3fnY9EBy_NcYLWatdFd-1kSu9e0/s1600/Low-EPS-disp-best2014.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgE5rfzUfN1qE_YIk80RbsyXpR3_tX2TglpB199xhXyy92ZJPGOJeBk5wNOF-fGuo9JozF_JO9i2-uI0X78uDPbxDyKlLBWiR7-couzwaCFNgxROnSYZ3fnY9EBy_NcYLWatdFd-1kSu9e0/s1600/Low-EPS-disp-best2014.png" height="168" width="320" /></a></div>
<br />
There is a preponderance of good green and a lot of consistency across the table amongst the stocks with the lowest dispersion between the highest and lowest EPS estimates.<br />
<ul>
<li>beta - volatility of stock price relative to the market average of 1.0 - is almost always low, and the worst stock, Finning International (TSX: FTT) has a beta (1.86) nowhere near the highest betas in the bottom group</li>
<li>profit surprises, both positive and negative, are not very large, except for one company Valeant Pharma (TSX: VRX), which is a decided outlier on several other metrics as well</li>
<li>profitability (ROE) is good across the board, as is consistency of profits and total market returns; P/E and P/B ratios seem restrained almost universally too</li>
<li>women directors are more numerous on average - 2.9 per company - compared to the higher dispersion stocks</li>
<li>half the lowest dispersion stocks are repeats from 2012</li>
</ul>
<b><span style="color: orange;">Middle EPS dispersion stocks - Potential reward but more risk too</span></b><br />
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<i>(click on image to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUHZLvGsnA5Y4niyFD2DoeRFV0XG3Mcuwtqdc4DkOCtGutTPlZqV_YqsEh71ZUMD-ObQSAVdQNOKVjRVOI06BpPE0q6eHyha7r9M4-cfRnvnqhMAIXXDIMZH3RGT4t_jBASmilG8M-N8-N/s1600/Low-EPS-disp-middle2014.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUHZLvGsnA5Y4niyFD2DoeRFV0XG3Mcuwtqdc4DkOCtGutTPlZqV_YqsEh71ZUMD-ObQSAVdQNOKVjRVOI06BpPE0q6eHyha7r9M4-cfRnvnqhMAIXXDIMZH3RGT4t_jBASmilG8M-N8-N/s1600/Low-EPS-disp-middle2014.png" height="188" width="320" /></a></div>
<br />
The rising range of EPS estimate dispersion, from 113% to 141% in this group, is accompanied by slightly less green and slightly more more cautious orange across the various indicators. There are higher average P/Es and fewer women directors per company.<br />
<br />
Our surprise comparing this set of results to 2012 is that <span style="color: blue;"><b>there seems to be much less differentiation from the top group</b></span>. Beta seems about the same as the lowest dispersion stocks. There are not many cases of poor profitability (ROE) or inconsistent (5 yr history) profits.<br />
<br />
A number of stocks moved down from the 2012 top group but not one moved up from the bottom group. <br />
<br />
<span style="color: red;">High EPS dispersion stocks - More risk than reward</span><br />
<div style="text-align: center;">
<i>(click on image to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdqOz4Svmd90QKUN8WR6dLf4PXu21hlXxrUT_obrGyvCwHgsGZ429p16ipvvBqX9py6Vo5zDntA7GBe4fby2DVuUq2AwZG5Z_tBmV1YURdhwjAvQk9_cKIgAB72yQfik6i5k2dheWWxRd2/s1600/Low-EPS-disp-worst2014.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdqOz4Svmd90QKUN8WR6dLf4PXu21hlXxrUT_obrGyvCwHgsGZ429p16ipvvBqX9py6Vo5zDntA7GBe4fby2DVuUq2AwZG5Z_tBmV1YURdhwjAvQk9_cKIgAB72yQfik6i5k2dheWWxRd2/s1600/Low-EPS-disp-worst2014.png" height="211" width="320" /></a></div>
<br />
As in 2012, there is plenty of bad red and cautious orange and not much good green in the bottom group. Stocks where the high vs low EPS estimate spread exceeds about 150% look truly risky. There are many companies with volatile profits and negative market returns. Most companies are repeats from the 2012 bottom list. A handful have dropped into the bottom list from the middle but not one fell from the top list to the bottom. These companies also have a much lower average number of women directors.<br />
<br />
<b>Comparing the ETFs - <span style="color: #38761d;">BMO's ZLB is decidedly the least risky and most attractive</span></b><br />
<div style="text-align: center;">
<i>(click to enlarge image)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_Q4zAETDtryzac0JlbHkf1URPGa-a-apoXuj-j6H9CzCxvkO-y8X1VBXeNYba0tulBmwXmqnyoXB_8rLAeWNTPSXsKpLNyAqyLCc9wM65_LD84a_1T9tmAqkDO9sst7xWPclUHWNmU_SZ/s1600/Low-EPS-disp-ETS2014.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_Q4zAETDtryzac0JlbHkf1URPGa-a-apoXuj-j6H9CzCxvkO-y8X1VBXeNYba0tulBmwXmqnyoXB_8rLAeWNTPSXsKpLNyAqyLCc9wM65_LD84a_1T9tmAqkDO9sst7xWPclUHWNmU_SZ/s1600/Low-EPS-disp-ETS2014.png" height="86" width="320" /></a></div>
<br />
<span style="color: blue;">ZLB wins by a long shot over XIU and PXC by holding a lot less of the bottom group with the highest EPS dispersion</span>. Only 10% of its weight is in the bottom group vs around a quarter for both XIU and PXC. ZLB has an appreciably lower weight in the top group stocks but that doesn't matter. It is not surprising that its one-year total return of 26.9% far outstrips the gains of the other two ETFs given the poor overall track record of the bottom groups stocks.<br />
<br />
Will that continue or will XIU and PXC experience a surge to catch up to or leap ahead of ZLB? It all depends on the future of the energy companies and miners, especially gold, whose stocks dominate the listings in the highest dispersion part of the table. XIU and PXC hold them, ZLB mostly doesn't. Who knows if the tide will turn, the professional analysts certainly don't agree as their EPS estimates demonstrate.<br />
<br />
<b>Bottom line:</b> Meantime, the safe route is to focus on the top two groups or ETFs like ZLB.<br />
<br />
<i>Disclosure: </i>This blogger owns shares of stock symbols REF.UN,
BEI.UN, CUF.UN, REI.UN, RY, CNR, NA, NWC, CU, FTS, EMA, MRU, BNS, BMO,
BCE, SJR.B, ACO.X, TD, HR.UN, TRP, IFC, EMP.A, POT, IMO, SU, FCR, TCK.B
as well as the ZLB and PXC ETFs that own virtually all the stocks in the
tables.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-15762450496793856822014-11-21T06:56:00.001-05:002014-11-21T06:56:24.679-05:00How Effective is Using Dispersion of Analyst EPS Estimates to Assess Stocks?Two years ago <a href="http://howtoinvestonline.blogspot.co.uk/2012/12/using-wisdom-of-crowds-of-analysts-to.html">our post applied the "wisdom of the crowds"</a> principle, <a href="http://www.amazon.co.uk/Wisdom-Crowds-Many-Smarter-Than/dp/0349116059">made famous by James Surowiecki</a>, to analyst future Earnings Per Share (EPS) estimates to try to differentiate attractive safe Canadian stocks from the not-so-attractive companies. The academic research we uncovered at the time suggested it should be effective but it's always important to check actual results against the theory, so now let's do an update and see what has happened.<br />
<br />
As before, we took our 2012 list of the best - the stocks with the lowest dispersion between high and low analyst next year (2013 in the 2012 post) EPS estimates - and the worst - those with the widest spread - and plugged the numbers into a <a href="http://www.theglobeandmail.com/globe-investor/my-watchlist/#dashboard/follows/">GlobeInvestor WatchList</a> to get the trailing one- and five-year total returns (the sum of capital appreciation plus dividends). Our benchmark for success is the mainstream large company ETF the <a href="http://www.blackrock.com/ca/individual/en/products/239832/?referrer=tickerSearch">iShares S&P / TSX 60 Index Fund</a> (TSX symbol: XIU) whose holdings along with the <a href="http://www.etfs.bmo.com/bmo-etfs/glance?fundId=86812">BMO Low Volatility Canadian Equity ETF</a> (TSX: ZLB) and the <a href="http://www.etfs.bmo.com/bmo-etfs/glance?fundId=86812">PowerShares FTSE RAFI Canadian Fundamental Index ETF</a> (TSX: PXC) we had used to assemble 110 candidate stocks.<br />
<br />
<span style="color: #38761d;"><b>Low EPS dispersion stocks performed impressively well</b></span><br />
In our comparison table below of the lowest dispersion stocks in 2012, <b><span style="color: #38761d;">green</span></b> is good, indicating substantially better performance than the benchmark XIU. The one- and five-year total returns of the stocks with the lowest dispersion of EPS estimates in 2012 is very consistently green.<br />
<div style="text-align: center;">
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<br />
In the five-year column, not a single stock under-performed XIU or had negative returns. Only three did only as well as XIU, everything else was miles ahead.<br />
<br />
In the one-year column, only two stocks, IGM Financial (TSX: IGM) and North West Company (TSX: NWC), had a negative (<span style="color: red;">red</span>) return. Eight stocks (highlighted in <b><span style="color: orange;">orange</span></b>) had positive returns, though less than XIU's +15.2%. <br />
<br />
<span style="color: red;">High EPS dispersion stocks performed remarkably poorly</span><br />
Our second table below showing <span style="color: red;">the 2012 highest EPS dispersion stocks is filled with ugly red</span>. There is very little good green or minimally acceptable <b><span style="color: orange;">orange</span></b>. Only one stock - Franco Nevada Corp (TSX: FNV) - had benchmark beating returns over both one- and five-year periods.<br />
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<br />
... <b>and the middle EPS dispersion stocks are in between</b><br />
The returns for the middle group are generally positive, more like the top group than the bottom, but display a larger amount of red and orange in the table below.<br />
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<b>BMO's Low Volatility Canadian Equity ETF (TSX: ZLB) in 2012 held a lot more of the low EPS dispersion stocks</b> than either XIU or PXC as the left-most column shows. It is thus little surprise that its 26.9% one-year total return (neither ZLB nor PXC has been around five years so five-year return is not yet available) handily beat that of both its rivals.<br />
<br />
<b>Why picking low EPS dispersion stocks might not work as well in the future?</b> The low EPS spread stocks are mostly in the financials, real estate and consumer sectors. Those sectors have done well. On the other hand, the high EPS spread stocks tend to be in energy and materials, both of which sectors have taken a beating in recent years. If those sectors rebound (the price of oil, gold and other commodities being such crucial uncertain variables), their returns could easily leap well ahead of the safe and steady stocks. That wouldn't necessarily mean the safe stocks would have negative returns; more likely they would under-perform.<br />
<br />
<b>Bottom Line:</b> The method is not foolproof but looks darn good. Taking note of the dispersion of analyst EPS estimates appears to be an extremely useful factor to consider in stock selection. Low dispersion = good, high dispersion = risky.<br />
<br />
This being the case, next week we'll review the current list of attractive and un-attractive stocks. We'll also compare the ETFs and their holdings.<br />
<br />
<i>Disclosure: </i>This blogger owns shares of stock symbols REF.UN, BEI.UN, CUF.UN, REI.UN, RY, CNR, NA, NWC, CU, FTS, EMA, MRU, BNS, BMO, BCE, SJR.B, ACO.X, TD, HR.UN, TRP, IFC, EMP.A, POT, IMO, SU, FCR, TCK.B as well as the ZLB and PXC ETFs that own virtually all the stocks in the tables.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.<br />
<br />CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-13165145633644340872014-11-17T14:43:00.001-05:002014-11-17T14:43:59.293-05:00Women on Boards: Pleasing ProgressA few years ago, <a href="http://howtoinvestonline.blogspot.co.uk/2012/08/women-on-boards-of-directors-in-canada.html">we explored whether the presence of women on boards of directors</a> was something investors should pay attention to. The indications we found in research and our cursory look at performance was that, yes indeed, companies with women fared better. We were curious to see how things have progressed since then. What we found looks pretty good.<br />
<br />
<b>Plenty more women on boards!</b><br />
In 2012, the slow progression of women into the boardroom caused some controversy, e.g. the "<a href="http://www.theglobeandmail.com/report-on-business/careers/management/board-games-2012/glacial-progress-of-women-on-canadas-boards-prompts-calls-for-reform/article5644350/#dashboard/follows/"><i>Glacial Progress</i></a>" Globe and Mail article by Janet McFarland. Corporate Canada seems to be changing fairly quickly, based on our analysis of the 100 largest companies by market cap that are publicly traded on the TSX (extracted using the <a href="http://web.tmxmoney.com/screener.php?qm_page=49036">TMX Money stock screener</a>).<br />
<br />
In November 2012, the top 100 companies had 167 women directors. Today the number is 200,a 20% increase. (We assembled this data ourselves by looking at the bios of directors under the Insiders tab of company listings on <a href="http://www2.morningstar.ca/homepage/h_ca.aspx?culture=en-CA">Morningstar.ca</a> - e.g. for <a href="http://quote.morningstar.ca/Quicktakes/Insiders/Insiders.aspx?t=RY&region=CAN&culture=en-CA&sub=4&ops=clear">Royal Bank of Canada</a>, which surprisingly is one of only three companies which have fewer women - one each - on the board than in 2012 ... but we shouldn't be too harsh on the Royal since it still has four women on its board and is thereby still in the upper echelon of the women director count as our comparison table below shows).<br />
<br />
Though we don't show it in the table, the 15 companies that already have women are adding more than those with none at all in 2012. Seven of them added women. In contrast, only five companies went from zero to one, Catamaran jumped from zero to two, while eleven stayed at zero. <br />
<br />
As an interesting aside, the financial sector which dominates the top of our table seems also (our impression from reading bios- we didn't count) to be the source, in the form of retired executives, of many women board members for other industries.<br />
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<span style="color: #38761d;"><b>Companies with women directors score better on governance</b></span><br />
We again took the scoring from the independent <a href="http://www.rotman.utoronto.ca/FacultyAndResearch/ResearchCentres/ClarksonCentreforBoardEffectiveness/BoardShareholderConfidenceIndex.aspx">Clarkson Centre for Business Ethics and Board Effectiveness</a> of the Rotman School at the University of Toronto (<a href="http://www.rotman.utoronto.ca/-/media/Files/Programs-and-Areas/Institutes/Clarkson/BoardShareholderConfidenceIndex2013ScoringBreakdown.pdf">2013 scores</a> since the 2014 update is not yet available). The results in the CCBE columns on our table for the 15 companies with four or five women directors are better than the 15 companies with no women.<br />
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<span style="color: #38761d;"><b>... and their stock performance is generally better too</b></span><br />
As we found in 2012, the one- and five-year total returns of companies (performance data is from the <a href="http://www.theglobeandmail.com/globe-investor/my-watchlist/?ord=1#dashboard/follows/">GlobeInvestor WatchList tool</a>) with the most women directors at the top of the table look much more impressive on average, with positive returns that more often exceed our benchmarks, the TSX Composite (embodied in the iShares ETF that tracks that index with stock symbol XIC) and the large cap TSX 60 index (tracked by the iShares ETF with XIU symbol). Dividends are higher on average and five-year dividend growth is almost always positive and more often in excess of the benchmarks.<br />
<br />
<b>Board diversity is greater in other ways too - with the inclusion of academics</b>.<br />
We were a bit surprised to come across <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2474522"><i>Professors in the Boardroom and Their Impact on Corporate Governance and Firm Performance</i></a> by Bill Francis, Iftekhar Hasan and Qiang Wu (acknowledgement to <a href="http://www.alphaarchitect.com/blog/2014/10/01/new-finding-us-professors-arent-totally-useless/#.VGSK14_XqEU">Alpha Architect blog for the reference</a>) that found a positive relationship between company performance and the presence of academics on boards. The paper sums up that profs are often "<i>valuable advisors and effective monitors</i>".<br />
<br />
We scanned the director bios for the profs too and lo and behold, though few companies seem to consider academics at all (only 16 out of the 100 largest have even one), several of the companies that do are at the top of our table, while there are none in the bottom. Mere coincidence of no significance? Probably not, board diversity helps sound decision-making by bringing together different perspectives and ways of thinking about issues.<br />
<br />
<b>Bottom line:</b> The conclusion is the same as two years ago - <span style="color: blue;"><b>women directors do not absolutely ensure a profitable investment but it is a positive factor</b></span> to include in the analysis of a company and its stock.<br />
<br />
<i>Disclosure</i>: This blogger directly owns shares of stocks mentioned with symbols BMO, BNS, CU, EMA, IFC, NA, POT and RY at the top of the list and HR.UN at the bottom, along with ETFs that contain more or less all the stocks. In addition, he has a stake in the futures of four daughters who might well one day be considered for board membership somewhere somehow.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-58683663843574121782014-11-07T17:20:00.001-05:002014-11-07T17:20:40.829-05:00Currency and Inflation Effects on Model Portfolio PerformanceAlmost <a href="http://howtoinvestonline.blogspot.co.uk/2009/12/historical-effect-of-inflation-and.html">five years ago we reviewed</a> how a broadly diversified international portfolio would have fared in the period from 1992 to late 2009. There's been more water under the bridge so let's update and expand the original analysis. We can add nine more years of data - the five from 2009 to 2013 and those back to 1988 - because Norbert Schlenker at <a href="http://libra-investments.com/">Libra Investment Management</a> has performed the excellent favour to investors by continuing to update the annual investment returns for a range of asset classes and making it available for free as a <a href="http://libra-investments.com/Total-returns.xls">downloadable spreadsheet</a>. In the intervening years we have also written about various model portfolios so we'll test those that we can to see how they might have performed (the main gap is those portfolios that invest in real estate since the spreadsheet unfortunately does not include that asset class). <br />
<br />
<b>The International Portfolio still performs very well</b><br />
The diversification benefit of additional equity holdings in the USA, developed market countries (abbreviated as EAFE - Europe, Australasia, Far East) and Emerging markets (such as India, China, Russia and Brazil), continues to be felt, primarily by boosting returns, while the T-Bill and bond holdings dampen portfolio swings, as our chart below shows.<br />
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<br />
<b>Inflation continues to steadily reduce returns ...</b><br />
On the chart below inflation continues to take a chunk out of returns, though at a lesser rate in recent years than the long term average. Inflation is highly unlikely to go away since it is Bank of Canada policy to target an inflation rate in a range of 1 to 3%.<br />
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<br />
... and <b>currency swings often have quite substantial effects, sometimes boosting, sometimes hindering, returns of foreign equities</b>, which also confirms what we noted in the first post five years ago. As the Canadian dollar (CAD) declines vis-a-vis foreign currencies, the same amount of foreign currency buys more Canadian dollars. That boosts returns. When CAD appreciates, the reverse happens. Thus, in our chart, CAD gains/appreciation are shown as a negative effect on returns (of the foreign holdings) and CAD losses/depreciation have a positive effect. In the early 2000s, for example, the Canadian dollar was gaining in
value and that undermined returns of foreign holdings for six years in a
row as the chart shows.<br />
<br />
Note that <span style="color: blue;">the currency exposure for holdings such as developed countries and emerging markets is to the currency of those countries and not the US dollar</span> when, for example, holding ETFs that are traded in USD on US exchanges. <a href="http://canadianfinancialdiy.blogspot.co.uk/2007/05/clarification-of-foreign-exchange-risk.html">CanadianFinancialDIY explained how and why this works in this post</a>. <br />
<br />
In the 26 years covered by 1988 to 2013 almost exactly half - 12 years - currency movement helped returns for a Canadian investor. The mean of the yearly gains and losses over the period is slightly negative, just under 1%. That seems to add further evidence to the <a href="http://howtoinvestonline.blogspot.co.uk/2012/02/foreign-investments-what-does-history.html">conclusion we presented in a 2012 post</a> that <span style="color: #38761d;"><b>hedging foreign currency holdings is not really necessary in the long term</b></span>. <br />
<br />
<b>The International portfolio grew more, with less volatility, than a similar domestic-only balanced alternative</b><br />
The following comparison chart was compiled from results<b> </b>of the <a href="http://www.ndir.com/cgi-bin/downside_adv.cgi">Stingy Investor Asset Mixer</a> tool that uses the data from the Libra spreadsheet.<br />
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<br />
As the table shows, <span style="color: #38761d;"><b>the international portfolio performed better than a domestic-only
portfolio</b></span> with the same basic structure (35% cash & fixed income and 65% equities). This was true both during a savings accumulation phase of life or during a retirement withdrawal phase. In each life phase the international portfolio also experienced fewer down years and a higher reward (return) to risk (volatility) ratio . International diversification showed its value.<br />
<br />
<b>The international portfolio also gained more than either the <a href="http://howtoinvestonline.blogspot.co.uk/2014/06/the-reluctant-investors-lifelong.html">Lifelong portfolio</a> and the <a href="http://howtoinvestonline.blogspot.co.uk/2014/04/the-permanent-portfolio-pros-and-cons.html">Permanent portfolio</a></b>. However, both these portfolios experienced considerably lower volatility, no doubt due to the 50% allocation of both to T-Bills and bonds.<br />
<br />
<span style="color: orange;"><b>The Permanent portfolio in particular looked much less attractive during a retirement phase</b></span> of 4% annual withdrawals as it had a lot more down years and minuscule total growth. The stats reinforce the idea of the Lifelong portfolio as a "good-enough" compromise, never the best but never the worst.<br />
<br />
Finally, by way of interest only since few would advocate such an unbalanced portfolio, we include stats for the 100% domestic equity (TSX Composite) portfolio and the 100% Canadian bond portfolio. Neither grew as much as either the Canadian balanced or the Lifelong portfolio, a surprise especially with respect to equities which have the image of higher eventual growth despite higher volatility. Regular annual rebalancing (which is what the tool models) provided the returns boost (see our post <a href="http://howtoinvestonline.blogspot.co.uk/2009/10/portfolio-rebalancing-what-why-and-how.html"><i>Portfolio Rebalancing - What, Why and How</i></a>). On the bond side, the surprise is the higher number of down years during retirement. The lower returns from bonds are more susceptible to turning negative, closer to the line between positive and negative, when withdrawals are also happening.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-62169730507050537922014-11-03T11:33:00.002-05:002014-11-03T11:33:17.620-05:00Testing the Ultra-Safe ARVA Retirement Portfolio Withdrawal MethodThe 4% constant inflation-adjusted rule <a href="http://howtoinvestonline.blogspot.co.uk/2009/11/sustainable-portfolio-withdrawal-rate-4.html">we posted about in 2009</a> is the standard advice for setting a retirement portfolio withdrawal rate that is not expected to run out of money, simply because the strategy always worked in the past. But future success depends on the future being like the past. As <a href="http://howtoinvestonline.blogspot.co.uk/2014/09/refining-4-retirement-withdrawal-rate.html">we recently wrote</a>, there are strong indications that future investment returns will be lower with the consequence that a safe withdrawal rate is closer to 3.5%.<br />
<br />
Suppose we don't want to mess around and want an iron-clad guarantee, or as close as is practically achievable, that our portfolio will never run out of money before death while withdrawing the highest amount possible. Step up Barton Waring and Laurence Siegel, whose paper <a href="https://dl.dropboxusercontent.com/u/31826398/bartonwaring.com%20webpage/Siegel_Waring_Only%20Spending%20Rule%20Article%20You%27ll%20Ever%20Need.pdf"><i>The Only Spending Rule You Will Ever Need</i></a>, proposes such an approach. The principle under-pinning their proposal makes sense - match assets (portfolio cashflows) with liabilities (spending / withdrawals). Level, guaranteed, lifetime spending with inflation-protected purchasing power most closely matches up with an inflation-indexed annuity, or with a ladder of real return bonds extending out to your expected lifespan.<br />
<br />
However, such annuities are difficult if not impossible to find in Canada at the moment (there are annuities which have a set ratcheting increase of 1 / 2 / 3% but none that explicitly adjust to CPI so you have to correctly guess the inflation rate). They also lock in money irreversibly - there's no liquidity or capability to cash out for unexpected needs.<br />
<br />
An RRB ladder of Canadian government bonds provides the best possible AAA credit security and direct CPI protection but they are extremely tax inefficient in a non-registered account, As well, the current limited range of issues maturing 2021, 2026, 2031, 2036, 2041, 2044 and 2047 make cash flows lumpy and hard to match with regular even spending. Plus, the furthest maturity is only 33 years away while maximum possible life expectancy is about 40 years, or 105 at age 65, according to the authors. RRB yields are extremely low, at their historic minimums these days, so many investors might still be tempted to keep their portfolio of volatile but higher potential return assets.<br />
<br />
<b>Spending must adjust to portfolio fluctuations</b><br />
For those investors who want to keep their volatile investment portfolio but protect it from exhaustion by respecting the annuity asset-liability matching princple, Waring and Siegel propose doing a simple annual recalculation of how much can be safely withdrawn, which they call <b><i>annually recalculated virtual annuity</i></b> or <b>ARVA</b>. Every year after portfolio returns are in, they calculate what income would come from the purchase by the retired investor of a perfectly structured annuity to figure out the maximum withdrawal. The withdrawal fluctuates according to three varying parameters: current average yields on a ladder of RRBs, remaining lifespan aka time in retirement and latest portfolio net balance.<br />
<br />
<b>Our Historical Simulation Test - What were amounts and fluctuation of maximum spending? </b><br />
The authors don't show what would have happened in the past by following their rule. Would the withdrawal fluctuate too widely, especially on the downside? How would the amount compare to the standard 4.0% rate, or 3.5% per today's outlook? For any portfolio size, which factor matters most - interest rate, remaining years? We decided to have a look using available Canadian data.<br />
<br />
Parameters:<br />
<ul>
<li>Balanced portfolio - containing passive index tracking ETFs, made up of 50% Canadian broad bond, 50% equity (30% TSX Composite, 10% US S&P 500 equity, 10% developed market MSCI EAFE) rebalanced annually; translated to Canadian dollars with real returns, from <a href="http://libra-investments.com/re01.htm">Libra Investment Management</a>'s free download <a href="http://libra-investments.com/Total-returns.xls">excel spreadsheet</a>. We applied a 0.3% annual MER cost to the portfolio as if it was composed of low cost ETFs, which doesn't really represent what was possible historically, but we are trying to guesstimate what might have happened if investment opportunities were similar to today. We generously gave ourselves a portfolio worth $1 million at the start of retirement.</li>
<li>Life expectancy / retirement duration - 35 years (i.e. to age 100 for a retirement start at age 65) in the base case charts below.</li>
<li>Retirement start year - 1992, which is the first year Canadian government real return bonds were issued </li>
<li>Real return bond yield rates - the <a href="http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/?page_moved=1">Bank of Canada benchmark rate</a> for a long term RRB at the end of each year; this doesn't really match the average for a ladder of RRBs since shorter maturity issues would most often have had a lower yield and thus reduce the overall average ... but we have to take what we can get and it took quite a bit of Googling to dig up even the benchmark Long-maturity RRB yields from the 1990s. </li>
</ul>
Formula:<br />
<ul>
<li>Excel's function <span style="background-color: #9fc5e8;"><i>PMT = (RRB rate, Years remaining, Portfolio value, ,1)</i></span> straight from Waring and Siegel's paper. The 1 means take the withdrawal at the start of the year. PMT = the maximum withdrawal amount for the current year.</li>
<li>Example PMT (4.5%, 35, $1,000,000, , 1) = $54,804 in 1992, year 1, of the chart below.</li>
</ul>
Results:<br />
<div style="text-align: center;">
<i>(click on image to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw_4np3WehLLLtMzCps0OLic_efSpM8WYSBxV-69KdWqt1Zqin-YziEOYnCt42FEe4FDo5AO6Crviq0m7N7KRQSWAIFMRDnUR4Z0KLK3Onj1C-faHSFHAHFufz5H7wndsnMdWpsx-ZLnsk/s1600/ARVA-Cda-1992-2014.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw_4np3WehLLLtMzCps0OLic_efSpM8WYSBxV-69KdWqt1Zqin-YziEOYnCt42FEe4FDo5AO6Crviq0m7N7KRQSWAIFMRDnUR4Z0KLK3Onj1C-faHSFHAHFufz5H7wndsnMdWpsx-ZLnsk/s1600/ARVA-Cda-1992-2014.png" height="174" width="320" /></a></div>
<br />
<ul>
<li><span style="color: #38761d;"><b>Maximum ARVA withdrawal beat the historical 4% rule or $40,000 real constant dollars by a big margin</b></span> - the lowest withdrawal under ARVA was the $54,800 in 1992, the average was $68,000 and the highest was an impressive $83,873 in 2000. Wow, that's wonderful, time to jump on board?</li>
<li><span style="color: orange;"><b>Huge variation in the annual ARVA withdrawal</b></span> - 1992 min to 2000 max was a 53% range and there was more than a $10,000 drop from one year to the next twice over the whole period, from 2002 to 2003 and 2008 to 2009. This might present quite a severe psychological challenge to the retiree - you get used to nicely rising income during the 1990s, perhaps upsizing your spending "needs" then bang suddenly the markets drop for a year or two or three and you need to scale back in a major way. Looking at the chart after the fact tells us that all would have turned out fine but during we could not have been so confident. Hard basic spending needs have to be well below the maximum to be sure the strategy won't catch us out.</li>
</ul>
<span style="color: blue;"><b>What matters most - Retirement duration, then portfolio value, then RRB yield</b></span><br />
To see how the parameters inter-act, we plugged various plausible numbers into the formula. Right now, the yield on a benchmark long term RRB (which currently is the 2041 maturity bond) per the above-linked Bank of Canada webpage is around 0.6%.<br />
<br />
The table below shows the sensitivity of the withdrawal amount to changes.<br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhc3cGEpauJ0qXXUbEYJgAvglP6ShbsuYtiL58XfyQqewzv6I2wsCXM49VSX4dLcVR5EIS2afpjn-bQFpdOhYvXkQfTI-JUk6g-EQ7gZgnBLXz5DtsJ24tWxvMhaB8SESjdPWqy08t_g3mq/s1600/ARVA-sensitivity.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhc3cGEpauJ0qXXUbEYJgAvglP6ShbsuYtiL58XfyQqewzv6I2wsCXM49VSX4dLcVR5EIS2afpjn-bQFpdOhYvXkQfTI-JUk6g-EQ7gZgnBLXz5DtsJ24tWxvMhaB8SESjdPWqy08t_g3mq/s1600/ARVA-sensitivity.png" height="73" width="320" /></a></div>
<span style="color: blue;"><b>The length of retirement has by far the biggest impact on maximum ARVA withdrawal</b></span>. Longevity is the most significant risk. Next is the portfolio size, as year to year changes translate directly into proportional changes - up 10% or down 10% means the same increase or reduction in withdrawal, other things being equal. Reducing portfolio volatility greatly helps anyone wanting to use the ARVA method.<br />
<br />
Finally, and surprisingly, the change in RRB yield has a relatively minor effect! Note how under today's conditions, the base case million dollar portfolio for a 30 year retirement, which is near life expectancy for a 65-year old, gives a far less generous withdrawal amount than in 1992 - only $36,500 per year i.e. less than the 4% rule and a bit more than the our lower 3.5% market valuation adjusted figure.<br />
<br />
We took the same formula to create the chart below showing how various combinations of RRB yield and retirement duration inter-act with the $1 million dollar portfolio.<br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjlS2XdtTheFCPqsXjY_g8Y6BrzKOTBSGRtDmY126PXf9sHQK5-zWE7s_IvAaUa_ljSSoANvFjs-g1axr5NUw6SP-iYlnxTrwpd68Kda1QjKOVyGIpuoJN7_m-JCkol4i_iP49dsbIPY5u/s1600/ARVA-range-chart.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjlS2XdtTheFCPqsXjY_g8Y6BrzKOTBSGRtDmY126PXf9sHQK5-zWE7s_IvAaUa_ljSSoANvFjs-g1axr5NUw6SP-iYlnxTrwpd68Kda1QjKOVyGIpuoJN7_m-JCkol4i_iP49dsbIPY5u/s1600/ARVA-range-chart.png" height="194" width="320" /></a></div>
<br />
<br />
The necessity to make funds last a long time has a huge impact on sustainable withdrawal rates. The difference between 40 and 20 years is much greater than even a several-fold increase in yields, as the contrast between the top and bottom lines vs the left and right edges of the graph show.<br />
<br />
<b>Bottom Line</b>: Cautious spending, or the willingness to make fairly substantial spending adjustments year to year are required for the investor looking to use the ARVA method to ensure that his/her portfolio will not expire before he/she does! Building a diversified portfolio that minimizes volatility will directly and proportionally minimize the withdrawal variations.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.<br />
<br />CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-64686972002682029962014-10-27T12:57:00.000-04:002014-10-27T12:57:42.982-04:00Ins and Outs of Managing Your Own Portfolio of REITsAs we mentioned a <a href="http://howtoinvestonline.blogspot.co.uk/2014/10/canadian-real-estate-etfs-which-is-best.html">couple of posts ago</a> when we started looking at Canadian REITs again, it is quite feasible for an investor to build a reasonably diversified portfolio of individual holdings instead of buying an ETF. There are several possible reasons to do this: 1) to save the ETF's fees known as the Management Expense Ratio, which get charged year after year, while the investor pays nothing for direct holdings; 2) to be able to customize the companies and/or weights of the portfolio holdings. There are various factors to consider, pro and con. The factors inter-act and the matter becomes a balancing act. <i>Disclosure</i>: this blogger has been wrestling directly with many of the issues, having taken the step of selling his REIT ETFs in 2013 and buying individual REITs instead at that time.<br />
<br />
<b>A minimum allocation to REITs of about $25,000</b><br />
We don't believe it is worthwhile to start buying individual REITs unless there is a fairly substantial sum available. It's really something to consider for larger portfolios of around $125,000 or more, i.e. 10% to 20% of a total balanced portfolio like the <a href="http://howtoinvestonline.blogspot.co.uk/2013/03/new-improved-model-portfolio-smart-beta.html">Smart Beta</a> or <a href="http://howtoinvestonline.blogspot.co.uk/2013/03/a-model-pre-retirement-portfolio-for.html">Swensen Seven</a>). Why so?<br />
<br />
Cost, for starters. The 0.39% annual MER of the lowest cost ETF from Vanguard (TSX symbol: VRE) on $25,000 is about $98 per year, which is the same cost as 9 trades at $10 each once a year to keep the portfolio in balance if 9 REITs are individually owned. MER is an unavoidable annual cost in an ETF. On the other hand, the DIY investor holding REITs directly pays a one time initial trading commission and then has the opportunity to control further costs for rebalancing, reinvestment and other purchases or sales.<br />
<br />
There is a trade-off between the single trade for an ETF to rebalance with the total portfolio once a year versus the multiple trades for a collection of REITs. <a href="http://www.ndir.com/SI/">Stingy Investor</a> provides a free <a href="http://www.ndir.com/cgi-bin/ETFsVsStocks.cgi">calculator to compare the cost of owning ETFs versus individual stocks</a> for a whole range of sectors, including the iShares REIT (Symbol: XRE). The tool demonstrates, using the higher 0.6% MER of XRE, that <span style="color: #38761d;"><b>longer holding periods, less frequent trading and larger portfolios favour holding individual REITs over the ETF</b></span>. Note that the tool's selection box titled Dividend Reinvestment really represents the cost of trading commissions of any kind, whether for reinvestment, rebalancing or purchases/sales of units. Most of the REITs offer a free dividend reinvestment program (DRIP), as our comparison table below shows. For that reason, we suggest entering "1" in the "Dividend Reinvestment" box to represent a single annual rebalancing trade, which is the base case frequency advice for managing a portfolio (see <a href="http://howtoinvestonline.blogspot.co.uk/2009/10/portfolio-rebalancing-what-why-and-how.html">our rebalancing post</a>).<br />
<br />
An investor (such as retired person) who intends to simply buy and hold REITs, receiving the cash distributions to spend and not to reinvest, nor to do any rebalancing, in other words to do no trading and therefore not incur any commissions, will save the MER every year. The savings on avoided MER really add up over time as Stingy's tool shows.<br />
<br />
<b>Reducing individual company risk to achieve diversification</b><br />
The more companies held, the less the investor's fortunes, good or bad, are determined by any single REIT. Our table below shows that anywhere from five to eight REITs are required to replicate about 50% of the weight of the three main REIT ETFs. BMO's ETF with symbol ZRE requires more due to its scheme of equally weighting all holdings. 75% replication requires eight (for XRE) to thirteen holdings (for ZRE). For the investor who is only trying to mimic the ETF and isn't trying to assess and select the best REITs (as we took a <a href="http://howtoinvestonline.blogspot.co.uk/2014/10/canadian-reits-which-look-good-which.html">stab at doing last week</a> with considerable time and effort) we believe the 75% replication level is preferable.<br />
<br />
Broader coverage of the various REIT sectors results from more companies and higher replication e.g. with 50% replication the cap-weighted XRE and VRE do not include any apartment REITs like Canadian Apartment Properties (CAR.UN) and Boardwalk (BEI.UN), but at 75% replication they are included.<br />
<div style="text-align: center;">
<i>(click to enlarge image)</i></div>
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<br />
<br />
<b>The diversification vs cost and complexity trade-off </b><br />
There is a trade-off - as the number of REITs and diversification rises, which is good, the trading costs and complexity of rebalancing rise too. With more holdings each individual holding is smaller, and rebalancing trades can involve quite small amounts - e.g. a 13-holding equally weighted $25k portfolio mimicking ZRE would hold 100%/13 = 7.7% in each, or $1900 for each one.<br />
<br />
On top of that, a $1900 holding yielding 6% annually, or 0.5% on the monthly basis that all the REITs use for payout frequency, gives only $9.50 per month, which is insufficient to buy a single share unit of all but one of the REITs. Thus, too many REITs with too small a monthly distribution means being unable to take advantage of the commission-free DRIP. At prevailing yields and unit share prices, it takes a holding of around $6000 to receive enough to buy at least one share on the monthly DRIP. That's another reason we think the minimum overall REIT allocation needs to be at least $25,000. Of course, investors who merely want to receive and spend the distributions need not worry about missing out on the free DRIP.<br />
<br />
<b>Strategy for company selection and weighting - cap-weighted or equal weight, or maybe one's own?</b><br />
It is important to have a strategy, otherwise you will not manage the portfolio, it will manage you.<br />
<br />
Cap-weighting is the traditional standard method and requires the least effort to manage. It is only necessary to swap in or out the lowest weight REIT holding every year, or on whatever rebalancing schedule is chosen. For instance, cap-weighted XRE is reviewed quarterly by iShares but a less frequent semi-annual or annual trade would likely suffice. We do have a concern about cap-weighting - too much concentration. The largest holding RioCan is already a hefty 19% in XRE and adjusting its weight in proportion for only eight holdings boosts that to 26% (see table above for weights and dollar amounts of each REIT for 75% replication of XRE).<br />
<br />
Equal weighting spreads company risk evenly but more stocks are needed to reproduce the same proportion of the ZRE ETF that has adopted that strategy. The biggest challenge with equal weighting is deciding how often to do rebalancing trades. As soon as they are purchased the REITs' market prices start heading in opposite directions. Quarterly rebalancing is too often. Even ZRE only rebalances twice a year. We feel that annual rebalancing is sufficient for the individual investor, a trade-off between accuracy, cost and effort.<br />
<br />
As DIY investors we can of course do whatever we want. We can select the best looking stocks with methods such as we used in <a href="http://howtoinvestonline.blogspot.co.uk/2014/10/canadian-reits-which-look-good-which.html">our post last week on the individual REITs</a>. We decided that Artis REIT fell into the less attractive group because it had net losses in two of the last five years, yet mechanically taking the top holdings of ZRE would see it included in a 75% replication portfolio. Deciding to drop it or include it or any other becomes a challenge of stock selection. As investors we would therefore be obliged to become analysts, with the extra time and effort initially and on-going, as well as the uncertain success such an approach entails.<br />
<br />
<b>Flexibility to take advantage of DRIPs, discounts, SPPs, tax loss selling </b><br />
The DIY investor in the process of building up investments can also focus his/her portfolio on REITs with worthwhile additional features. The majority of the big REITs offer plans to reinvest distributions in additional units for no cost (called a DRIP - Dividend ReInvestment Plan). One that does not is Boardwalk.<br />
<br />
Some offer attractive cash discounts on the purchase of DRIP units, such as RioCan, H&R, Canadian Real Estate REIT and Calloway. Yet others offer plans that give bonus units when the investor DRIPs, though the size of holding required to get even one share at a discount can be very substantial, as our table below shows. ETFs do not participate in the REITs' DRIP discount or bonus plans - the ETFs' DRIPs merely buy shares on the market. An ETF REIT investor therefore loses that benefit.<br />
<br />
Many of the big REITs also offer Stock Purchase Plans (SPP), which allow the investor to periodically buy more units for no commission. <a href="http://www.dripprimer.ca/">Canadian DRIP Primer.ca</a> maintains handy lists of all the DRIP and SPP details, like SPP minimum purchase amounts and allowed frequency of extra purchases. The following table summarizes the DRIP and SPP offerings of the top REITs.<br />
<div style="text-align: center;">
<i>(click to enlarge)</i></div>
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<br />
<br />
Investors holding REITs in taxable accounts can also more easily take advantage of tax loss selling (see <a href="http://howtoinvestonline.blogspot.co.uk/2009/12/tax-loss-selling-explained-what-why-and.html">our post on this topic</a>) when holding a number of individual REITs. Chances are, some REIT will have a price decline even when the sector is swinging up. A downside is that there is a multiplication of book-keeping required for multiple individual REITs versus an ETF in a taxable account. All the REITs distribute a lot of Return of Capital (ROC), which is not taxable in the year of receipt, being in effect deferred capital gains. On-going yearly ROC means careful time and effort to properly track Adjusted Cost Base (ACB; see also our ever-popular<a href="http://howtoinvestonline.blogspot.co.uk/2010/07/return-of-capital-separating-good-from.html"> post on ROC</a>). It may be worthwhile to use a pay service such as <a href="http://www.acbtracking.ca/">ACB Tracking Inc</a> to help do it correctly.<br />
<br />
<b>Psychological challenge of on-going portfolio management</b><br />
Managing a portfolio is not just mechanical effort. There is considerable effort of discipline, both to not do anything or to actually go ahead and do whatever one's intended strategy requires. The stock market is good at inducing mind tricks - "Yes, I know my strategy is to rebalance to equal weights per the ETF now but this REIT has had several bad quarters, its price is way down and the analyst commentary and recommendations are negative. Should I not sell out and buy another REIT instead of buying more? Besides, it's only a few hundred dollars rebalancing amount, it isn't worth the commission." Before we know it, our own strategy rules are not fixed but arbitrary.<br />
<br />
<b>Bottom line</b>: Buying and holding a portfolio of individual REITs instead of an ETF offers the potential for appreciable cost savings and flexibility for those with at least $25k to invest in REITs. However, it requires extra time, effort and discipline.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-72029848693811300842014-10-17T15:26:00.000-04:002014-10-17T15:26:15.202-04:00Canadian REITs - Which look good, which don'tLast week's post concluded by noting that the continued success of Canadian REIT ETFs from iShares and Vanguard depend a lot on two of their heavyweight holdings - RioCan and Boardwalk. This week, we'll drill down into these and other REITs, or similar real estate corporations, to see if they look attractive. We take the point of view of an investor looking for steady, high sustainable income and not, for instance, seeking under-valued turn-around candidates.<br />
<br />
<b>Safety first - Financial stability</b><br />
The ability to keep paying distributions, especially higher rates, arises from a very solid financial foundation, notably:<br />
<ul>
<li>Strong, consistent profitability - We looked at the net income performance of the last five years, favouring those REITs who always made money and downgrading the others. One REIT, Northwest Healthcare Properties REIT (TSX symbol: NWH.UN), did fine for four years up to 2013 but has faltered in recent months.</li>
<li>Track record aka proven management and size - A longer successful history means management and the internal processes of a REIT are more probably solid. One slightly worrying sign at RioCan is the <a href="http://investor.riocan.com/English/investor-relations/press-releases/press-release-details/2014/RioCan-Real-Estate-Investment-Trust-Announces-Officer-Resignation/default.aspx">resignation on October 2nd</a> of the President and CEO Fredric Waks for the reason often given when it is not a happy departure - "... <span class="ContentPaneDiv"><span class="ContentPaneDiv2"><i>to pursue other interests</i>". </span></span>A larger portfolio of properties provides more internal diversification. We have thus eliminated REITs whose market cap is below $350 million (which excludes none of the REITs held by any of the three big ETFs). Also eliminated were a couple of REITs tied to one retailer - Canadian Tire for CT REIT (TSX:CRT.UN) and Loblaws for Choice Properties (TSX: CHP.UN).</li>
<li>Limited debt - The classic 2004 guide to REITs from Deloitte (still available as a <a href="http://www.investorvillage.com/uploads/83675/files/Deloitte_REIT_Guide_8th_Edition.pdf">free download from Investor Village</a>) notes that 40 to 60% debt on the balance sheet is a desirable conservative range. We put aside those REITs above that range, shown as a Debt/Equity ratio above 1.5 in our table below (40% debt = D/E 0.67)</li>
<li>Business sector - REITs operate in various sectors, from hotels to office buildings. Some sectors are more vulnerable to economic swings, most particularly hotels. The most stable are apartments and seniors homes. In between are retail, office and industrial. </li>
</ul>
<b>Sustainability of distributions</b><br />
REITs should not pay out more cash than what is needed to maintain the assets and the business, as a minimum, or to undertake expansion that will grow distributions, as a more ambitious goal. The commonly used metric to gauge how much is Adjusted Funds From Operations (AFFO), which <a href="http://www.snl.com/irweblinkx/genpage.aspx?iid=4105059&gkp=206894">CREIT (TSX: REF.UN) describes</a> as "... <i>a measure of operating cash flow generated from the business, after providing for all operating capital requirements</i>". Taking the actual distribution as a percentage of AFFO the maximum advisable rule of thumb (per the Deloitte Guide) is a 95% payout ratio. A couple of REITs, Pure Industrial (TSX: AAR.UN) at 101.1% and Crombie (CRR.UN) at 98.3%, exceed the target. RioCan is right on the line at 95.3%.<br />
<br />
<b>Growth in distributions, actual historical and potential future</b><br />
A track record of growing distributions by a REIT is a good thing, the converse of no growth or reduced distributions being bad of course. The one-year and five-year growth records show what the REITs have delivered to investors. The better-performing REITs levitate towards the preferred upper part of the table.<br />
<br />
Growing AFFO, low payout and low debt/equity show a greater capacity and potential for future distribution increases. The REITs in the top of the table show favourable combinations of these elements.<br />
<br />
<b>Interest rate effects</b> - The benchmark against which REIT payouts are compared is the Government of Canada 10 year maturity bond. Currently, the GOC10 yields 1.95% (<a href="https://ycharts.com/indicators/canada_10_year_benchmark_bond_yield">see Y Charts</a>), though it can only be purchased by an individual investor for around 1.77% yield (the broker takes a cut). Is it enough compared to the yields in our table below, or other fixed income investments (see our post a few weeks back <a href="http://howtoinvestonline.blogspot.co.uk/2014/09/fixed-income-best-rates-in-canada-for-1.html">comparing best fixed income rates</a>)? It's up to us individually to decide.<br />
<br />
One other factor we investors need to keep in mind is that REIT prices will decline should interest rates rise. Last year, <a href="http://www.investorvillage.com/uploads/51958/files/64577843.pdf">CIBC's REIT review</a> estimated that REIT prices would fall about 12% for every 1% rise in GOC10 rates. Another review from Dundee Capital Markets in the Globe and Mail pegged the sensitivity at 13:1. In reality, after the approximate 1% rise in interest rates in 2013, REITs fell 16% on average.<br />
<br />
<b>Bottom line</b>: <span style="color: #38761d;"><b>15 REITs we like</b></span> - top half of the table - and <span style="color: orange;"><b>13 we don't like</b></span> - in the bottom half.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh80iHrtRG6y_T2F0KBFZYZMR111NhQ2dHPxodkalBXvjwSM0tCkVTQ3uCZ_ye8Tsytz7Rd-GDHrrk3VEqUfrA_BAIWTIfj6CLvXCi5o9zWrgmuKXQc1gA1U-AXwixSDIrCcxwlqH02Xg2V/s1600/REITs-Oct2014-tbl.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh80iHrtRG6y_T2F0KBFZYZMR111NhQ2dHPxodkalBXvjwSM0tCkVTQ3uCZ_ye8Tsytz7Rd-GDHrrk3VEqUfrA_BAIWTIfj6CLvXCi5o9zWrgmuKXQc1gA1U-AXwixSDIrCcxwlqH02Xg2V/s1600/REITs-Oct2014-tbl.png" height="215" width="320" /></a></div>
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There is a wide range of yields on offer from:<br />
- a low of 2.9% from Boardwalk (TSX: BEI.UN), which displays a high degree of safety plus past and potential growth, to<br />
- a high of 8.5% from Dream Global (DRG.UN), a smaller, more levered, less established, portfolio in a more economically sensitive sector i.e. riskier player.<br />
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<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com0tag:blogger.com,1999:blog-4751610667110065763.post-22337357342442894132014-10-14T16:13:00.000-04:002014-10-14T16:13:44.527-04:00Canadian Real Estate ETFs - Which is best?REITs are a basic component of most diversified portfolios. We <a href="http://howtoinvestonline.blogspot.co.uk/2010/06/real-estate-investment-trusts-for.html">first looked at the basic characteristics of investing in real estate trusts and funds</a> in 2010, with updates in <a href="http://howtoinvestonline.blogspot.co.uk/2011/03/real-estate-etfs-on-roll-canada-usa.html">March 2011</a> and in <a href="http://howtoinvestonline.blogspot.co.uk/2013/12/whats-up-or-should-we-say-down-with.html">December 2013</a> after <a href="https://www.vanguardcanada.ca/advisors/etfs/etfs-detail-overview.htm?portId=9559#overview">Vanguard Canada launched its REIT ETF</a> in November 2012. A bare month ago in September, <a href="http://www.firstasset.com/products/overview/?fund=First+Asset+Active+Canadian+REIT+ETF">First Asset entered the market with its ETF</a>, joining well-established competitor funds from <a href="http://www.blackrock.com/ca/individual/en/products/239843/?referrer=tickerSearch">iShares</a> and <a href="http://www.etfs.bmo.com/bmo-etfs/glance?fundId=80001">BMO</a>. Let's do another update to see which is the best ETF and to see how the sector has been doing.<br />
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We've compiled the comparison table below to compare the ETFs and their characteristics. Data was obtained from <a href="http://www.theglobeandmail.com/globe-investor/my-watchlist/#dashboard/follows/">GlobeInvestor's My WatchList</a>, <a href="http://web.tmxmoney.com/marketsca.php?locale=EN">TMX Money</a> and <a href="http://www2.morningstar.ca/homepage/h_ca.aspx?culture=en-CA">Morningstar Canada</a>, as well as from the provider websites.<br />
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What are the key points arising from the table?<br />
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<a href="http://www.firstasset.com/products/overview/?fund=First+Asset+Active+Canadian+REIT+ETF">First Asset's Active Canadian REIT ETF</a> (TSX symbol: FRF) is an unknown - There is very little hard data about FRF. There is no track record, of course. But there is also little visibility into the portfolio. The entire portfolio is not revealed, only the top ten of 32 holdings. The fact that it is actively managed fund means that the fortunes of investors in FRF will depend largely on the skill of manager Lee Goldman in attaining the objective of "... <i>regular income and long-term capital appreciation</i>". One thing that is quite likely are higher trading expenses, as a result of the active management. This in turn is likely to push the management expense ratio (MER) a greater degree above the management fee than FRF's passively managed competitors.<br />
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<b>Similar portfolios</b> - There is a high degree of similarity between the other three ETFs, especially between that of iShares (stock symbol: XRE) and Vanguard (VRE). The number of holdings is almost the same, as is the average size of companies, their P/E and P/B ratios, the largest stock and its weight (inevitable given that they both weight holdings by market cap). Our other table below shows in detail the high degree of overlap between the holdings of XRE and VRE.<br />
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BMO's ZRE is also fairly similar with a high degree of holdings overlap. But ZRE weights holdings equally, resulting in much less concentration in one stock - Riocan is only around 6% of ZRE versus the 18/19% it represents in XRE and VRE. We consider the lower concentration risk to be a plus for ZRE.<br />
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<b>Similar distribution safety</b> - In consequence, XRE, ZRE and VRE all exhibit similarity in several data points that inform us about the likelihood of continued high distribution yields by the under-lying holdings and thus of the funds themselves:<br />
1) the number of holdings with either no dividend increase or a cut in the past five years - about a third of holdings in each ETF;<br />
2) the number of holdings with a very high dividend yield of over 7% - again all in the 20's percentages;<br />
3) the number of holdings whose ratio of dividend payout to earnings is in excess of a 90% danger zone - between 11 and 20% for the three.<br />
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<b>Similar multi-year returns for XRE and ZRE</b> - Despite the different weighting schemes, XRE and ZRE, the funds with the longest history, have amazingly similar returns and volatility. Both have also lagged the TSX benchmark stock fund (<a href="http://www.blackrock.com/ca/individual/en/products/239832/?referrer=tickerSearch">iShares' S&P / TSX 60 Index ETF</a>, symbol: XIU) over the past three years.<br />
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Encouragingly, after a big dip in 2013 when interest rates took a blip upwards, returns have been positive again recently as interest rates again moderated. <span style="color: #38761d;"><b>Every single holding in all of the ETFs has had a positive total return over the past year.</b></span><br />
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<b>VRE's management expense ratio advantage</b> - One significant difference between the ETFs is VRE's expense ratio, which is 0.2% or more lower than the others'. All else being equal, which does seem to be quite the case per the above, a lower MER leaves more money for the investor, year-in, year-out. <a href="https://www.vanguardcanada.ca/advisors/resources/fundcompare.htm#selectedFund0=F00000P28W&target=cst&selectedFund1=FOUSA06AZ4&selectedFund2=F00000IR62">Vanguard's cost simulator</a> shows that the MER difference constitutes a significant long term advantage if the funds achieve the same long term return from holdings.<br />
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<b>Distribution smoothing and yield</b>: <span style="color: orange;"><span style="background-color: white;"><b>differences more of optics than of substance</b></span></span> - ZRE pays out the same smooth amount of cash every month (currently $0.083 per unit). Meanwhile, XRE typically has paid the same amount for several months at a time, then it changes up or down, and VRE pays an erratically varying amount every month.<br />
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That smoothness of ZRE's distribution is not because the underlying holdings produce such steady income. As we've seen above, the holdings are pretty much the same as XRE's and VRE's. The difference arises only because BMO managers have decided to pay out a steady amount to suit investors who look at REIT funds as income generators.<br />
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All the ETFs, in order to maintain their internal non-taxable status and allow all income to be taxed in investors' hands, must distribute all their income in any calendar year. Within the year, whether it is paid out evenly each month, or in gyrating amounts, doesn't matter. The choice to smooth the income can result in some return of capital (ROC) to the investor if BMO mis-estimates the yearly income and pays out too much (that might be a bit of bad ROC but we have to remember also that good ROC can consist of unrealized capital gains or index-mimicing distributions - see our post on <a href="http://howtoinvestonline.blogspot.co.uk/2010/07/return-of-capital-separating-good-from.html">Good and Bad ROC</a>, and this post in 2013 which discussed <a href="http://howtoinvestonline.blogspot.co.uk/2013/03/return-of-capital-examples-of-good-and.html">XRE and ZRE's ROC performance</a>). The key point is that both XRE and ZRE have had returns, a sum of income received from holdings and their capital gains, that have consistently exceeded what they have distributed annually. So, though both have given out ROC, they are OK. <br />
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The <span style="color: orange;"><b>other non-issue is Vanguard's consistently lower distribution yield</b></span>. Read some excellent, simple explanations of how this comes about <a href="http://www.canadiancapitalist.com/why-etf-distributions-fluctuate/">by Canadian Capitalist</a> or <a href="http://canadiancouchpotato.com/2013/12/19/why-has-vre-outperformed-its-rivals-in-2013/">Canadian Couch Potato</a> or in <a href="https://www.vanguardcanada.ca/individual/how-to-invest.htm">one of Vanguard's FAQs</a>. Vanguard's VRE portfolio is generating the income - see the blue bordered cells in the table that show the low trailing distribution yield of 1.8% along with the 5.4% yield of the portfolio holdings. The income is being distributed by the ETF, it's just that as the ETF grows, the investor benefits from capital gains instead of cash income.<br />
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For investors who are not withdrawing but building up assets and reinvesting distributions, the building up of capital gains in VRE's Net Asset Value can even be a convenience, though all the ETFs offer a free automated dividend/distribution reinvestment program (DRIP) which can accomplish more or less the same thing.<br />
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<span style="color: #38761d;"><b>Real estate a good diversifier in a portfolio</b></span> - Some investors look at the high distribution yield for income as the main benefit of REIT ETFs. But long term investors, who follow the strategy of rebalancing to a fixed asset allocation (see our <a href="http://howtoinvestonline.blogspot.co.uk/2009/10/portfolio-rebalancing-what-why-and-how.html"><i>Rebalancing what, why and how</i></a> and model portfolios we have suggested - <a href="http://howtoinvestonline.blogspot.co.uk/2009/11/simple-portfolios-compared.html">Simple</a>, <a href="http://howtoinvestonline.blogspot.co.uk/2013/03/a-model-pre-retirement-portfolio-for.html">Swensen Seven</a>, <a href="http://howtoinvestonline.blogspot.co.uk/2013/03/new-improved-model-portfolio-smart-beta.html">Smart Beta</a>), look to the diversification benefits of REIT ETFs. The data is accumulating with time and it reinforces the notion that REITs provide diversification benefit by virtue of providing positive returns that are uncorrelated with other asset classes.<br />
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We can see this by using <a href="http://www.investspy.com/calculator">InvestSpy.com's calculator</a> to find that XRE (enter the symbol XRE.TO) over the past twelve years has a 0.53 correlation with XIU (enter XIU.TO) and a -0.05 correlation with XBB (enter XBB.TO), the <a href="http://www.blackrock.com/ca/individual/en/products/239493/">iShares broad Canadian bond ETF</a>. The numbers vary somewhat for different time periods but XRE has had consistently low correlation with XIU and XBB i.e. away from the 1.0 mark which indicates the complete perfect correlation that we do not want. By contrast, XIU's correlation with US equities, as represented by the S&P 500 (SPY) in InvestSpy, has been 0.7 or higher all along.<br />
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<b>Bottom line</b>: It's a trade-off between the lower concentration risk of BMO's ZRE and the appreciably lower MER of Vanguard's VRE. We tend to favour the certain benefit of the lower MER, but all depends on the continuation of at least reasonable performance of big holdings Riocan and H&R.<br />
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Next week, we'll therefore look at the health of the individual REITs. Readers will also have noticed that the ETFs don't have many holdings and even a fairly small individual investor could buy all or most of the REITs in the ETFs themselves and save any MER entirely. In two weeks, we'll examine the considerations involved in managing a portfolio of REITs.<br />
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<i>Disclosure</i>: This blogger owns REITs, but only shares of individual REITs, and none of the ETFs mentioned above.<br />
<br />
<span style="font-style: italic;">Disclaimer</span>: This post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a
professional advisor.CanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.com1