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About Norm
In the press
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Norm in the Press
Thus far I have made a number of appearances in the press on a
variety of topics. I'll include a few editorial comments in
[square brackets] to correct out of date info. I'm always more
than happy to talk to reporters on all things financial.
Norm's Canadian MoneySaver & MoneySense Articles
Date: April 1 2006
Media: The Globe and Mail
Reporter: Rob Carrick
Article: Drop by drop, DRIPs build your wealth
Date: May 29 2005
Media: Toronto Star
Reporter: David Cruise & Alison Griffiths
Article: A grandparent's legacy
Date: May 12 2005
Media: MoneySense
Reporter: Larry MacDonald
Article: The best Canadian investment blogs
Date: May 10 2005
Media: The National Post
Reporter: Jonathan Chevreau
Article: Are Boomers bonding to bonds?
Date: May 7 2005
Media: The Globe and Mail
Reporter: John Heinzl
Article: The hunt for value
Date: April 26 2004
Media: The National Post
Reporter: Jonathan Chevreau
Article: Asset allocation does count
Date: February 15 2004
Media: The National Post
Reporter: Jonathan Chevreau
Article: Top fund picks for your RRSP
Date: January 22 2004
Media: The National Post
Reporter: Jonathan Chevreau
Article: Don't get hit by falling rates
Date: January 17 2004
Media: The Globe and Mail
Reporter: John Heinzl
Article: Dig deep for hidden value
Date: December 13 2003
Media: The National Post
Reporter: William Hanley
Article: Scrooge of the investing world
Date: February 15 2003
Media: The National Post
Reporter: Jonathan Chevreau
Article: Conservative is the refrain as RRSP deadline nears
Date: July 25 2002
Media: The National Post
Reporter: Jonathan Chevreau
Article: Smart Boomers haven't sold off
Date: May 4 2002
Media: The Globe and Mail
Reporter: Rob Carrick
Article: E-mail subscriptions useful for stock tips
Date: September 22 2001
Media: The National Post
Reporter: Jonathan Chevreau
Article: What to do with a windfall
Date: August 11 2001
Media: The National Post
Reporter: Jonathan Chevreau
Article: Tools for the brave investor
Date: May 26 2001
Media: The National Post
Reporter: Jonathan Chevreau
Article: The big squeeze crimps retirement
Date: May 15 2001
Media: The Globe and Mail
Reporter: Rob Carrick
Article: PERSONAL FINANCE MoneySaver: No-frills investment tips for the financially hip
Date: April 21 2001
Media: The National Post
Reporter: Glenn Flanagan
Article: Stingyinvestor.com: Low-rent paradise for cheapskates
Date: March 4 2001
Media: The Toronto Star
Reporter: David Cruise and Alison Griffiths
Article: Buy and hold the right Medicine
Date: February 18 2001
Media: The Toronto Star
Reporter: David Cruise and Alison Griffiths
Article: Building a portfolio a few shares at a time
Date: March 4 2000
Media: The Globe and Mail
Reporter: Rob Carrick
Article: The word of mouth on discount brokers in Internet chap groups is a study in customer dissatisfaction, Rob Carrick says.
Date: Feb 17 2000
Media: Montreal Gazette
Reporter: Alison MacGregor
Article: Teleglobe drops But BCE's shares advance after deal
Date: Jan 28 2000
Media: Montreal Gazette
Reporter: Alison MacGregor
Article: Bullish on spinoff, but analysts question Monty's Net strategy
Date: July 31 1999
Media: The Globe and Mail
Reporter: Rob Carrick
Article: DRIPs are time-consuming, but worth it
Date: June 1 1999
Media: The National Post
Reporter: George Bragues
Article: We need an 'open sky' policy for Canadian investors
Date: Mar 20 1999
Media: The Globe and Mail
Reporter: Rob Carrick
Article: So you want to open a U.S. broker account and trade on the Internet
Date: Mar 13 1999
Media: The Globe and Mail
Reporter: Tony Martin
Article: Physics PhD bones up on his investing strategies
Date: Feb 6 1999
Media: OnTV: Investors Online
Reporter: Bruce Sellery
Article: Online Brokers
Date: Jan 1 1999
Media: The Canadian MoneySaver
Reporter: David Stanley
Article: Year-End Conglomerate
Date: Nov 14 1998
Media: The Globe and Mail
Reporter: Rob Carrick
Article: Let the discount brokerage on-line price wars begin
Date: Nov 12 1998
Media: The Toronto Star
Reporter: James Daw
Article: TIPS or no TIPS: the debate rages
Date: Feb 21 1998
Media: The Globe and Mail
Reporter: Andrew Bell
Article: It pays to be a stingy investor
Date: Some where between Oct 19-31 1996
Media: The Globe and Mail
Reporter: David Zgodzinski
Article: Net addresses to check for investment candy
| Article List |
The Globe and Mail
Drop by drop, DRIPs build your wealth
Manulife Financial has just handed small investors a gift with an
unpleasant surprise inside.
Manulife introduced a dividend reinvestment plan, or DRIP, last month
that will give shareholders the option of having their dividends used
to buy new shares instead of paid in cash. Manulife also created a
share purchase plan, whereby shareholders can buy additional stock
directly through the company.
Companies as big and successful as Manulife don't introduce DRIPs very
often these days, so this is big news for investors who appreciate the
slow, steady wealth-building potential of reinvesting dividends
without paying brokerage costs. Unfortunately, in a move that could be
a trendsetter for other big companies, Manulife decided to depart from
the custom in Canada and charge investors fees and brokerage
commissions to use its DRIP and SPP.
The two Manulife plans still have some appeal to the investor who
wants to build a position gradually in a Canadian blue-chip company
with a global reach (full disclosure: I'm a Manulife shareholder). But
it also serves as a reminder that there are other DRIPs and SPPs that
not only forego fees, but also let you buy shares at a discount.
Manulife's fee schedule is as follows: for the DRIP you pay 5 per cent
of the reinvested dividends up to $6 per quarter (plus GST), as well
as a nominal brokerage commission of 4 cents a share purchased with
those dividends; for the SPP, the cost is $15 per purchase plus the
same brokerage commission. Selling DRIP or SPP shares costs $20 plus
commissions and an additional charge of 6 cents a share.
"That seems very stiff to me, to be honest," said Norman Rothery, a
financial consultant who has for years maintained a DRIP database on
his very useful website, Stingy Investor (ndir.com). "Fees are pretty
common in the U.S., but they're unusual in Canada. Most of the time,
it's a no-fee situation."
Manulife's explanation is that it's in a unique position with respect
to its new DRIP because of its vast base of almost 900,000
shareholders in Canada and the United States. Terri Neville, the
insurer's assistant vice-president of shareholder services, said that
if the percentage of shareholders using the DRIP is in line with other
established companies, then the cost of administering the plan would
represent a considerable expense to be borne by all the company's
shareholders, regardless of whether they used the DRIP.
"We thought, do we want everybody to pay the cost of something maybe
30 per cent of the people will use?" Ms. Neville said. "We decided,
no, we don't. We thought it was more equitable for people who want it
to pay for it, and people who don't want it don't have to pay."
Fees like those charged by Manulife are fairly common among big
U.S. blue chips, although the amounts are sometimes lower. For
example, Verizon Communications Inc. charges $2.50 (U.S.) for cash
purchases of shares, $1 to $2 for reinvested dividends and $10 to sell
shares, while IBM charges up to $3 for reinvested dividends, $5 for
optional cash purchases and $15 to sell shares.
Ms. Neville suggested that charges like this will be increasingly
common among big Canadian companies that want to introduce DRIPs but
also control administrative costs. "I know there have been very few
issuer-paid plans started up in the past few years for the reason that
it's really starting to hit the bottom line," she said.
Fortunately, many blue-chip Canadian companies still have no-cost
DRIPs, including each of the Big Six banks, BCE Inc., Fortis Inc.,
Imperial Oil Ltd., Magna International Inc., Suncor Energy Inc. and
TransCanada Corp. Many income trusts offer free DRIPs as well, as do a
few closed-end funds such as Canadian General Investments. (Closed-end
funds are basically mutual funds that trade like a stock).
Companies offer DRIPs to help raise capital and broaden their
shareholder base. Some companies are eager enough to pursue these
goals that they build a discount into the price of shares that
investors buy through dividend reinvestment or SPPs, or they provide a
small bonus of extra units.
Discounts run from 2 to 6 per cent of the market price at the time the
shares are purchased, while the bonuses are usually in the 3-per-cent
range and apply to the amount being reinvested. "It's a pretty sweet
deal and well worth using," Mr. Rothery said.
Not surprisingly, the highest-profile companies don't offer discounts
on their DRIPs. But you will find discounts available from companies
and trusts such as the following.
ARC Energy Trust (AET.UN). Widely considered to be one of the more
stable oil and gas energy trusts, ARC offers a 5-per-cent discount on
reinvested dividends and cash payments used to buy more units.
H&R REIT (HR.UN). Canada's second-largest real estate investment trust
offers a 3-per-cent discount on its DRIP, but not its SPP.
MDS Inc. (MDS). This health care company offers a 5-per-cent discount
on its DRIP, but not on its SPP.
Nexen Inc. (NXY). One of the largest oil and gas producers listed on
the Toronto Stock Exchange, Nexen offers a 5-per-cent discount on its
DRIP.
RioCan REIT (REI.UN). RioCan is the largest REIT in the land and it
offers a discount of 3.1 per cent on its DRIP, but not its SPP.
There are actually two kinds of DRIPs, the traditional offered by
companies and an alternative run by many full-service and discount
brokers. If Manulife's new DRIP proves to be a trendsetter, those
brokerage DRIPs are going to be an increasingly attractive option.
With a company-offered DRIP, you have to buy a share or shares of a
company through a broker and request that the share be registered in
your name and sent to you. Next, you complete a DRIP enrolment form
(they're available from corporate investor relations departments) and
send it to your company's plan administrator, known as a transfer
agent. Many DRIP companies allow you to reinvest dividends into
fractional shares, which means you can put every penny of your
quarterly dividend payments to work in buying new shares.
With a broker DRIP, your broker collects the dividends and reinvests
them in new shares. Many brokers do this without fees or commissions,
but be sure to enquire about any costs.
Broker DRIPs offer a few conveniences over company plans, one being
that you can keep your DRIP stocks under the same roof as your regular
investments. Another is that you don't have to pay the fees associated
with buying a share, having it registered in your name and then sent
to you so you can enroll in a company plan.
The drawbacks of brokerage DRIPs are that you probably won't be able
to buy fractional shares with your dividends, and you won't be able to
buy extra shares at no cost using a share purchase plan.
A good alternative to both types of DRIPs is to use the services of
Canadian ShareOwner Investments (investments.shareowner.com), a
brokerage that has commissions as low as $9 and free reinvestment of
dividends. ShareOwner Investments is an offshoot of the Canadian
ShareOwner Association, which promotes sound investing by small
investors through the bimonthly ShareOwner magazine.
Hard-core Canadian DRIP enthusiasts will be interested to know that
Manulife now offers a direct purchase plan for its U.S. shareholders,
whereby they can buy their first shares directly through the company
rather than a broker. DPPs are common in the U.S. market, but
regulators haven't showed much enthusiasm about allowing them to be
introduced here.
"We can't do it in Canada because the regulations won't allow it,"
Manulife's Ms. Neville said. "We really wish they would."
DRIPPING WITH BARGAINS
Many publicly traded companies allow shareholders to use their
dividends to buy more shares at no cost through a dividend
reinvestment plan, or DRIP. Manulife Financial has a new DRIP that
breaks this custom by charging fees, but there are several TSX-listed
companies and income trusts that both offer no-cost DRIPs and either
allow investors to buy new shares at a discounted price, or provide a
small bonus on the dividends reinvested. These companies and trusts
include those below.
Agnico-Eagle Mines AEM 5%
Allied Properties REIT AP.UN 5%
ARC Energy Trust AET.UN 5%
Calloway REIT CWT.UN 3%
Canadian REIT REF.UN 3%
Contrans Income Fund CSS.UN 5%
Enerplus Resources Fund ERF.UN 5%
First Capital Realty FCR 2%
Fort Chicago Energy Partners FCE.UN 5%
Inter Pipeline Fund IPL.UN 5%
MDS Inc. MDS 5%
Nexen Inc. NXY 5%
Paramount Energy Trust PMT.UN 6%
Pengrowth Energy Trust PGF.B 5%
Penn West Energy Trust PWT.UN 5%
Plazacorp Retail Properties PLZ 3%
Primewest Energy PWI.UN 2%
Pulse Data PSD 5%
Retirement Residences REIT RRR.UN 3%
RioCan REIT REI.UN 3.10%
Summit REIT SMU.UN 5%
TransAlta Corp. TA 5%
TransAlta Power LP TPW.UN 5%
Vermilion Energy Trust VET.UN 5%
SOURCE: THE STINGY INVESTORWEBSITE, COMPUTERSHARE LTD., CIBC MELLON, COMPANY WEBSITES
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Toronto Star
A grandparent's legacy
The stock market really is a very simple concept. Companies raise
money by selling bits of themselves, called shares. Many investors
purchase these shares hoping to make money by selling them later at a
higher price. Other investors hold the shares in order to enjoy the
perks of ownership, called dividends.
Anyone who has puzzled over reading an investment account statement,
tried to figure out the tax implications of various income trusts or
attempted to determine how much money they've made or lost on a
particular mutual fund after accounting for distributions, withdrawals
or deposits, will laugh hysterically at our use of the word simple.
Nonetheless, at its foundation the stock market is an elegantly simple
beast. Nowhere is this more evident than in the experience of our
patient's dear, old grandpa. For 14 years he used a small veteran's
pension to steadily build up a stake in seven companies: Bank of
Montreal, Bank of Nova Scotia, CIBC, Alcan Aluminum, Imperial Oil,
Telus, and Molson.
In 1991, Samantha's grandfather began enrolling in dividend
re-investment programs (DRP) offered by 70 Canadian companies. Such
plans allow you to buy stock and fractions of stock from a company by
re-investing the dividend payments. He chose companies that also
offered share purchase plans (SPP) so he could add money to the
dividends to buy additional shares, without paying a commission.
For a primer on DRPs and SPPs look at last week's column on our
website, http://www.portfoliodoctor.ca.
Toronto financial consultant Norm Rothery has been a DRP and SPP
devotee for many years. He's quite impressed with the choices
Samantha's grandfather made. "She's in a very low- cost little
portfolio. Sure, it's not perfectly diversified but I'm sort of fond
of this situation. I think there's an argument to be made for not
doing much of anything with it."
Of the stocks Samantha now owns Molson would be Rothery's first pick
as a "clean-up" candidate. "I'm not a big booster on the Alcan front
but it's not horrible."
This is good news for Samantha, who needs to spend a bit of time
educating herself about investing and the less she has to do to her
portfolio in the short term the better.
In Rothery's opinion, nothing could be better for young or beginning
investors than the DRP/SPP route. "There's a perverse advantage to a
DRP in that it is moderately inconvenient to sell. You're definitely
going to think twice before you wander down to the safety deposit box
to remove the certificates. Psychologically it is very useful for many
people."
Most of us understand that long term investing in good companies pays
off. But on-line investing makes it all too easy to sell stock for
that bathroom renovation you've been thinking about. Additionally,
investors are apt to jump in and out of investments without giving
them a chance to perform. Making the selling a little more
time-consuming imposes the valuable discipline of reflection.
Another advantage is that DRPs tend to encourage investors to become
educated about the stock they own. Because there is a process involved
in starting the program and adding cash to the dividends to buy more
stock on a regular basis, investors are more likely to keep an eye on
what they own.
Alas, the government and the financial services industry can add
complexity to even the simplest concept.
"The combination approach is perfectly acceptable," Rothery points
out. If Samantha wants to transfer all or part of her portfolio into
an RRSP she will have to remove those holdings from the company
DRP. Subsequent purchases of the companies removed from the DRP will
have to be made according to the fee schedule of the broker she deals
with and the dividends will be paid directly into her account.
But before Samantha makes any moves, Rothery urges her to weigh the
financial implications. Since her income is modest, and she is the
single parent of two children under 18, she may not need much, if any,
of an annual RRSP contribution to receive a tax benefit. She should
also factor in the $100 to $125 account fee she will be paying on a
relatively small RRSP against the tax benefits, to see whether the
move is worth it. If Samantha's income is not secure, then having a
non-registered, fairly liquid portfolio offers a safety net.
Another option is for Samantha to leave her DRP portfolio as is and
start putting any spare cash into an RRSP. Starting small with one
high-quality Canadian, one U.S. and one international mutual fund will
make monthly small purchases easy to make and track. (The funds should
be top performers with no loads and low management fees). She should
overweight in favour of the U.S. and international funds at this
point, as she already has $18,000 in Canadian stocks.
Reader Gail Axton wrote to us with a useful addition to last week's
DRP primer. "I know for certain that you can sell BCE simply by
contacting the DRP agent (in this case Computershare Trust Company of
Canada). The shares are sold in the same way they are purchased,
(i.e. on a specific day of the month), and a cheque arrives in the
mail."
There are, indeed, a handful of companies which allow investors to
both buy and sell directly.
Norm Rothery recommends a careful reading of all plan documents and
you may need a phone call or a Web search to find out the exact
selling fees, which can vary fairly widely. He also cautions that you
may only be able to sell all of your shares, i.e. no partial sales.
"When it comes to the sell feature, Computershare (transfer agent)
looks to the leader with several of its DRPs set up for selling. In
BCE's case the commission appears to be okay at $.03/share or $3 for
100 shares. For BMO it's 50 cents a share, a rather rich $50 for 100
shares." Another example, Boardwalk, a real estate income trust,
charges $7.50 plus 6 cents a share. Selling 100 shares would cost
$13.50.
The Patient
Samantha D., 36.
Situation: Employed, single parent, two children, 9 and 7.
Income: $33,000.
Debts: Credit line owed $2,300 for car purchase.
Investments: RRSPs, none.
Non-registered, $18,000 in seven stocks: Bank of Montreal, Bank of
Nova Scotia, CIBC, Alcan Aluminum, Imperial Oil, Molson, Telus
Concern: "My grandfather left me his portfolio of stocks. I understand
he bought them directly from the companies themselves. I'd like to
continue but I don't have any idea about how to do it. Do you
recommend this as a good way to invest? Also, I would like to start
putting money in an RRSP. Can these stocks go into an RRSP?"
The Doctor: Norm Rothery, financial consultant, Dan Hallett &
Associates and author of The Rothery Report.
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MoneySense
The best Canadian investment blogs
"No man but a blockhead ever wrote, except for money." Samuel Johnson
quoted in James Boswell's The Life of Samuel Johnson (1791).
One wonders what Samuel Johnson would say today. Without receiving any
real monetary reward, thousands of people now spend hours of their
retirement or leisure time toiling away at a computer, writing down
their thoughts (and/or compiling links to items of interest) in online
personal journals called Web logs (or 'blogs'). Mr. Johnson might
observe that our era has more than its share of blockheads.
Some blogs make money if they have large followings like The
Adventures of Accordion Guy in the 21st Century and can collect
advertising revenues. Other blogs exist to promote a commercial
service such as a newsletter or consulting practice. But many blogs,
it would appear, toil on in obscurity and penury.
Blogs now cover just about every subject imaginable. The topic of
financial markets is no exception plenty of blogs have emerged in this
category and it is a pleasant surprise to note that the bloggers tend
to be of high caliber. It turns out they have advanced university
degrees and/or extensive experience in the investment industry, as can
be seen from the following guide to the best of Canadian investment
blogs. Although a blog is technically a web application that contains
time-stamped posts on a webpage, I'm using a looser definition to
encompass regularly updated investing commentary on the web.
The Big Picture Speculator
Capsule comments on resource stocks provided by Jim Letourneau, a
consulting petroleum geologist based in Calgary, Alta. Good references
to background studies on the energy sector. This blog is used to
advertise Letourneau's subscription investment service.
Bill Cara: Capital Markets and Social Equity
Three to four observations a day, a weekly wrap-up and recommendations
on financial markets from Bill Cara, a retiree from the Canadian
investment industry (where he developed the electronic quote service
Star Data and set up regional branches for two Canadian brokerage
firms). This Web site is for students of the markets, traders and
technical analysts.
Dividend Based Investing
Don't let the spartan design of this Web site put you off because it
is a great place to learn about investing in dividend stocks as well
and get ideas for your portfolio. It is run by 55-year-old Michael
Higgs, who quit his job as a vice president in the operations
department of a mutual fund to "go cruising full time" in a sailboat
with his family for several years. He now lives in Peterborough.
Dividend Growth
This is another blog where the layout may put a reader off at
first. But that would be a shame because it is also a good place to
learn (and get ideas) about dividend investing. The author is Thomas
P. Connolly, publisher of The Connolly Report (deals with
dividend-paying common stocks) since 1981.
Connolly has a great one-sentence summary of his approach: "When they
are value priced, I buy common stocks of companies which have a good
record of increasing dividend payments and hold them for the rising
income." Take the example of Terasen. He bought its stock in 1995 when
the dividend was $0.45 a share. Since then, the dividend has been
raised to $0.84, which now provides a yield of 12.3% on his money.
Canadian stocks rated by Iain Fraser
This blog is published by Iain Fraser, another retiree from the
Canadian investment industry, where he was the founder of an advisory
service (Fraser Research Ltd.) and "the lead analyst" in the 1980s and
1990s with investment dealer Midland Walwyn. His site provides
interesting stock commentary and recommendations, based on a screening
system (called quantitative analysis) that rates stocks by several
fundamental and technical criteria.
Value Investigator
This blog is a true gem and a must read. It is written by the dean of
the value investing school in Canada: Irwin Michael, portfolio manager
of the ABC Group of funds (have one of the best long-term records in
Canada). On his site, Michael highlights the principles of value
investing and provides a running commentary on a portfolio of stocks
in which he has invested.
Read Irwin Michael's column on MoneySense.ca.
Stingy Investor
Founded in 1995 by financial consultant Norm Rothery (he has a
doctorate in high-precision atom physics and his Chartered Financial
Analyst designation), this Web site is the granddaddy of Canadian
investment blogs. It is also one of the most visited: since 1999, the
number of hits has surpassed 15.6 million. Attractively designed, its
main feature is regularly updated links to articles about value
investing and low-cost investing via index funds and exchange traded
funds.
Read Norm Rothery's column
on MoneySense.ca.
I'll extend the list of best Canadian investment blogs in my next
column.
May 12, 2005
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The National Post
Are Boomers bonding to bonds?
But not everyone is sold on a fixed-income strategy
Baby Boomers have been stock junkies since the bull market began in
1982. They ran up prices of stocks and real estate and can be expected
to do so with every asset class they collectively touch.
Demographers can therefore make the logical prediction that as the
Boomers hit retirement, they will have a rising appetite for the more
sedate asset class of fixed income. That should be bullish for bonds.
This theme is being explored in a series of recent commentaries by
Merrill Lynch chief economist David Rosenberg. In "Why we are bullish
on bonds," Rosenberg says the secular bull market in bonds "cannot be
over" because such an event could happen only when most of the public
embraced that asset class. But "the bond remains the least-favoured
piece of paper on the planet."
Most Boomers are overweight equities and underweight bonds. But as
they enter capital preservation mode they may flock to what Rosenberg
terms "long-duration quality fixed-income product." Rosenberg predicts
Boomers will need "I-N-C-O-ME," (his caps) once they retire.
Their need for income "cannot be derived from a 1.7% dividend yield on
the S&P500," Rosenberg says. This need could be exacerbated by the
looming insolvency of America's Social Security system and the shaky
longevity of some employer-sponsored pension plans.
Rosenberg believes rising life expectancies means the public will
focus more on duration. He predicts a demand-supply mismatch for
quality long-duration bonds. Indeed, supply has been falling since
1999-2000. Typical is debt-free Alberta, which no longer needs to
issue bonds. Last week, on the heels of his first commentary, the
U.S. treasury announced it may reissue 30-year bonds. Europe already
has sovereign bonds with 50-year durations.
Such talk of long bonds may confuse the average retail investor
advised to keep maturities short -- typically below five years. But
few are saying individuals should stock up on 30-year U.S. treasuries,
assuming they come to market. The main customers for such bonds are
pension funds or insurance companies matching bond income to long-term
liabilities.
One who disagrees with the bullish outlook for bonds is Patrick
McKeough, who remains a believer in North American stocks. The latest
issue of his Canadian Wealth Advisor is headlined "Bad Timing for
Bonds."
The expected long-term return of bonds is 5%, compared with 8% to 10%
for stocks, he says. Bonds buffer volatility during the inevitable
downswings of stock markets but "that's a pretty expensive buffer."
Bonds are far less tax-efficient and "at these prices, who needs
them?"
McKeough says interest rates may level out soon and not have the
swings of previous decades. "If so, that's a very favourable
environment for equities. If interest rates depart from current levels
it will be upwards not downwards, which means the value of your bonds
will go down. It means inflation will be higher, which is worse for
fixed income as opposed to variable high-income stocks."
No one knows for sure which direction rates or stocks are headed, so
there's something to be said for being in both major asset classes at
all times. The old rule of thumb that bond exposure should equal your
age is not a bad one, says Warren Baldwin, senior vice-president for
T. E. Financial Ltd.
Fred Kirby, of Armstrong, B.C.-ased Dimensional Investment Planning
Inc., says bonds should be bought not on the latest rate predictions
but by considering one's risk tolerance and stage in the financial
planning life-cycle.
Bond investors aren't adequately compensated for risk beyond five
years -- beyond that, bond returns flatten out while risk keeps
rising, Kirby says. That's why DFA Global Fixed Income Fund keeps
maturities below five years, says David Bruce, advisor with
ScotiaMcLeod.
For the risk portion of your portfolio, use equities, Bruce
says. Thus, he sees no place for high-yield bonds or bond funds. Their
risks were revealed last week, when the corporate bonds of both
General Motors and Ford were downgraded to "junk'' status.
With today's paltry bond yields, it's more true than ever that "costs
matter." Before commissions, a five-year Ontario strip bond pays just
3.82% and a five-year corporate bond 3.9%, Bruce says.
The average bond fund in Canada has an MER of 1.7%, which means you're
kissing goodbye to close to 40% of the yield of the underlying bonds.
Indeed, Kirby finds the median actively managed bond fund
underperformed index bond funds in 13 of the past 17 years.
If you want rock-bottom costs, it's hard to beat bond index funds or
an exchangetraded fund like iBond (XBB/TSX, MER 0.3%.). For active
management, the handsdown winner is PH&N Bond (MER 0.57%), says Norman
Rothery, a contributing editor to Frugal Funds.
Boring? Yes.
If you want excitement, try a hedge fund. But if Rosenberg's thesis is
correct, Boomers won't be looking for that kind of excitement when
they retire.
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The Globe and Mail
The hunt for value
These investors specialize in finding solid stocks that are
overlooked, JOHN HEINZL writes
Most investors wince when the stock market tumbles. But for value
investors such as Chris Blake, there's nothing quite as exhilarating
as a market correction.
"I'll tell you, six months ago we were having a tough time finding
names. Right now, I'm awash with them," says the co-manager of GGOF
American Value Fund and managing director with Lazard Asset Management
in New York.
Like early-risers who scour yard sales on Saturday mornings for hidden
gems, value investors specialize in hunting for solid stocks that are
overlooked, unloved or beaten down by temporary setbacks. Where others
see scuffs and scrapes, they spy opportunities.
This week, billionaire Kirk Kerkorian announced plans to double his
stake in General Motors Corp., sending the downtrodden shares up 18
per cent in one day. Less than two weeks earlier, news surfaced that
fellow billionaire and value-investing legend Warren Buffett had
bought a stake in Anheuser-Busch Cos. through Berkshire Hathaway Inc.,
lifting the brewer's depressed stock nearly 7 per cent.
A key premise of value investing is that markets usually overreact to
negative news, pushing stocks below their true value as the herd
mentality takes hold. That's when value investors swoop in and pick up
shares at a hefty discount.
To be successful, a strong contrarian streak is essential. Having
loads of patience is also important, because the market often takes
years to recognize the value it's been overlooking. And during that
time, a stock can give investors fits.
"Most people probably can't be value investors because they don't have
the temperament for it. They'll buy a few stocks and then they'll get
spooked out of them and sell," says Norm Rothery, founder of
StingyInvestor.com and a financial consultant with Dan Hallett and
Associates Inc. of Windsor.
Uncovering value also requires some facility with numbers. No two
value investors share the same approach, but most delve into ratios
such as price/earnings, price/cash flow, price/book value and
debt/equity. Like batters waiting for the perfect pitch, some will
watch a stock for years until the ratios enter their strike zone.
There wasn't much to swing at for years. But now, with the market well
down from its highs, more fat pitches are crossing the plate.
"We're seeing some fantastic values because of what the market has
done. Really, at the end of February, we couldn't find anything except
for outside of Canada," says David Taylor, a value-oriented portfolio
manager at Dynamic Mutual Funds.
Here are some samples.
Rummaging through the bargain bin
Value (vaelju), n. The relative status of a thing, or the estimate in
which it is held, according to its real or supposed worth, usefulness,
or importance. -- Oxford English Dictionary
Westwood One
Shares of the company, which produces content for radio stations --
including news, traffic and weather reports - have been hammered by a
slump in ad rates, GGOF's Chris Blake says. But Westwood still spins
money like a DJ spins CDs, pumping out more than $20-million of free
cash flow in the first quarter. This week, it initiated a 10-cent
quarterly dividend.
Royal Caribbean
Shares of the cruise operator have sprung a leak amid rising fuel
costs, but investors need to get a grip, Mr. Blake says. Cruise ships
use low-grade bunker fuel, which is cheaper than gasoline. And even
after factoring in the added costs, analysts expect earnings to rise
22 per cent to $2.76 a share in 2005. If fuel costs fall, "these guys
are just going to mint money," he says.
Ipsco
The steelmaker has hiked its dividend twice this year as profits
soared. Yet the stock plunged about 20 per cent from early March to
mid May, before rebounding. Sure, steel prices have softened, but
demand remains robust for the plate Ipsco supplies to manufacturers of
heavy equipment and rail cars, Dynamic's David Taylor says. So when
the stock tumbled, he doubled his position.
AGF Management
The fund company "is facing massive redemptions ..... month after
month the numbers are just godawful," Mr. Taylor says. AGF is too big
to be a niche player, but lacks the scale of larger competitors. So
what's to like? "They probably would look really nice in the hands of
somebody else," he says. If the Goldring family ever decides to sell,
he thinks the stock could fetch $25.
Hart Stores
Few stocks are more overlooked than Hart, which operates junior
department stores, primarily in Eastern Canada. Most days, only a few
thousand shares trade on the TSX- and sometimes none at all. But
StingyInvestor.com's Norm Rothery notes that Hart is profitable,
growing modestly, and sports an attractive p/e of less than 8. It even
pays a dividend, for a yield of 2 per cent.
Amisco Industries
Another of Mr. Rothery's small-cap favourites, the Canadian
manufacturer of tubular steel furniture has a dividend yield of nearly
8 per cent. And last year, it paid a special dividend of $2.45 a
share. Higher steel prices and competition from China have hurt, "but
they just seem to collect up cash and they've decided to start paying
it to investors, which is awfully nice," Mr. Rothery says.
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The National Post
Asset allocation does count
Last week's column by Levi Folk picked a convenient period
"Of course asset allocation is not meaningless," Levi Folk now says, clarifying a piece he wrote in this space last Monday.
Casual readers and investors may have gotten the opposite impression from the original version of the article, appearing at Folk's FundLibrary.com. It's headlined Asset Allocation Explains No Part of Portfolio Returns.
Internet pundits and financial advisors take issue with the apparent message that investors should ignore the conventional wisdom on asset allocation -- i.e. , spreading investments across stocks, bonds, cash and other asset classes reduces volatility and provides optimum returns with less risk.
Some accused Folk of "data mining," since he zeroed in on data for Canadian markets for the 10 years ended March 31. It so happens over that time period returns of Canadian bonds and equities were identical: 9.02%.
Based on that one period, Folk declared asset allocation was therefore "effectively pointless." But he says he did so to make a point: It "was meant as hyperbole to show how silly the original study was."
The study to which he's referring is an often-misunderstood academic
treatise on asset allocation known as Brinson Hood Beebower.
What Folk thought he was refuting was the "accepted wisdom" flowing
from the study that asset allocation accounts for more than 90% of
portfolio returns.
But here he fell into a common error many journalists and even some
advisors often make.
As I explained four years ago (April 20, 2000) in this newspaper,
Brinson et al. analyzed pension funds and found that, on average,
asset allocation accounted for 93.6% of the variation over time in
portfolio performance. It's that critical word variation (not to
mention the qualifer, "on average") that often gets omitted in
off-the-cuff interpretations of this study.
Financial advisors I respect still believe asset allocation is
critical for dampening down volatility of clients' portfolios.
This is especially true for retirees on fixed incomes , says Jim
Rogers, chairman of Vancouver-based Rogers Group Financial.
Because asset allocation reduces portfolio volatility, it's
"absolutely critical" for retirees, Rogers says. Otherwise, for a
retiree drawing income from a portfolio, significant volatility in
returns will exacerbate the loss in the value of their portfolios, he
says.
Rogers says investors need look no further than the Easy Chair
portfolio or the Rip Van Winkle portfolios (described in earlier
columns) for evidence on how asset allocation smoothes the investment
journey.
Another Vancouver-based advisor, KCM Wealth Management's Adrian
Mastracci, remains a firm believer in the merits of asset
allocation. "The headline said asset allocation explains no part of
returns. To me that means zero, and I can't buy into that
thesis. Perhaps he [Folk] can submit his position for scrutiny to AIMR
[Association for Investment Management and Research.] "
Warren Baldwin, regional vice-president at Toronto-based
T. E. Financial Ltd., says a proper analysis of the returns from asset
allocation should include international and after-tax data.
Fund companies are just as adamant about the importance of asset
allocation. "It is wrong to suggest that asset allocation is of no or
relatively minor importance," says Karen Bleasby, senior
vice-president and portfolio manager with Mackenzie Financial
Corp. "While asset allocation is important for determining portfolio
return, it is even more important for determining portfolio risk."
She agrees returns of stocks and bonds in Canada were virtually
identical over the last 10 years, but says asset mix had a large
impact on returns over shorter time spans over that decade.
Thus in 2003, the return on the Scotia Capital Universe (bonds) was
6.7%, while the S&P/TSX returned 26.7%. In 2002, the Scotia Capital
Universe returned 8.7%, while the S&P/TSX returned -12.4%. "Obviously,
one's mix between bonds and stocks had a huge impact on return in each
of these periods. "
Furthermore, over each of the last four decades, the return on the
S&P/TSX ranged from 10% to 12.2%, while the range on bond returns was
3.4% to 13.2%.
The critical point is asset allocation reduces overall portfolio
risk. "Bonds experienced lower volatility of returns than stocks and
the portfolios with a higher bond content experienced lower volatilty
of returns than those with a higher equity mix."
Folk also came to the convenient (for him) conclusion that security
selection was more important to portfolio returns than asset
allocation. Here he was on somewhat more solid ground. Bleasby agrees
stock selection can be "an important determinant of return. It is for
this reason that the asset allocation programs offered by Mackenzie
incorporate actively managed funds."
But believers in low-cost investing have another view. Norman Rothery
of The Stingy Investor says Folk would have been better off attacking
over-diversification of active funds rather than asset allocation.
In a parody of what he thought Folk should have written, Rothery
summed the issue up nicely on another Web site: "Using active funds to
form a diversified portfolio is a high-cost way to poor performance. A
well-diversified portfolio of active funds will result in a portfolio
that looks very much like the market portfolio. However, the cost of
such a synthetic market portfolio is many times that of buying the
actual market portfolio with low-fee index funds."
Rothery suggests smart investors should do one of three things:
Exchange high-cost active portfolios for low-cost passive ones; accept
less-diversified portfolios in the hope well-chosen active funds can
outperform; or use a core passive portfolio with some select active
funds.
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The National Post
Top fund picks for your RRSP
With almost 5,000 investment funds to choose from, Canadians have a formidable challenge narrowing the field down to a handful of picks for their RRSP. Even the annual mutual fund guides have hundreds of top-rated selections. So FP Money asked eight fund gurus for their single best picks in the three key categories appropriate for RRSPs: Canadian equity, global equity and fixed income.
To add some spice, we also requested a wild-card choice, which could be a mutual fund in any category, an exchange-traded fund (ETF), a hedge fund or anything else that struck the picker's fancy.
Who's doing the picking? We've tried to span the spectrum of philosophies and backgrounds, starting with Gordon Pape, who created the genre of annual mutual fund guides in Canada. Then we go to fund analysts Duff Young, president of FundMonitor.com Corp., and Dan Hallett, president of Windsor-based Dan Hallett & Associates Inc.
Nate Mechanic, advisor at RBC Investments, provides the bank-owned brokerage view. Financial author and former advisor Stephen Gadsden, meanwhile, delivers the independent "curmudgeon's" perspective.
Ed Thompson, an advisor with financial planning firm Money Concepts, believes well chosen actively managed funds can recoup their fees and then some.
The "costs matter" crowd is also represented. Norman Rothery, publisher of the Stingy Investor newsletter, is a fan of low-cost but actively managed no-load funds. As for index and exchange-traded funds, we tapped Pape's coauthor, Eric Kirzner, a finance professor at the University of Toronto.
For each selection, we summarize the picker's reasons and list the management expense ratio. Generally, the lower the MER, the more returns accrue to investors. But remember that some funds earn back their fees and more: the performance stats in the newspaper factor in those charges. Besides, many investors opt for a compromise by owning a blend of "active" and "passive" funds.
So, without further ado, the envelopes please....
CANADIAN EQUITY
Pape: RBC O'Shaughnessy Canadian Equity. It's diversified between growth and value investments, and less risky than average in the category. MER: 1.63%.
Young: CIBC Canadian Emerging Companies. Small-cap equity funds like this one are better investments than large-cap funds in Canada because the latter tend to own the same 10 stocks. This fund owns exciting companies and has never been in the bottom quartile. MER: 2.0%.
Hallett: Saxon Stock. This fund isn't heavily marketed, and that shows in the low MER. Good value is hard to find in large-cap funds lately, so this one's all-cap mandate is attractive. MER: 1.75%.
Mechanic: Elliott & Page Growth Opportunities. Most investors are under-represented in the mid-cap stocks this fund owns. It's focused on growth companies but has never had a negative calendar year. MER: 2.93%.
Gadsden: BluMont Hirsch Performance. A consistent, top-performing hedge fund managed by Fidelity's former ace, Veronika Hirsch. MER: 0.64%, plus 20% performance fee when returns exceed certain benchmarks.
Thompson: C.I. Harbour. Its manager sticks to his discipline in good times and bad, and a conservative fund is warranted now. MER: 2.32%.
Rothery: Beutel Goodman Canadian Equity. The fund picks stocks that have below-average price-to-cash-flow ratios and above-average dividend yields. This combination should protect investors in case of a market downturn. MER: 1.35%.
Kirzner: i60s (S&P/TSX 60 Participation Units: XIU/TSX). The ETF tracks the S&P/TSX 60 Index, providing exposure to the 60 largest Canadian stocks, and it's RRSP-eligible. MER: 0.17%.
GLOBAL EQUITY
Pape: Cundill Value. Global equity funds have been hurt by the bear market and the sagging U.S. dollar. Peter Cundill's deep value style has helped him buck the trend. Half this fund's investments are in Japan. MER: 2.58%.
Young: Templeton Global Smaller Companies. Never trendy but always trustworthy. MER: 2.76%.
Hallett: Trimark Fund. A solid approach to stock picking, great management and reasonable fees. MER: 1.62%.
Mechanic: Templeton Global Smaller Companies. This fund is well diversified (with 20% in emerging markets and 12% in the U.S.), consistent and lower risk than the global market tends to be. In 13 years, the only negative return was a 0.5% loss in 2002. It also makes a good complement to the popular Trimark Fund. MER: 2.76%.
Gadsden: Cundill Value. Reliable, long-term consistency courtesy of 2002 Manager of the Year, Peter Cundill. MER: 2.58%.
Thompson: Ivy Foreign Equity. A conservative fund that sticks to its discipline, going to cash if it can't find firms that meet its stringent investment criteria. MER: 2.31%.
Rothery: Trimark Fund. A reasonably frugal fund with a good long-term record. Its growth-at-reasonable-price strategy searches the world for undervalued industry leaders, with a strong focus on the U.S. MER: 1.62%.
Kirzner: iUnits MSCI International Equity Index RSP fund (TSX/XIN). This ETF tracks the Morgan Stanley Capital International Europe, Australasia and Far East Index (EAFE), a 21-country index of the major developed markets excluding North America. MER: 0.35%.
FIXED INCOME
Pape: PH&N Short Term Bond and Mortgage. It owns short-term bonds and residential first mortgages, investments that are less vulnerable to a potential rise in interest rates. MER: 0.7%.
Young: None. "I hate fixed income funds. Fees gobble up too much of the yield."
Hallett: PH&N Total Return Bond. Top-notch team, rock-bottom fees and a more flexible mandate than flagship PH&N Bond. MER: 0.57%.
Mechanic: Trimark Advantage Bond. This fund is focused on investment-grade corporate bonds. Alas, it's closed to new investors; if you already own it, buy more. MER: 1.34%.
Gadsden: PH&N Bond. A dynamite no-loader that blows away bank equivalents. If equity markets tank, this fund won't. MER: 0.56%.
Thompson: AGF Global Government Bond. The manager understands central banking, with a feel for the direction of interest rates and inflation, and hedges against currency fluctuations. MER: 1.85%.
Rothery: PH&N Bond. Costs are vital in bond funds. It makes no sense to give 40% of the gains to managers buying government bonds, as mainstream bond funds often do. But getting PH&N's smart managers for a small extra cost is entirely reasonable. MER: 0.56%.
Kirzner: iG5 (TSX/XGV). The ETF tracks five-year Government of Canada bonds and is the cheapest way to park money for the mid-term with no default risk. MER: 0.25%.
SPECIAL FAVOURITES
Pape: Dynamic Focus Plus Balanced. For those who can't make up their minds on asset mix or want one-stop shopping, this fund's portfolio is divided between stocks, bonds and cash. The returns are better than the balanced category average over all time frames. MER: 3.0%.
Young: GGOF Monthly High Income. "Two words: John Priestman." MER: 2.55%.
Hallett: Dynamic Canadian Value Class. Altamira alumnus David Taylor is a staunch value manager who buys whatever he likes. MER: 2.83%.
Mechanic: Dynamic Focus Plus Balanced. This all-purpose fund made money in 2002, when most lost it. MER: 3.0%.
Gadsden: Millennium Bullion Fund. The fund invests equal parts in gold, silver and platinum. It suffers from a high MER, but is suitable as a hedge against the collapsing U.S. dollar. "Where else can you get in on the precious-metals gravy train, with 100% liquidity, fund assets insured, and you don't have to dig a hole in your back yard?" MER: 3.5%.
Thompson: Talvest Global Health. With Baby Boomers aging, the health care industry is just beginning its long-term growth. MER: 2.90%.
Rothery: PH&N Dividend Income. Most dividend funds are less expensive, value-oriented, large-cap Canadian equity funds. This one has a long history of outperforming them. MER: 1.16%.
Kirzner: iUnits S&P/TSX Canadian REIT Index fund (XRE/TSX). Real estate investment trusts are closed-end funds that invest in real estate and mortgages. This low-cost ETF tracks the S&P/TSX Canadian REIT index. MER: 0.55%.
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The National Post
Don't get hit by falling rates
Depending whether you're a borrower or a lender, Tuesday's quarter point (0.25%) drop in the bank rate to 2.5% was a promising portent or an ominous sign. Every drop in rates rewards those in debt and punishes savers.
Homeowners playing mortgage roulette at the short end will be encouraged to stay short in variable mortgages for at least a few more months; retirees will feel further squeezed by rates close to the lowest in a generation.
Prudent souls parking wealth in liquid vehicles like money market funds or treasury bills now suffer further punishment for their caution. Those with long-term bonds, bond mutual funds or preferred shares get more bang for their buck with each drop in rates.
While tiny in magnitude this time around, the interest rate direction is a 180 degree turn from the climate last summer, when bond traders feared American interest rates had finally hit bottom and were poised to rise sharply. If they had (as they had began to do in mid-2003), holders of long-term bonds would have suffered significant losses.
The lesson for investors in bonds appears to be the same as with stocks: don't fight the Fed. When Alan Greenspan says he'll keep rates down around 1% for some "considerable time," believe him.
Meanwhile, the Bank of Canada is "taking back" some of its rate hikes from 2003, imposed when inflation appeared to be heating up, says Vince Hunt, a fixed-income manager at AIM Trimark Investments. The bond market is pricing in at least another 50 basis points in cuts for upcoming meetings in March and April, he says.
When that happens, homeowners may get another chance to lock mortgages in for longer terms at still near-historic lows.
However, Burlington-based mortgage consultant Ron Cirotto [www.Amortization.com] says if forced to choose between a fixed and variable mortgage, he'd still stay short in the latter.
If you're on the receiving end of interest payments, those with ladders of bank GICs or strip bonds coming up for reinvestment may stay short. Rates could stay low another year or two but at some point will start to rise and present more attractive reinvestment opportunities than now.
Every time rates fall, yield-starved investors reach for higher returns. If so, the dynamics are in place for Income Trust Mania, The Sequel.
Similarly, mutual fund bond managers are juicing returns with investment grade corporate bonds and higher-yielding "junk" bonds. The lower the credit quality the less interest-sensitive bonds tend to be. Thus, business fundamentals have more impact on such firms than rates, says Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc.
Bond managers fall into two camps right now, Hallett says: those who think there is more risk in bonds than stocks; and those who think rates will be stagnant for few years and if they do rise, will do so only marginally.
For now, fears of a crash in the bond market are on hold.
The rate cut reveals how the soaring loonie is impacting the economy, says Norman Rothery, publisher of The Stingy Investor. "We appear to be in for a period of stable or declining rates in the short term ... the real danger in the longer term is inflation and increasing rates."
If yields "back up" and rise again, causing bond prices to fall, long-term bonds would lose the most, as occurred in mid-2003. Apart from that risk, historical data reveals little compensation for the greater risk taken on longer maturities, Hallett says. Thus, many advisors recommend clients stay in bond funds with maturities of five years or less.
Rate cuts give bond fund holders a short term bounce but "bond funds will continue to eke out modest returns" in the optimistic case of long term stable rates, Rothery says. So he favours low-fee "frugal funds" from firms like PH&N, Leith Wheeler, Legg Mason and Barclays. "Should bonds yield 5%, you don't want to see almost half of your interest going to pay fund fees."
High fees and low rates also make returns of money market funds look even punier next to high-interest bank accounts like ING Direct's.
"People wanting to play the variable game with their mortgages are best to de-emphasize investment assets that are strongly, inversely related with interest rate changes," Hallett says.
"Or, if one is more comfortable with trusts and bonds in the portfolio, perhaps they should consider locking in a rate on the mortgage."
I couldn't put it better myself, so I won't attempt to.
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The Globe and Mail
Dig deep for hidden value
Irwin Michael's specialty is sniffing out undervalued stocks. But after last year's market surge, the manager of ABC Funds has to dig deeper to uncover hidden gems.
"It's becoming tougher and tougher," he says. "A year ago we looked at three stocks to buy one. Now, we look at 10."
The bargains are slim in a market that's already risen 25 per cent, but Mr. Michael and other value investors with proven track records say it's still possible to find them -- if you know what to look for.
That means companies with strong balance sheets and solid business models, but which have been overlooked or beaten down for one reason or another. Maybe the company is in an out-of-favour sector, or its profits have been hammered by short-term factors that obscure the company's favourable long-term outlook.
The trick to value investing is to buy good companies when nobody else wants them, which requires a strong contrarian streak -- and buckets of patience. It is not a game for day traders or investors with weak stomachs.
"With value investing, you want to buy a fairly wide variety of stocks, with the knowledge that . . . from time to time you're going to get a real stinker," warns Norman Rothery, who edits Stingyinvestor.com and the Rothery Report.
For Mr. Michael's part, he looks for companies with price-to-earnings multiples of less than 10 and price-to-cash flow multiples of less than five, and whose shares are trading at a discount to book value.
He searches for hidden assets such as tax-loss carry-forwards or potential spinoffs, and for companies with solid management (although lousy management can also be positive by making the company a takeover candidate).
Among his recent purchases is Sears Canada Inc., which he scooped up for less than book value. The shares closed yesterday at $16.92 on the Toronto Stock Exchange, down from a 52-week high of $21.50 in early November, even as Sears ended the year on a high note with better-then-expected holiday sales.
"I think the stock can go back to the early $20s," he says.
Another retailer he likes is Danier Leather Inc., which has a solid business and no long-term debt, both of which position it nicely for a turnaround in the sector. "The Street loved it at $16 or $17, they hated it at $10, so we bought it at $10, which was book value," he said. It closed yesterday at $11.03.
His ABC Fundamental Value Fund also holds an assortment of paper and forest stocks, including Canfor Corp., which has bounced back since the fall, and still-downtrodden Norske Skog Canada Ltd. The sole bank he owns is Laurentian Bank, which "everyone hates. That's why we feel very comfortable owning it."
Stingyinvestor.com's Mr. Rothery is also a fan of Danier.
"I like the fact that it's cheap, it's growing, it controls its business from top to bottom, it manufactures and sells. I generally think it's a class act," he says.
On the downside, the stock is thinly traded, "so it can get pulled one way or another very quickly."
A more speculative pick is PriceSmart Inc., a U.S.-based operator of warehouse club stores in Latin America, Asia and the Caribbean. If buying at the point of maximum pessimism is your goal, this one has plenty to offer: a share price that has collapsed to $6.32 (U.S.) from more than $40 in 2002, accounting errors, restated financial results, and numerous shareholder lawsuits.
"Given time, this one can turn around nicely, but it is a riskier situation," Mr. Rothery cautions.
When shopping for stocks, value investors often look for a juicy dividend. Riding out periods of volatility is easier if a cheque is arriving every quarter. "Dividends allow us to be stupid longer," jokes Benj Gallander, co-editor of the Contra the Heard investment newsletter.
One dividend-paying stock that made him look smart was Hudson's Bay Co.
He and fellow "Contra Guy" Ben Stadelmann bought it last March at $8.50 (Canadian). The shares are yielding 3 per cent and closed yesterday at $12.15. "We think they've got some awfully good assets and, of course, very well-known name," Mr. Gallander says.
The retailer is also a possible takeover target. South Carolina investor Jerry Zucker has accumulated more than 10 per cent of its shares. Some observers question whether Mr. Zucker will follow through with a bid, but Mr. Gallander wouldn't be surprised.
"In 1997, he bought us out of Dominion Textiles," he says of Mr. Zucker. "He's not just somebody who comes out of the blue, buys a small piece of a company and pumps and dumps. This is somebody who will buy a firm and pay a lot of money for it."
Mr. Gallander bought a handful of stocks in December -- he would not discuss them, citing his newsletter's policy of giving subscribers exclusive access to such information for 30 days -- but bargains aren't in abundant supply.
"I don't see any sectors right now that jump out at me," he says. He and his partner are sitting on "an awful lot of cash" and are in no hurry to spend it. "We won't buy a company that we've followed for less than six months. Often we follow it for more than five years before we will take the plunge," he says. "One of the problems right now is we just don't have that many stocks that are interesting buys."
Richard Howson, chief executive officer of the value-oriented Saxon Mutual Funds family, faces a similar challenge. "It's a lot tougher to find cheap stocks today than it was a year ago, but I believe that there are still cheap stocks out there," says the manager of the Saxon Stock Fund, Saxon Balanced Fund and Saxon High Income Fund.
One he likes is Nu-Gro Corp., which produces packaged fertilizer and other lawn and garden products. The company is trading at less than 12 times earnings and is "statistically cheap," he says.
Another pick is Specialty Foods Group Income Fund. The fund slashed its distribution last fall, citing rising beef prices linked to the discovery of bovine spongiform encephalopathy in Canada.
The units closed yesterday at $7.33, down from more than $10 in September, and are now yielding 8.7 per cent. The setback is only temporary, Mr. Howson says.
"I feel it's a well-run company and I wanted to take advantage of a lower price. You've got to buy these things when things look bleak."
UNEARTHING BARGAINS
It's not easy to find undervalued stocks in a market that has rallied 25 per cent in the past year. But with a little digging, our experts hope they've hit paydirt with these diamonds in the rough.
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The National Post
Scrooge of the investing world
A a time of year when most people are being urged to spend, Norman Rothery is going about his business of urging people to be thrifty in how they invest their savings. Examining the menu over a Diet Pepsi at Pangaea, in the heart of the fashionable Bloor Street shopping district in downtown Toronto, the founder of StingyInvestor.com and FrugalFunds.com and publisher of two quarterly newsletters is an unlikely Scrooge -- more of a happy warrior of the value investing world.
The "debt-phobic" Rothery's cheerful espousal of the virtues of thrift would be a hard sell in the debt-defying luxury shops around the corner and an even harder sell a mile or so south on Bay Street, where leverage lives large. It sounds like a tautology, but he declares: "I want to emphasize that people shouldn't [invest] unless they have money. Unless they've paid off all their debts, they shouldn't be doing it."
Furthermore, stocks should be far down on the list of holdings for the average person, after real estate that's paid off and a rainy-day fund as an insurance policy.
No, Bay Street is not going to have a parade for this guy.
In his 34 years, Norm Rothery has managed to earn a PhD in experimental atomic physics, founded a successful newsletter business and become such a canny value investor that he could afford a frugal retirement right now. "It's a place to build on and it's a safety net that's very comforting. So that's a nice place to be."
Pangaea is a very nice place to be, too, though it's not particularly appropriate for the frugal-minded diner. Lunch Money has enjoyed lunch here before and has fond memories of when this fine space was Acrobat years ago and Noodles well before that. On this Tuesday, it's doing a bustling pre-Christmas lunch trade, with shoppers and local business types creating a festive buzz.
The buzz-making at our table is limited to the aforementioned Diet Pepsi and a couple of glasses of mineral water. We are less frugal in our food orders, though we both forgo starters. Our guest orders the roast beef sandwich, which comes very rare and with Yukon gold fries. Lunch Money can't resist the John Dory, which we rarely see on Toronto menus. This meaty Atlantic fish comes butter-seared, with roasted beets and fingerling potatoes.
Rothery, whose lunch most often consists of wandering off to the local coffee shop and wandering back to his home office, founded the Stingy Investor newsletter and Web site in 1995 after he completed his physics doctorate at York University. "[Experimental atomic physics] wasn't where you made money," he says. "It's much like journalism. You don't necessarily go into it for the money."
We manage a thin smile while reflecting on that inescapable fact after more than 35 penurious years in this business.
"I moved from physics on to finance," he says, adding that the two disciplines share a math background, a healthy skepticism for numbers, and a penchant for problem solving. "It also allows you to avoid being bamboozled. A lot of people will try to snow you in this business."
He and his business partner, Carl Wolfe, a fellow science PhD who teaches at York, have made value and thrift their touchstones to help Canadian investors avoid being snowed on their investments. The Frugal Funds newsletter reviews low-fee mutual funds and exchange-traded funds and focuses on low-cost passive funds and thrifty active funds that are not easily replicated.
"How many people do you have to pay before you get to the money?" Rothery asks as our meals arrive. "The shareholder is the person at the end. Do you want to pay 2% to management and 2% to your mutual fund manager as well? You're not making much money at the end of it all."
Among the funds the letter rates highly are the Beutel Goodman and Leith Wheeler Canadian equity funds, and the North Growth and Mawer U.S. equity funds.
The second newsletter, The Rothery Report, focuses on Canadian and U.S. stocks and is aimed at the more hands-on investor. Among the stocks Rothery recommends for the short term are Altria Inc. (formerly Philip Morris), Apple Computer and Fairfax Financial Holdings. Long-term holdings include BCE Inc. and TransCanada Corp. The emphasis on bargain-hunting for true value produced an average annual return of 17.6% for the stock portfolio from 1995 to 2002.
In looking for value, Rothery uses many techniques developed by the legendary Benjamin Graham. Low price-to-earnings and low price-to-book value have worked well for him in the past three years, as have low debt and low price-to-sales ratios. His methods have beaten the S&P 500 index the past couple of years.
While he could find lots of bargains last fall, at the bottom of the bear market, he's finding very little to buy today. "In value investing," he says, "it's very easy for the market to get into non-value territory." He reckons the sector with the most promise right now could be pharmaceuticals, which have performed poorly in the past year.
Rothery, who has personally done well in equities, emphasizes that many people shouldn't even consider stocks as investments. "They should stick to government bonds, GICs even. [These investments] are paying small amounts, but if you don't have the stomach for it, well.... Warren Buffett says if you can't stand a 50% loss in your stocks, you shouldn't be in the market. For the average guy, GICs are not a horrible thing.
"It's really being comfortable with your strategy and with the philosophy involved. If you're not comfortable, for instance, as a value investor, you're toast. Because there's going to be a day, just as there was a few years ago, when no one wanted to invest in stodgy stocks. You've got to believe you're buying dollars for dimes and that it will work out eventually."
Eventually, Rothery says as we enjoy dessert -- an apple turnover and whipped cream for him and some cookies with coffee for Lunch Money -- he could go to work as an investment counsel. "I could make a lot more money going to work for people on Bay Street. But the flip side is, I like [my current] lifestyle. And being your own boss is very pleasant."
Which reminds us that we've got to head back up to the office this afternoon, while Rothery has some work to do for a children's charity he supports.
Lunch at Pangaea, as we said, is not for the frugal. With tax and tip, the bill comes to $90, but for the fine food, ambiance and crisp service, that's value for money in these parts.
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The National Post
Conservative is the refrain as RRSP deadline nears
Canadians will put 20% less in their RRSPs this year and shift to more
conservative investments, a recent TD Bank poll revealed.
With two weeks to go to the March 3 deadline, "conservative is
definitely the word this RRSP season," agrees fee-only planner Leonard
Hughes.
Stocks threaten a fourth down year, but fund analyst Duff Young says
the risk of investing in stocks is lower. "Now's the time to buy
because they're cheap."
How much risk an RRSP should take on depends on age and other sources
of retirement income, such as corporate pensions, says fee-only
advisor Adrian Mastracci. If you have a large non-registered stock
portfolio, tax considerations favour overweighting RRSPs with fixed
income.
The 10 RRSP ideas here start with the least risk (and return) and get
steadily more aggressive.
1. Cash or equivalents: With interest rates at 40-year lows and ready
to rise, long-term bonds have more risk than short-term or
cash. Treasury bills, GICs, Canada Savings Bonds and money market
funds have tiny yields but provide safety and still generate RRSP
receipts. You'll enjoy the "bull market in cash" if stocks languish.
High-interest savings accounts at ING Direct and MRS Trust pay 3%. The
Stingy Investor's Norm Rothery likes T-bill funds from Altamira and
Perigee. Maximize GIC payouts through deposit brokers at
www.fcidb.com.
2. Fill gaps in strip ladder: Get higher yields and hedge against
reinvestment risk by building a "ladder" of strip bonds maturing from
one to 10 years out or more. Longer maturities are riskier if rates
rise so now's a good time to fill ladder gaps just a few years
out. Financial planner Jim Otar suggests maturities should average
five years.
3. Bond funds and bond ETFs: At today's rates, Management Expense
Ratios ( MERs) chew up much of the yield in bond mutual funds. Try
no-load funds like PH&N Bond or own government bonds directly. Or hold
five- or 10-year Canadas via two Barclays bond exchange traded funds
(ETFs), with MERs of 0.25%.
Active bond managers have a better shot at adding value in corporate
bond funds. Broker Nate Mechanic suggests dividing fixed income 70%
safety and 30% corporate bonds. Stick with funds holding bonds rated
BBB or better and avoid high-yield "junk" bond funds. Consider Trimark
Advantage Bond, AGF Canadian Total Return Bond and -- for global bonds
-- C.I. World Bond.
4. Real return bonds: Real return bonds pay about 3% currently, but
the payout rises with inflation (hence the term "real return"). RRBs
are comparable to investing in long-term bonds (more than 10 years
out). TD Bank has a RRB bond fund but its MER consumes a good chunk of
the return.
5. Index linked GICs or segregated funds: RRSP investors torn between
stocks and bonds might consider the banks' index-linked GICs. The more
underlying stock indexes rise, the more interest these hybrid GICs
pay. These are not true capital gains, so should be held in RRSPs. If
markets fall, no interest is paid, but initial capital and precious
RRSP contribution room are preserved.
Insurance segregated funds have high MERs but can buy you
protection. Agent Paul Barbour cites a client who locked $220,000 in a
seg fund before the market tanked. Market value fell to $68,000 but in
2012, she gets the full $220,000 back.
6. Income trusts: Income trusts are high-yielding equities between
bonds and equities on the risk/return spectrum. If rates rise, yields
may fall off. Advisor Jim Rogers thinks they are better RRIF products
than RRSP accumulation vehicles. Tax treatment of return of capital
may make them better non-registered investments.
If you pick your own trusts, spread them across power, energy,
business, consumer and real estate trusts. Use the S rating system: S1
is highly rated, S7 is the lowest.
If you don't mind the MERs, try a "basket" approach through Sentry
Select Diversified, Citadel, or Saxon High Income Fund. For REIT
exposure, consider Barclays iREIT, an ETF invested in 12 REITs with a
MER of 0.55%.
7. Low-fee balanced funds: These provide active management of asset
classes and stocks. Purists don't like them because the fee also
applies to the bond portion. But younger investors with small
portfolios can do worse than Rothery's suggestion of PH&N Balanced
(MER 0.86%), Perigee Accufund, McLean Budden Balanced or advisor Jane
Baker's recommendation of Bissett Canadian Balanced (MER 0.94%). Otar
likes Trimark Income Growth and Cundill Global Balanced.
8. Dividend funds: These held up well in the downturn, but rising
rates could hurt dividend funds. Because of the dividend tax credit,
these may better be held in non-registered plans. Conservative
investors who only have RRSPs can try Rothery's suggestion of PH&N
Dividend and Scotia Canadian Dividend or fund analyst Steve Kangas's
picks of Royal Dividend and BMO Dividend. An alternative is Barclays
iFin (MER 0.55%), invested in banks, insurance and fund stocks.
9. Canadian equity funds or ETFs: RRSPs must be 70% Canadian content,
so growth investors need Canadian equities. Actively managed funds
like ABC Fundamental Value or Trimark Canadian make sense in this
environment but many large-cap funds own the same stocks. You can
bypass their MERs through the Barclays i60s (MER 0.17%), which owns
the top 60 TSX stocks. Active management is more likely to pay off for
small or mid caps, Young says.
10. Foreign equity funds: For tax reasons, foreign equity ETFs should
be held outside RRSPs and actively managed funds inside the 30%
foreign content of RRSPs. Avoid sector funds in RRSPs. Kangas favours
global value funds like Trimark or Ivy Foreign Equity; Rothery likes
Mawer World Investment and Saxon World Growth.
This may be the place for aggressive investors to hold hedge funds,
but the conservative route of using "fund of fund" structures entails
hefty fees.
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The National Post
Smart Boomers haven't sold off
A well diversified portfolio allocates 50% to stocks
Not all Baby Boomers are bailing out of stocks, financial planners and
retired Boomers say.
Responding to yesterday's column outlining James Cramer's
controversial "Boomers are bailing" thesis, Vancouver-based advisor
Adrian Mastracci said, "Thankfully, my calls from Boomers are
completely different."
Mastracci says clients are not bailing out of equities and swimming to
the lifeboats. "They all have part of their portfolio allocated to
fixed-income securities. This makes a substantial difference."
Where Cramer is closer to target is a particular type of investor who
overdosed at the top of the bubble on fashionable tech stocks, who are
now looking for advisors to straighten out what's left of their
battered portfolios.
He's hearing from potential clients who had "virtually everything in
stocks. The past five new clients had 85%, 90%, 95%, 95% and 100% in
equities," Mastracci says, "Obviously, they had not heard of asset
allocation and investor profiles until I pointed it out."
It's hard to believe that in this age of 24/7 media and Internet
coverage of investing that 50-year old investors haven't absorbed the
lesson of asset allocation.
But I'm not that surprised. The past year I've heard from many
retirees whose advisors -- whether out of ignorance or malice -- had
elderly clients still 100% in equities.
High equity content is "probably the biggest difficulty with Boomer
portfolios," Mastracci says, "often coupled with an investor profile
that has no resemblance to the actual allocations."
Asset allocation is not the same thing as diversification. A portfolio
of a dozen equity mutual funds representing stocks from around the
world, in all the economic sectors and representing companies of all
sizes, is still not diversified enough -- because it's not asset
allocation.
Such portfolios consist of only one asset class: stocks, also known as
equities. There are at least two other core asset classes: bonds and
cash, plus several optional asset classes: precious metals/gold,
commodities//managed futures, real estate and short-selling hedge
funds, to name a few .
Since Baby Boomers are roughly half a century old, their core asset
allocation should be almost evenly divided between stocks and
cash/bonds. Every case is different and professional advisors can
suggest the exact appropriate mix.
Despite three years of sagging stock markets, diversified low-cost
portfolios have held up amazingly well, says the Web site. Using this newspaper's FPX indexes as a benchmark, from
inception in April, 1996, the Balanced (50%/50%) portfolio returned
7.2%, Income (70%/30%) portfolio 7.7% and Growth (30%/70%) portfolio
6.6%. Any of these returns are a far cry from the devastating losses
some investors have suffered.
Asset allocation was the key to the Rip Van Winkle portfolio I've
described in columns aimed at younger investors with modest RRSPs.
A simple balanced fund -- preferably a low-cost one like Trimark
Income Growth -- provides instant asset allocation.
As portfolios grow, tax considerations bring complications. But after
a decade at this job, I've come to the following simple approach which
may help free you from worrying about markets every day.
If you're in the 50-50 camp (near age 50, with a risk profile of 50%
stocks and 50% bonds), forget about stocks and pack your RRSP entirely
in a ladder of strip bonds and real-return bonds, or a high-income
bond fund. Such investments are too highly taxed outside RRSPs.
By now, Canadian Boomers should also have started to build a
non-registered or "taxable" investment portfolio. If this is roughly
the size of your RRSP, it can be packed with quality dividend-paying
stocks and equity funds.
Again, taxes are a major consideration: Canadian dividends receive
favourable tax treatment, and capital gains and losses are better
handled in non-registered vehicles.
I'd go so far as to suggest this: the core of a non-registered
portfolio need be no more complicated than being half the Barclays i60
exchange-traded fund (passively managed Canadian stocks, MER 0.17%),
and half a reasonable priced active global equity fund like Trimark
Fund (MER 1.62%).
If Boomers are bailing, it's because they now realize their registered
plans are too heavy in stocks.
For many, their non-registered portfolios are smaller than their
RRSPs, which means the bear market is an opportunity to gradually
build up a quality non-registered portfolio.
I also heard from Boomers who still believe in stocks. Norm Rothery,
publisher of Toronto-based The Rothery Report quips that he hopes
Boomers will flee the markets more quickly. "I hope to spend another
50 years or so on this rock and I'd like to see low low prices."
Keith Betty of Lethbridge retired in 1998 at the age of 50 and
continues to advocate a mix of bonds, quality dividend-paying stocks
and REITs (real estate investment trusts.) His portfolio is up 30%
since retiring.
Since world markets tend to move down in tandem, investors must
include non-equity assets in their portfolio, he says. However, "this
isn't the time to exit equities altogether. Buy well-managed
companies, with real earnings and real dividends, that have been
beaten up."
Selling all your equities now would be "utterly wrong," Betty says,
"Just the opposite: I have sold bonds in the last few weeks to
increase my equity holdings."
Betty cleaves to the 3Ds of discipline, diversification and
dividends. His ideas can be found on the Web at "Shakespeare's
investment primer".
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The Globe and Mail
E-mail subscriptions useful for stock tips
Every smart investor needs an idea machine.
You know, something to churn out ideas for stocks and mutual funds that can be investigated as possible additions to one's portfolio.
A great way to get a flow of ideas going is to subscribe to the free e-mails sent out on a daily or weekly basis by a number of investing Web sites. These e-mails usually offer brief summaries of stories on these sites -- if you're interested, just click on a link and you'll jump to the site.
You'll sometimes find particular stocks being suggested by money managers or analysts in these e-mails, as well as broader market trends or specific investing and personal finance issues. Just take the ideas that sound promising and test them by doing further research.
As for everything else, that's what the delete button is for. Don't feel bad about this -- the purpose of these e-mails is to act as a teaser to get you to a Web site that will often try to get you to sign up as a paying subscriber.
Here are five sites that are a good source of investing ideas:
Investor Canada
(http://www.investorcanada.com):
Every day, Investor Canada interviews a mutual funds manager, economist, analyst or financial planners, then highlights the stocks they suggest in an e-mail.
If a stock catches your eye, just click on a link in the e-mail and you'll be able to read the interview or listen to it on-line. Everything is archived, which means it's waiting for you whenever you have the time.
A particularly good feature of this site is the way it keeps track of its recent stock picks by documenting the day they were recommended, their price at the time and the gain or loss to date.
Multex Investor
(http://www.multexinvestor.com):
Multex is basically an on-line supermarket for analyst research reports on stocks listed on U.S. and, to a lesser extent, Canadian exchanges.
To whet your appetite, Multex will send you a daily e-mail that highlights certain reports from investment dealers or independent analysis firms.
Even if you don't intend to buy any reports, the e-mails are worth receiving because they include an "Investing Ideas" section with commentary from the site's own columnists. Recent articles have looked at how Motorola's second-quarter results were stronger than other players in the telecom sector, and at some of the biotech stocks that are on the list of the most-recommended stocks on Wall Street.
Multex also offers free weekly newsletters on Internet and telecommunications stocks that are full of investing ideas.
SmartMoney.com
(http://www.smartmoney.com):
SmartMoney.com is the on-line division of The Wall Street Journal's personal finance magazine, and it's is one of the slickest investing Web sites around right now. You'll quickly see this in the "Daily Views" e-mail it offers.
Each e-mail is like a menu highlighting the analysis added to the site that day.
There's a market wrap-up, plus articles on specific stocks, as well as broad investing and personal finance issues.
The caveat here is that SmartMoney has recently introduced a premium subscription-based version of its basic service. As you'd expect, some of the most tantalizing stories cropping up in the Daily Views e-mail are reserved for paying customers only.
Stingy Investor
(http://www.stingyinvestor.com):
Six weekly e-mails are available from this low-profile but excellent site, which is run by a physics PhD named Norman Rothery. Mr. Rothery's forti is value investing, which focuses on undervalued stocks. Four of his site's weekly e-mails highlight Canadian stocks that meet various value investing criteria, while a fifth gathers articles of interest in the financial media.
There's also an e-mail on funds that contains articles contributed by Dan Hallett, a mutual fund analyst with Sterling Mutuals in Windsor, Ont.
Don't sign up for the e-mails without browsing the excellent collection of articles and data the site offers for do-it-yourself investors.
ClearStation
(http://www.clearstation.com):
Active stock traders with an interest in the U.S. market should definitely take a look at ClearStation, which is a subsidiary of on-line brokerage E*Trade Group Inc.
Think of ClearStation as an on-line community where investors recommend stocks to each other, then use the tools on the site to do further research. ClearStation emphasizes a multifaceted approach to research that incorporates both fundamental analysis and technical stock analysis.
People who recommend stocks on ClearStation receive a ranking from their peers on the quality of their picks. If you find someone who looks impressive, you can subscribe to an e-mail service that alerts you whenever this person makes changes in his or her recommendations.
rcarrick@globeandmail.ca
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The National Post
What to do with a windfall
Capital preservation the dominant theme among experts as bear market rages on
Suppose that, in the midst of the heartache and pain afflicting so
many this month, fortune smiled on your family.
A $10,000 windfall -- perhaps a bonus, a lottery prize or an
inheritance from a favourite aunt -- suddenly comes your way. What to
do with it?
We posed this question to a variety of financial advisors, authors,
newsletter publishers and mutual fund analysts after the U.S. stock
exchanges reopened on Monday and plummeted in the wake of the Sept. 11
terrorism.
The answers were as varied as the choice of investments out
there. Capital preservation is the dominant theme, reflecting a rising
if belated acknowledgement of a global bear market. But a few think
now is the perfect time to roll the dice on aggressive growth equity
funds and beaten-down Nasdaq tech stocks.
Here's what experts contacted by FP Money had to say:
GORDON PAPE, Toronto-based financial author:
Priority must be capital preservation over growth potential. This is not the time to go bottom-fishing. Underweight stocks and stick with defensive sectors like banks, pharmaceuticals and consumer staples. Oil and gas stocks will look good if a major war develops. Avoid long-term bonds, which will be whipsawed when rates start to move back up. Don't lock in to five-year GICs.
DIANE MCCURDY, Vancouver-based financial planner and author of How Much Is Enough?:
Pay down debt or buy Great West Life Real Estate fund.
PATRICK MCKEOUGH, Toronto-based publisher, The Successful Investor:
Buy any Canadian bank stock, such as Bank of Nova Scotia. For more diversification, Universal Canadian Growth Fund.
NORMAN ROTHERY, president, Toronto-based www.StingyInvestor.com:
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In contrast to Mr. McKeough, Mr. Rothery does not believe many investors will be successful in the next decade.
After taxes and inflation, bonds barely break even and stock returns will also be disappointing.
First priority is, therefore, to pay down debt, then to build a three-month emergency fund in the form of a separate high-interest account at ING Direct or PC Financial. If anything is left, put aside $1,000 for Christmas and other gifts and spend on a holiday or a consumer item like a television set.
DAN HALLETT, fund analyst, Windsor, Ont.-based Sterling Mutuals Inc.:
More now than ever, equity exposure should be through mutual funds managed with a fundamental value style.
Divide the windfall three ways: $3,500 in Templeton Growth, $3,300 in Spectrum Dividend and $3,200 in Mackenzie Cundill Canadian Security.
Aggressive investors can put $5,000 into C.I. Harbour Fund and $5,000 into Saxon World Growth. Also consider precious metals and energy funds.
STEPHEN GADSDEN, author and financial advisor, Aurora, Ont.:
Now that growth funds have been pummelled, he thinks it's the perfect time to put a windfall into growth equity funds.
Still, he would put the whole amount into Larry Sarbit's AIC American Focus Fund. It's a large-cap value fund now 80% in cash, which will allow Mr. Sarbit to scoop up bargains if markets fall a little more.
GARTH TURNER, Millenium Media Television, Toronto:
If you're a gambler, buy Air Canada stock because there is no way the federal government will refuse a bailout package after blessing the death of airline competition in this country.
DIANNE NAHIRNY, Hamilton, Ont.-based author of Stop Working, Start Living:
Take a family preservation stance. Put half into a solid Canadian oil stock and put the other $5,000 into an emergency fund in case of job loss -- a cashable CDIC-insured savings account paying at least 3.9%.
Few investments will match the returns of eliminating high-interest consumer debt. If you have no consumer debt, split the $5,000 to pay down mortgage debt, and use the rest to buy or replace durable goods like a freezer. Fill it with imported food, and fill your oil tank.
ADRIAN MASTRACCI, KCM Wealth Management Inc., Vancouver:
Treat yourself to something special. Splurge on a vacation.
Share the wealth. Consider a charitable contribution for a cause you believe in.
Put something in an emergency fund for a rainy day. Pay the bills. Pay off the highest-cost loan, mortgage or line of credit where the interest is not deductible.
Make your RRSP contributions.
Get some professional advice for a long-term game plan.
TALBOT STEVENS, financial educator based in London, Ont.:
If time horizon is less than three years, put it into cashable GICs or the highest-yielding guaranteed, liquid investment.
If time horizon is between three and seven years, put 40% into global equities, 30% into bonds and 30% in cash.
If investing for seven or more years out, put 50% to 80% in equities, and the rest in bonds.
HUGH ANDERSON, Montreal-based publisher of Uncle Hughie's Opinionated Independent Newsletter:
Mr. Anderson would invest in any of three U.S. stocks.
Bank of America pays a good dividend, and has a huge nationwide account network.
Office Depot is already rising but still cheap, and sells things much in demand.
IBM is the strongest name in an industry moving back into favour, security and disaster-recovery solutions are still hot, it has lots of cash flow and is doing a big stock buyback.
DAN RICHARDS, Toronto-based financial marketing consultant :
If you want to quadruple your money in 15 years and not worry about it in the meantime, buy Barclays Global iShares S&P Global 100 Index fund. Holds 100 blue-chip stocks around the world.
WARREN BALDWIN, regional vice-president of T. E. Financial Consultants, Toronto:
Don't bet the farm on a sector or fund de jour, in the hope of making the big kill. Taking the funds to a casino or buying lotto tickets would be about as effective a strategy. Instead, use the $10,000 to rebalance toward a previously established "target mix."
If the windfall is your entire savings, construct an asset mix and learn about the fundamental concepts of portfolio management and diversification.
HANS MERKELBACH, Vancouver-based investment advisor:
$3,000 in gold or precious metals funds (Universal, Dynamic or AGF), $2,500 in short-term government bonds (no corporate bonds), $4,500 cash until the end of October.
TERRY GREENE, financial advisor, Vancouver-based MSC Financial Services Ltd:
Equity-oriented investors should take a value approach through funds like AGF International Value, Mawer World, Mawer New Canadian or Trimark Canadian.
Indexers can consider Diamonds, the S&P500 SPDRS or Barclays' new 100% RRSP-eligible EAFE exchange-traded fund.
Contrarians could try Bombardier or some of the badly beaten up insurance or airline stocks.
ALAIN QUENNEC, advisor, Vancouver-based The Rogers Group:
Those with market-based investments should stand pat, as the planning process used has established their asset allocation. Recent events have not undone that work. For those wishing to invest new money, wait a short while, as we see the world events unfold.
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The National Post
Tools for the brave investor
Books, Web sites make research easier
For investors who can separate the wheat from the chaff, there may be real opportunities in the current market. The "sell high" climate of the late 1990s and early 2000 now appears to have transformed into the current "buy low" dynamic of 2001.
If you don't think you have the capability to assess valuations of individual stocks, your investment advisor may be able to help you nibble gradually back into the market through some judiciously chosen "value" mutual fund managers, such as Peter Cundill of Mackenzie, Kim Shannon of Spectrum Investment, Irwin Michael of ABC Funds and Charles Brandes of AGF. Indexing enthusiasts can give themselves some "margin of safety" by choosing the value versions of exchange-traded funds.
But if you insist on picking your own stocks, there are plenty of candidates out there. With the help of a capable advisor, some good books and newsletters, and various tools on the Internet, you should be able to increase the odds of finding the market's gems and avoiding the land mines.
One book discussed by knowledgeable investors on the Internet is Buffettology. The book about superinvestor Warren Buffett -- written by Mary Buffett, his former daughter-in-law -- describes his investment approach, which amounts to finding bargain-priced great companies with a technological moat or unique consumer monopoly and that demonstrate ever-growing earnings. Two similar books are Value Investing Made Easy and The Warren Buffett Way.
Go through these books and your first emotion may be, or should be, humility. If you're the type who buys unresearched tips from friends or financial television shows, you'll soon realize just how much you don't know about the fine points of securities analysis.
Indeed, hard work, research and mathematical acumen are necessary if you are to locate great stocks rather than disasters. If those are not your strong suits, there's little point in competing against those willing or able to do such things.
If you're not interested in crunching numbers and following the market every day, delegate the task to fund managers or investment advisors. You'll pay for the privilege but if they can help you avoid the land mines, the price will be worth it.
If, however, you feel you're "almost there," you may need just a little help from your advisor and a few tools to crunch the numbers.
Fortunately, 21st-century investors have the Internet. And what a tool it is.
There are at least three free Web sites that can whip up the relevant data and help you decide whether a company meets the Buffett criteria. I wouldn't be surprised that this is what your broker is doing at the other end of the phone when he gives you his opinion on a stock.
Professional fund managers with a value orientation often talk about picking stocks trading below their "intrinsic value." Calculating this is tricky but you can do it with a few clicks of a mouse at Quicken.com (quicken.com/investments/seceval/). Plug in the stock symbol and the site will tell you if the stock at its current price is trading above or below its "intrinsic value." There's also other material on earnings momentum, revenue growth rates and the like.
Alternatively, try Microsoft's stock screener (moneycentral.msn.com/articles/common/finderpro.asp). You can set the program to filter stocks according to your personal investing beliefs. It can, for example, show you only large-cap stocks with maximum dividend yield and the lowest price-earnings ratio.
Both these sites focus on U.S. stocks, but with the 30% foreign content in Canadian registered plans, and increased emphasis on non-registered plans, such sites will be increasingly useful to Canadian investors.
Microsoft Network recently unveiled a Canadian screener (ca.msn.com). Another free Web site with coverage of Canadian stocks is Norm Rothery's Stingyinvestor.com. Canadian Shareowner (shareowner.com) is a useful comparable site, but charges for its services.
The tools are out there for the courageous investor. It's just a matter of using them properly and locating the gems, while the amateurs step continue to find the land mines.
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The National Post
The big squeeze crimps retirement
The more you earn and save, the less your pension buys: Do not try to produce a fortune, with a looter riding on your back -- Ayn Rand, Atlas Shrugged
Canada is a great place to retire -- if you're poor or work for the government. Judging from the flood of e-mail generated by last week's column about pension expert Malcolm Hamilton, those who must save for their own retirement feel increasingly shackled by Ottawa's stingy retirement savings limits. Hamilton suggested that tax breaks for those saving for life after work are so chintzy the only solution for many Canadians is to stop saving altogether or get out of the country. It was a rallying cry that sparked intergenerational squabbles on financial Web sites last week about just how much money retirees need and who should pay the freight.
"With gold-plated, indexed pensions and expansive benefit packages, our civil 'servants' may be the only Canadians who truly don't have to save a nickel, even if they decide to retire early," Ellis Armsteinbogle, of Vancouver, complained bitterly in an online discussion at www.wealthyboomer.com.
Despite the massive federal surplus, registered retirement savings plan limits in Canada remain frozen at 18% of earned income, to a maximum $13,500 a year. Comparable limits apply to employer-provided pension plans, and these are also frozen.
Inflation has exacerbated the situation. For 30 years, the government has indexed pensions for civil servants and MPs to inflation while freezing RRSP and pension limits for the rest of us. Incredibly, Hamilton said, since 1976 indexed government pensions have increased four-fold while the limit on registered pension plans has not changed.
The bottom line is that the more you earn and save, the less you are able to recreate in retirement the standard of living enjoyed in your working years.
To maintain a pre-retirement standard of living, the Investment Funds Institute of Canada suggests a family needs to replace 70% of its pre-retirement income.
Those with small incomes can achieve this without saving a penny. Thanks to generous government programs like Old Age Security, those with a pre-retirement income of less than $10,000 can replace 147% of their income in retirement, according to 1998 Statistics Canada data cited by Hamilton, a Toronto-based actuary with William M. Mercer Ltd. Those making $20,000 can replace 69% of their working income; those at $40,000 can replace 60%; those at $70,000 can replace only 56%; those above $70,000 can replace a paltry 45%.
Since extra income is taxed or "clawed back" from OAS and other programs, Hamilton and other actuaries have argued that lower-income families may actually be better off not bothering at all with retirement saving.
When Ottawa equalized RRSP contribution levels with pension savings opportunities in 1990, it led to a steady decline in employer-sponsored pension coverage while deposits into RRSPs have been increasingly withdrawn well before retirement, says Greg Hurst, a Vancouver pension consultant.
Hamilton is pessimistic that Ottawa will substantially raise the level of tax-assisted savings in time for his generation -- the early boomers -- to retire. In his talk, entitled "The Shape of Things to Come," he said a younger, more naive version of himself might have pushed policy-makers to redress the imbalances. Now he assumes Ottawa will never change course. So he presented three logical coping strategies: Leave the country, retire early or spend rather than save.
In fact, moving to another country was what Prime Minister Jean Chritien suggested in 1999 would be the appropriate course of action for those disgruntled with this country's high taxes.
And that's exactly what some Canadians have done, including Arthur Friedrich, who now resides in Chicago. "When Jean Chritien challenged Canadians to leave Canada and go elsewhere if they didn't like the high taxes, I decided enough was enough and if my hard work was going to be punished, then I would leave as well," he said in an e-mail.
"I have only a few short years left with which to build some equity for retirement. I didn't see any way that could be accomplished in Canada."
While intercountry comparisons are always difficult, most upper-income Americans and Britons have significantly greater access to tax-sheltered retirement savings than do Canadians, Hamilton says.
Those suffering most are the higher earners in the middle class, making between $76,000 and the new top tax bracket of $100,000
It's the $76,000-point when the self-reliant start falling behind state-subsidized retirees. At that level, even if you put aside the full $13,500 that can be sheltered annually in an RRSP, the 70% target can't be reached, says Tom Hockin, head of IFIC. "The federal government must increase RRSP contribution limits."
While considered "rich" by the government, the top 10% of wage earners are desperately trying to make up the shortfall by investing in so-called "taxable" or open investment accounts.
But this attempt is largely futile, Hamilton argues. "The government takes half of your hard-earned income before you can save anything ... it takes, over 20 years, 50% of the profits. This leaves you with half the profit on half your money."
Those above the $100,000 threshold have alternative mechanisms to supplement their pensions, albeit not always with tax-assistance. If you're a top executive in the private sector, for example, registered pensions are sweetened with SERPs, or supplementary executive retirement plans.
"Somebody with a $150,000 income is only allowed to contribute 9% of their income to RRSPs. Plans such as individual pension plans instead of RRSPs, in later earning years, can be a significant help for those qualified -- but even these won't replace their working income," says Rob Barfuss, a Saskatchewan financial planner.
"That leaves saving outside of RRSPs. The 50% inclusion rate on capital gains has made this a little more palatable than before. For high-income earners, there are no other options."
Unfortunately, for three-quarters of working age Canadians earning more than $20,000 a year, the RRSP or RPP is their main hope. That's why groups like the Association of Canadian Pension Management and Retirement Income Coalition are calling for a doubling of the $13,500 limit to $27,000.
At first, Ottawa was aware of this need. Before pension tax reform in 1990, RRSP limits were just $7,000 a year, or $3,500 for those in an RPP. RRSP limits were set to reach $15,500 in 1991. This was pushed off until 2005, by which time RRSP limits will be less in real terms than they were in 1976.
Rob Brown, an actuarial professor at the University of Waterloo, says policy-makers and social activists balk at higher tax-assisted savings levels because they perceive the associated upfront tax savings as a "cost" to government.
But he says the $15-billion a year in supposed tax cost borne today will, in 40 years' time, become $15-billion a year in future tax revenue (as RRSPs turn into taxable RRIF income). The "cost" starts to become a net gain for the government by 2022, about the time Baby Boomers will need higher levels of health care.
Higher RRSP levels and the need to fund greater health care make a finely balanced system, Brown says.
"The government should look at RPPs and RRSPs not as tax expenditures but as absolutely perfect deferred tax assets. If we allow the Baby Boomers to save for their retirement they will, in fact, pay for their own health care."
RRSP limits should at least be indexed to inflation and to the rising costs of health care, Brown suggests.
Do-it-yourself investors aren't holding their breath for all this to happen, however. Many are already adopting some of Hamilton's coping strategies rather than attempting to build fortunes with the tax looters on their backs.
"After obtaining a low level of work and savings, anything more is not really worth the effort," Norman Rothery, president of Stingy Investor.com, says in his contribution to the debate at the Wealthy Boomer site.
"The situation is unlikely to change with the government pulling in about 40% of GDP. You can 'join' the poor or walk. Until they impose a wealth tax, I've elected to join the 'poor' and manage my investments."
SLIM PICKINGS:
The higher the income, the steeper
the drop: Pre-retirement income
Per cent of income replaced
Less than $10,000 147%
$10,000 -$19,999 69%
$20,00 -$29,999 62%
$30,000- $39,999 60%
$40,000 -$49,999 59%
$50,000 -69,999 56%
More than $70,000 45%
Source: Statistics Canada.
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The Globe and Mail
PERSONAL FINANCE MoneySaver:
No-frills investment tips for the financially hip
At some point in the past few years, personal finance and investing went Hollywood.
Now, there are television shows devoted to these subjects, glossy magazines and shelves of books in every bookstore. Public interest is such that ads from banks, brokers and mutual fund companies are everywhere.
Ever wish for a source of information on investing that isn't quite so mainstream, that isn't decked from top to bottom with ads for the products being written about?
Then let me introduce you to Canadian MoneySaver, a monthly magazine published since 1981 by Dale Ennis of Bath, Ont.
The MoneySaver's an aesthetic disaster and even Mr. Ennis thinks so. "It's ugly," he matter-of-factly says. "It doesn't have any gloss."
It also doesn't have any paid ads. All revenue comes from subscriptions, which cost $21.35 a year, including GST.
What the MoneySaver does offer is a dozen or more articles per issue on subjects related to investing in stocks, mutual funds and bonds, on taxation, estate planning and insurance.
If you're looking for a comfy, explain-it-all introduction to these subjects, skip the MoneySaver. This is a magazine where people who already know about investing and personal finance go to learn something new.
Included in the May issue is an introduction to hedge funds by Peter Brieger, a Bay Street portfolio manager with GlobeInvest Capital Management; a meditation on the Nortel fiasco by Wynn Quon, an Ottawa technology investment consultant; and the latest instalment of a continuing feature on investing for children by Angelo Vicere, a senior financial adviser at Berkshire Securities in Hamilton.
Other topics covered recently include closed-end funds, strip bonds, wrap accounts, dividend reinvestment plans (DRIPs), universal life insurance and the utility of registered retirement savings plans.
"I believe our subscribers should be introduced to as many different ideas as possible," Mr. Ennis says. "Whether or not I accept them isn't important."
Contributors come from all over the country and most work in some capacity in the financial industry. Some of the articles can be technical at times, but there are some writers with a folksy touch as well.
Mr. Ennis says Carolyn Williams, a financial planner in St. John's, is an example of the latter. "Our subscribers just love Carolyn because she's so practical and down to earth."
One thing that's common to all MoneySaver contributors is that they work for free. They also have to agree to respond to questions from readers.
Why would reputable financial experts take on a job like this?
"It's mostly about building a personal brand, where giving good advice will get you business down the road," says Norman Rothery, a frequent contributor who runs an investing Web site called The Stingy Investor (http://www.stingyinvestor.com).
Mr. Rothery says he's spoken to other people who write for the magazine simply because they enjoy it. Whatever the reason, he says, contributors get to explore topics that are too complex for the popular media and also challenge conventional wisdom in a way they might not otherwise be able to.
Before starting the MoneySaver, Mr. Ennis was a schoolteacher. He got the idea for the magazine after buying an insurance product and realizing later that he really didn't understand how it worked.
The name MoneySaver goes back to the magazine's origins as an eight-page newsletter during the recession year of 1981. Back then, the focus was on ways to live frugally in tough economic times. Early articles touched on subjects such as greenhouse gardening and the three "I's" of investing -- interest, income and inflation.
Mr. Ennis started off with 500 subscribers that he rounded up by promoting the magazine with local media in Kingston, Ont., the nearest city to Bath. He also managed to convince a reporter at The Toronto Star to write an article that ended up generating publicity.
These days, the magazine has about 30,000 subscribers. Another few hundred subscribe to an on-line version available on the MoneySaver Web site (http://www.canadianmoneysaver.ca), which includes an archive of 7,000 articles.
The MoneySaver has moved away from its early mandate to focus entirely on financial matters, but one thing that has stayed the same is the complete absence of paid advertising.
Short write-ups on a few products and services are included in each issue, but Mr. Ennis forgoes any payment and instead has companies provide MoneySaver subscribers with special discounts.
If you're looking for the MoneySaver, you'll have to subscribe. The magazine used to be available on newsstands, but Mr. Ennis isn't bothering these days because of distribution problems.
Anyway, MoneySaver never did look at home next to those glossy investing and personal finance magazines. You can contact the MoneySaver at 613-352-7448 or by e-mail at moneyinfo@canadianmoneysaver.ca.
rcarrick@globeandmail.ca
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The National Post
Stingyinvestor.com: Low-rent paradise for cheapskates
We're all consumers, but we approach purchases differently. Some just
walk in off the street and plunk down their money for something they
want. Others take a bit more time to shop around before making a
choice, and a third group moves slowly, weighing all possible choices,
and may also try to haggle a bit. The financial markets are no
different. Some people deal with a full-service broker for all their
needs, while others are more conscious of commissions and other
charges. The third group looks for the most cost-efficient route of
all. A Web site that will definitely appeal to the penny pinchers is
Stingy Investor (www.stingyinvestor.com). The straightforward and low
budget site, the foundation of which was formerly called Directions,
is the creation of Norman Rothery, a Toronto-based fellow who seems to
like to combine his expertise in physics and technology with the
financial world. The aptly named site, which has had about 4.6 million
visitors since 1999, emphasizes the commonsense and practical
approaches that can be taken by the "frugal individual investor."
Mr. Rothery offers some useful information on mutual funds fees, share
purchase plans, dividend reinvestment plans, discount brokers, value
investing and strategies to seek out solid stocks. There are also
articles on why investors tend to behave irrationally, the potential
pitfalls of index investing and strategies to use to get a short list
of potential investment candidates. A separate icon leads to a number
of investment articles Mr. Rothery has written. The site also offers
brief reviews of the latest investment books, as well as an e-mail
centre, which lets you subscribe to a number of free and regular
market commentaries available daily, weekly or quarterly. There are
also a few screening programs that let the user search for specific
groups of Canadian or U.S. stocks. There is even an automated stock
game that lets you buy or sell three stocks and see how you would do
-- after paying commissions. Links are sprinkled throughout the site
that allow you to instantly find stock charts or historical
information about Canadian and U.S. companies that you are
investigating. For a small and independent site, Stingy Investor
offers a lot to keep you busy, and hopefully some information to save
you some money as well.
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The Toronto Star
Buy and hold the right medicine
Eleven-year-old twins - E & P to family and friends - are ``outraged''
at us for using the word ``kid'' to refer to a 20-year-old university
student in last week's column.
``We are real kids,'' they write, ``and we are thinking about
investing our money and want to know how to invest.''
Their timing is perfect, as this is the final column in our series
about getting your feet wet in the stock market. Last week, we
outlined two mutual-fund portfolios for neophyte investors. Today, we
have a start-up stock portfolio.
We went to David Cork of Scotia McLeod Inc., author of The Pig And The
Python and The Pig Goes To Market, to construct this portfolio for us.
Cork's approach to investing is based on three simple things: Buy
great companies, hold them forever and don't try to time the market.
``If you'd stayed in the market (TSE 300) every day over the past 10
years,'' he explains, ``you would have pocketed an annualized compound
return of about 10 per cent.
``If you'd tried your hand at market timing and missed the best 40
days -that's only 40 days over a 10-year time period - your return
would be a measly 2 per cent a year.''
With apologies to real kids like E & P, we think his approach is
suitable for beginning investors of any age, but especially those with
a 10-to-15-year investment horizon.
We've already had experience with Cork's philosophy in action.
In June, 1998, he designed an imaginary $50,000 portfolio for us that
we followed, along with four others, for a year in this newspaper. The
six stocks he chose were Bombardier Inc., Mackenzie Financial Corp.,
the Bank of Nova Scotia, Power Financial Corp., Loblaw Companies
Ltd. and Thirty-Five Split Corp.
Thirty-Five Split Corp. is a financial instrument created by Cork's
firm that mirrors the TSE 35 index. It is a little like an index fund
but with a difference. These shares are split into preferred, which
get the dividends, and common, which gets the growth.
Cork uses demographics as a tool to help predict market directions.
``Demographics isn't a slam dunk,'' he observes, ``but it can give you
an edge, at least a general idea, of where to put your money.''
We can just hear E & P's burning question: ``So, how much money did he make?''
Well, actually not a lot to begin with. That was the beginning of the
tech boom and Cork's staid-looking portfolio languished. The downturn
in the fall of 1998 knocked 20 per cent off its value and it didn't
come roaring back like high tech did throughout 1999 and early 2000.
Cork was remarkably sanguine. ``When the world is beating you up, you
want to have absolutely fabulous companies in your portfolio.''
He cites Bombardier as a prime example. ``People don't realize what a
world-class company it is. It's highly diversified. When the Asian Flu
hit, that bad news was cushioned by increased orders for the company's
commuter aircraft.''
Today, after 2 1/2 years, the portfolio Cork designed for The Star is
starting to show its legs. While much of the tech sector has tanked,
his financial-heavy portfolio has crept up to a 7 per cent annualized
compounded return.
To investors with Nortel Networks Corp. and JDS Uniphase Canada
Ltd. in their portfolios, those results don't look too shabby. And
Cork firmly believes the returns will strengthen considerably over the
next few years.
``Call me again in 10 or 15 years,'' he says with confidence.
For our Getting Your Feet Wet portfolio, Cork is sticking to the same
investment style. He has chosen eight Canadian stocks that could
comprise the domestic portion of a start-up RRSP or serve as the basis
of a non-registered portfolio.
Cork's choices are: BCE Inc., Bombardier Inc., Manulife Financial
Corp., Canadian Pacific Ltd., TD Split Inc. (a similar instrument to
Thirty-Five Split Corp described above), CI Fund Management Inc.,
Nortel Networks Corp. and the Bank of Nova Scotia.
``These stocks are designed for conservative investors,'' explains
Cork, ``whose investment horizon and objectives focus on long-term
capital appreciation. (That means you two, E & P!) The core portfolio
comprises stock of companies that are market leaders in their
respective industries and that have demonstrated an ability to provide
above-average historic returns on a consistent basis.''
Contrary to what readers may think, starting-out investors are usually
fairly cautious. They don't have a lot of money, so they are anxious
to preserve it while at the same time see it grow steadily.
This portfolio should be augmented by foreign content. For beginning
investors, the easiest way to do this is to pick a no-load index
mutual fund or what are now called exchange-traded funds (ETFs). These
aren't mutual funds but baskets of stocks that track a certain index;
SPDRs, for example, track the S & P 500. Other ETFs mirror major
indices in countries around the world. They are listed on the American
Stock Exchange.
Cork designed his start-up portfolio to be heavy on financials because
he feels they weather downturns better than most and the sector will
also capitalize on the burgeoning financial needs of the baby-boom
generation.
We were a little surprised to see Nortel added to his list of core
holdings, especially in light of recent events.
``Fundamentally, Nortel is still a great company,'' he
contends. ``It's important to understand that it hasn't done anything
wrong. The economy has just slowed. Their products are still
leading-edge. When the economy picks up, it will do well.''
Because young investors like E & P aren't likely to have enough money
to buy 50 or 100 shares of anything until they begin working, trading
costs for little purchases will be prohibitive.
However, a number of brokerage firms offer youth accounts with a
couple of free trades a year. They can save their money in a
high-interest savings account and make their purchases twice annually.
Depending on how much money they have in hand, they can start with a
single company on the list and buy a different one each time.
Alternatively, they can purchase some of these companies - the Bank of
Nova Scotia, Canadian Pacific, BCE and Nortel - directly from the
companies themselves through a share-purchase plan with no trading
fee. Check out http://www.stingyinvestor.com for a full
explanation.
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The Toronto Star
Building a portfolio a few shares at a time
Jeffrey R. complained to us recently that we were doctoring too many
portfolios of the senior-citizen variety. So, ever-anxious to imbue
the younger set with investing smarts, our starting-up series, which
began last week with funds, continues this week, focused on the
backbone of the market - stocks themselves.
Unfortunately, it is ridiculously expensive to buy small amounts of
any stock on a regular basis, as young investors need to do. We are
sure that is going to change and south of the border, it already has.
Several organizations, such as Netstockdirect.com, allow you to buy
dollar-based quantities of a wide variety of stocks. If you have $200
to invest monthly, you can purchase a $50 portion each of four
different stocks, paying about $8 per transaction.
In Canada, the only similar alternative is the Canadian Shareowners
Association, which offers 64 stocks plus four exchange-traded funds
for monthly or quarterly purchase in small amounts. We like the
organization for do-it-yourselfers but some readers object to paying
$90 annually to join, even though it gives you the association's
excellent investor magazine and a number of other resources.
Oddly, considering that today's small purchaser will be tomorrow's
larger purchaser, the brokerage industry has been lousy at fostering
stock investment by those starting out. Though many firms offer youth
accounts with a couple of free trades a year, this is no help if you
are new in the workplace and just starting to build an RRSP with $100
a month.
Despite the trade fees, you can still build a stock portfolio in four
to five years if you are patient and willing to swallow a little more
expense at the front end. We recommend putting your savings in a
money-market account and buying your stocks twice a year.
You should spread your investment over at least three stocks to begin
with, even if that means you only pick up 20 shares of each. You will
pay a minimum trade commission but over the lifetime of your
investment, it will amount to peanuts, even if it is a full-service
brokerage fee. Also, don't let the amount you have to invest influence
the stock you pick. Far better to have 10 shares of a good company
than 50 of a lacklustre one.
Of course, the first step is to narrow the thousands of stocks into a
few worth holding on to for the long term. Look for a financial
adviser or broker to help you with some initial research.
Last week, we suggested a simple way to filter mutual funds. We'll
apply a similar technique to stocks.
Start with only TSE 300 stocks (go to http://www.tse.com and click on
market news, then indices for a list). There are some wonderful
companies that are not in the index but let's keep it simple with
larger, long standing companies.
There are also many companies that have been stinkers for investors,
which is why just any old TSE 300 company won't do.
Now, concentrate on three sectors of the 14 major ones on the TSE:
financial services, industrial products (manufacturing) and consumer
products. These have been strong in the recent past and most of our
portfolio doctors believe will be in the near future.
Drop all the stocks that fall into hardware or software
technology. Again, no slam against the sector but this is an area
where most investors are better off buying a basket of stocks through
a mutual fund. Use last week's article to apply the filters we
recommended but shorten the time frame to three years because most
tech funds are relatively new.
This isn't to say there aren't great companies in other sectors but
areas like technology and resources are either volatile or highly
cyclical and require the kind of stock-picking acumen most new
investors don't have (nor do veterans, for that matter).
Now, ask the broker to filter out any companies that don't have 10
years' worth of positive earnings and revenues.
Third, bid adieu to those that have experienced a substantial decline
in either earnings or revenues for more than two years out of the
decade.
Fourth, drop any that have reduced their dividends in that time.
Finally, toss any that don't offer dividend re-investment plans (DRIPs).
DRIPs are a wonderful way to build up your portfolio, as dividends are
re-invested, fee free, in shares. Most full-service brokers will set
these plans up for you.
This process is actually fun, a bit like cleaning out your closet -
daunting at first, then, suddenly, you become ruthless and the waste
pile grows.
In some ways, this filtering is unfair and heavy-handed. There are
good companies that will end up in the garbage can just because they
had a couple of bad years. But what we are looking for are companies
that have demonstrated they can grow through thick and thin, which
means your invested money will, too.
Now, where do you go? In industrial products, do you choose Bombardier
Inc. or Gennum Corp? Look at price history and go with the strongest
performer. Bombardier has had a steady growth in share price over the
last five years with a recent plateau, whereas Gennum has been
dropping since early '99.
If you are working with a broker, you can also ask for his or her
firm's top two picks for the future in each of the sectors you are
researching.
Past history is far from a perfect predictor of the future but in the
end, it's all we've got.
If you are doing this on your own, apply the dividend re-investment
plan criteria as the first filter. You can get a list at
http://www.stingyinvestor.com or http://www.moneysaver.com. Those
sites include all TSE-listed companies with DRIPs, only 44 of which
are part of the TSE 300.
You'll also find information about how you can buy directly from these
companies with just a single share in hand.
For DIY'ers, narrowing down your 44 shortlisted stocks based on the
other criteria will be tougher. The best way we've found is using the
research available from the Canadian Shareowners Association,
http://www.shareowner.ca.
If you are in the early-building phase, stick to individual stock
purchases for Canadian companies and use exchange-traded funds (ETF)
for your foreign investing. ETFs are proliferating like rabbits these
days. They are essentially a mutual fund-like basket of stocks that
mirror a particular sector or market index. They trade exactly like a
stock on the American Stock Exchange.
Look at http://www.amex.com or ishares.com for more information.
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Globe and Mail
The word of mouth on discount brokers in Internet chap
groups is a study in customer dissatisfaction, Rob Carrick
says.
The word of mouth on discount brokers these days is like what you'd
imagine Ford Pinto owners
were saying around the time those gas tanks started exploding.
Investors are doing a lot of talking about discounters on Internet discussion forums and the
comments are a study in customer dissatisfaction.
The purpose of checking out the on-line chat about discounters wasn't to trawl for negative
comments. Believe me, I have enough of those already.
Instead, I wanted to see if these forums are worth checking out if you're an investor trying to
choose a discounter from among the dozen that do business in Canada. After all, at least a few
discount brokerage executives monitor these forums to see what their clients are saying.
If you're shopping for a broker, definitely take a few minutes to peruse the discussion forums
mentioned here. Just be warned that the participants come across like that kid Mikey in the Life
cereal commercial -- they hate everything. There are some complimentary postings out there, but
their impact is often lost in the vitriol.
In fact, the best way to use the discussion groups may be to scan for brokers people hate the least.
These discussion groups are also good for a laugh, by the way. There are techno-malcontents out
there who refer to Royal Bank's Action Direct as Inaction Direct and call TD Waterhouse's
WebBroker on-line trading system WebBroken.
A good place to start comparing customer comments on discount brokers is the Directions site,
which has lots of good information on discounters, including commission comparisons and fairly
detailed ratings in such areas as speed, cost and resources. (The addresses of all the Web sites
mentioned are listed below.)
To find investor comments, click where it says "Canadian discount broker survey," then head to
the bottom of the page that comes up and click where it says: "Check out what other investors are
saying!"
The best thing about the comments found here is that they start about 1998 and continue right up
until the present. This means you can track customer satisfaction during a variety of market
conditions, including the stark raving trading insanity of the past four months.
If you want to get the full sense of how attitudes have changed, read the early comments and then
skip to the end to get the most up-to-date ones.
"Excellent Web site. Fast execution," the first (undated) posting in the Royal Bank Action Direct
section says. "I'm a satisfied customer."
The last posting, dated Feb 17, comes from a client who is clearly suffering from battle fatigue.
"One-hour trade processing; 2.5-hour confirmation; antiquated site layout; 30-minute-plus phone
responses; I am shopping around for something reasonable. I cannot trade this way."
Several brokers more or less duplicate the Action Direct experience on the Direction site. People
start off reasonably happy and then get progressively more peeved as service levels decline in the
face of heavy trading volumes. You'll have to sift through the nuance of the various complaints to
decide which brokers are worse than others. Be prepared to see every broker criticized as being
slow.
It's a subjective thing, but the worst drubbings on Directions may have been given to CIBC
Investor's Edge and TD Waterhouse, Canada's largest discounter.
The Investor's Edge comments are plain nasty for the most part. "Never again!" says one succinct
posting.
TD Waterhouse's problems seem to stem from high expectations related to its market dominance
as much as slow service.
Charles Schwab Canada is at the other end of the scale. This broker takes its lumps, but it also has
a few very favourable comments from people who have tried other discount brokers. "The banks
should be embarrassed by what Schwab can do," one investor wrote.
Another place to compare discounters is The Fund Library's popular discussion forum. At any
given time, you're likely to find a variety of threads on discounter-related topics.
Sometimes, the mere title of the thread tells a story. Two examples from this past week: "Schwab is
falling apart" (so much for the halo around Schwab) and "E*Trade fiasco continues -- any ideas?"
Another way to use the Fund Library forums is to do a search under the name of a broker you want
to research. Or just type "discount brokers" into the search engine. I came up with a thread of 35
messages that was generated by the query: "Are all discount brokers that bad?"
This thread is worth reading for its well-rounded look at how discounters are meeting the needs of
their clients. Several frustrated investors chipped in with some comments, but so did a few others
who have found service to be adequate or better for their purposes.
The Quicken.ca Web site has created a discussion forum on discounters to go along with its recent
2000 On-line Brokerage Report. The Quicken people rate Schwab Canada highest, followed by
HSBC InvestDirect and TD Waterhouse.
So far, there hasn't been enough action on the Quicken.ca broker forum to make it worth reading.
Wait a while and check back.
The exact opposite is true of the Silicon Investor site. This ever-popular U.S. investing discussion
site has attracted a large number of Canadians who endlessly commiserate with each other about
how bad their discount brokers are.
Early last year, someone sent a posting to Silicon Investor posing the question, "Where is the I hate
TD Green Line thread?"
Two hundred and sixty-five snarky replies later, they're still working on this one.
Comments and suggestions are welcomed at
rcarrick@globeandmail.ca
WEB SITES
Web sites mentioned in this article:
www.ndir.com/stocks.broker.html
http://www.fundlibrary.com
http://www.quicken.ca
http://www.siliconinvestor.com
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Montreal Gazette
Teleglobe drops but BCE's shares advance after deal
Trading in BCE Inc. and Teleglobe Inc. shares was volatile
yesterday as investors reacted to BCE's plan to spend
$9.6 billion in stock to buy the rest of the troubled
long-distance carrier.
Initially, investors panicked, shedding BCE and Teleglobe
stock in a frenzy. Shares of both companies plunged, with
Teleglobe shares plummeting as much as 31 per cent.
BCE hit a low of $165, before rising steadily to close at
$177.65, up $4.40 on the Toronto Stock Exchange.
Teleglobe fell as low as $33, before recovering to $41.10,
down $6.45 from Tuesday's close.
BCE and Teleglobe were among the most active issues on
the TSE.
"There was sheer panic this morning. ... It was
ridiculous," said John Wilson, an analyst at Warburg
Dillon Read in Toronto. "For our clients, we just said back
up the truck and buy as much as you can. And it turned
out to be the right call."
Analysts had lingering concerns yesterday about BCE's
decision to buy the 77 per cent of Teleglobe it doesn't
already own. BCE could have bought Teleglobe a long
time ago for considerably less than what it now will pay,
said telecom analyst Eamon Hoey.
"The shareholders of BCE should be asking themselves
some serious questions here," he said. "Why are they
paying so much for a company that could have been
bought for significantly less dollars, and for which BCE
had lots of opportunity to buy in the past 10 years."
Instead of laying out an over-all strategy, Hoey said, BCE
management is "behaving reactively to the events around
them rather than to a really definitive strategy."
BCE's decision last month to spin off Nortel is another
example of a lack of strategic thinking, he added.
"Why did they get rid of their interest in Nortel?" Hoey
asked. "Not because they sat there like great
pontificators and thought out this strategy that we're
going to sell off Nortel.
"They sold off Nortel in a desperate move to try and get
valuation out of the rest of their business. That's not
strategy. That's just reacting to the events that are
bigger than you are."
"They are paying a very high price for it and I'm
skeptical," said Norman Rothery, chief investment
strategist at Fund Monitor.com Corp.
"It may be more about (BCE chief executive Jean Monty's)
ego than anything else. It may be about BCE wanting to
become a world player and maybe it is justified, but I'm
skeptical."
Douglas Kirk, an analyst with Nesbitt Burns in Toronto,
said it's hard to say "if the deal is positive for BCE and
Teleglobe shareholders. If the deal goes ahead, it
converts into BCE and I think that can ultimately raise the
value of Teleglobe."
He said he had been concerned about dilution in BCE
shares as a result of the new shares BCE would be
issuing, "but the market seems to have accepted that for
the future." He said he still maintains a buy rating on
BCE.
Warburg Dillon Read's Wilson said that "over the long
term, there is no question in my mind that it's a good
deal."
"The problem is that when this thing eventually closes,
will BCE's share price likely be in the range they talk
about?" Wilson asked. "I'm actually fairly confident that it
will be, and, in fact, there is a good chance that it could
be higher than that."
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Montreal Gazette
Bullish on spinoff, but analysts question Monty's Net strategy
Stock markets were in a frenzy yesterday as they reacted to the
blockbuster news that BCE Inc. plans to spin off most of its stake in
high-flying Nortel Networks Corp.
Financial analysts and mutual-fund managers remained bullish on BCE,
but expressed concerns about chief executive Jean Monty's Internet
strategy.
BCE had been under pressure from investors to unlock the value of the
company's other holdings by spinning off Nortel, whose shares had
quadrupled in value in the last year, fueled by strong demand for
communications-network equipment.
BCE, which is keeping a stake of about 2 per cent in Nortel, is giving
its shareholders the rest of its 39.2-per-cent stake. This windfall is
worth almost $73 billion to shareholders.
The problem was that Nortel's spectacular performance was
overshadowing parent BCE. As a result, BCE's stock had been trading
significantly below the underlying value of its assets by up to $30
billion.
Yesterday, BCE shares traded as high as $156 before closing at $150 in
Toronto, up $7.55. It was the day's most active stock in Toronto, with
9.8 million shares changing hands. Nortel, however, closed down $3.50
at $139.95, with 6.5 million shares traded.
"It is a wonderful thing to be a BCE shareholder right now," said John
Wilson, a telecommunications analyst with Warburg Dillon Read in
Toronto. He added that "we believe that there are significant upsides
still to go."
"We should see an increase in the value of BCE based on the stub value
the spin(off) uncovered," said Mary-Ann De Monte-Whelan, an analyst
with BLC Securities in Toronto. "So we have a $160 target."
De Monte-Whelan said she expects the spinoff to initially lower BCE's
discount to 15 per cent, adding that this could go up or down,
depending on how BCE undertakes its restructuring plans to turn itself
into more of an operating company.
"The stock price is going to go up," said John Grandy, a
telecommunications analyst at Yorkton Securities in Toronto. "The
implications are very positive.
"I have a target price of $162, and that's not including any more
acquisitions," he added.
"And I'm aware that there are some analysts that have target prices
that are even higher than that."
But the three analysts expressed concern about BCE's lack of a strong
Internet strategy.
"That's still a bit of a mystery," said Grandy, adding that the
strategy currently consists of Bell Canada's Sympatico Net-access
business, which gets most of its revenue from subscribers on a monthly
basis.
Sympatico has had much-publicized problems with its high-speed
service, including complaints about poor customer service. Monty
himself has said that Bell will have to scale back on the number of
targeted new subscribers as they work to iron out the problems of
those already connected to the service.
As well, competition for high-speed Net access has been strong from
the cable industry, whose service is comparable with, if not faster
than, the high-speed Sympatico service.
"Their whole Internet strategy has to be rethought," said De
Monte-Whelan, adding that while BCE has a good base of dial-up
customers through its Sympatico service, the company has got to go to
the next level - providing content on the Internet to its customers,
perhaps through a Net portal.
$8 Billion to Spend
One analyst estimated that BCE has about $4 billion in cash available
from its sale of 20 per cent of Bell to SBC Communications Inc. for
$5.1 billion. Add to that about $4 billion that BCE could raise by
selling its remaining 2-per-cent stake in Nortel, after the spinoff,
and BCE's buying power totals about $8 billion, the analyst said.
The BCE chief did say that he will be making a major announcement in
the next couple of weeks about the company's strategy, although it was
not clear whether this involved an Internet-related acquisition.
Another hurdle BCE faces in the post-Nortel era is fierce competition
in the long-distance and local-calling telephone market.
Bell Canada has been hit hard by heavy discounting and loss of market
share in long distance, as well as recent deregulation of the
local-calling sector, which is drawing new rivals, including, once
again, cable companies.
But it is the Sympatico problem that BCE needs to solve quickly, said
analyst Wilson of Warburg Dillon Read.
"It would be naive to say that they don't have challenges," he said,
adding that the Internet industry is moving at an extremely fast pace,
and "BCE has not been great on that front."
Funds Avoided Nortel
As for mutual-fund managers, many of them had bought positions in BCE
and avoided Nortel, said Norman Rothery, chief investment strategist
at Fund Monitor.com Corp. of Windsor.
"They were essentially making the bet that BCE would in fact spin off
its Nortel bit - which it is has done," he said. "If they stuck with
their positions throughout the summer and into the winter, they have
done very well on that bet."
Ian Ainsworth, vice-president (equities) of Altamira Management Ltd.,
said the Nortel spinoff "doesn't really change the (fund's) strategy."
"It didn't really change our weight in Nortel - all it does is
consolidate it now in one security," Ainsworth added. "We've liked
Nortel for some time - it's one of the world's great technology
investments."
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The Globe and Mail
DRIPs are time-consuming, but worth it: Dividend reinvestment plans
allow you to buy more shares without paying commissions
What every long-term investor needs is a dividend reinvestment plan --
and a week or so of free time to research how to set one up.
It's basic investing advice to take advantage of the DRIPs offered by
hundreds of Canadian and U.S. companies. These
plans allow you to use your quarterly cash
dividends to buy more shares of a company without
paying brokerage commissions.
A few companies even give you a 5-per-cent discount off the price of their shares when
bought through a DRIP. Others have an optional share purchase plan allowing you to
invest new money along with your dividends.
Admit it, this DRIP thing sounds kind of good. In fact, you're probably wondering how and
where to sign up.
That's where the week of free time comes in. While everybody sings the praises of DRIPs,
finding step-by-step instructions on setting them up is surprisingly hard.
So here's a rundown on what you need to know. First, there are two main sources of
DRIPs -- from a company itself in conjunction with the trust company that acts as its share
transfer agent, and from a full-service or discount broker.
Generally, small investors without large positions in a stock will find the company DRIP
most useful, even though it's a pain to get rolling.
The reason is that company DRIPs usually allow you to buy fractional shares. If you
reinvest $20 in dividends from a company with a $30 share price, you'd end up with
two-thirds of a share.
Most brokers, both full-service and discount, don't want the annoyance of keeping track of
fractional shares, so they'll only buy full ones. If your dividend payments aren't sufficient to
do this, then no DRIP for you.
If a company DRIP is the way to go then you'll first need to find out which firms offer them.
A company's annual report will say if it offers a DRIP. Failing that, the Toronto Stock
Exchange publishes an annual list that you can order for $20 plus tax by calling
416-947-4681. Right now, there are 110 companies on the list.
You can also check a few different sites on the World Wide Web, notably those offered
by leading transfer agents CIBC Mellon Trust Co. and Montreal Trust. Both carry lists of
the DRIPs they administer, including downloadable enrolment forms in many cases. Two
other great sources of DRIP information are a wide-ranging investing site called Directions
and the Web site operated by Canadian MoneySaver magazine.
The next step is to call your broker and request that the shares (you can start with as few
as one) you want in the DRIP be registered in your name and then sent to you. According
to the Directions site, discounters will charge $25 to $30 to do this. The cost is in addition
to whatever commission you pay to buy your shares.
Once you've got your shares registered in your name you'll need to fill out a company's
DRIP enrolment form and send it to the transfer agent. Either the company or the transfer
agent can supply the forms.
That's all there is to it, unless you want to make your DRIP a registered retirement savings
plan.
In that case, you'll have to set up what's called a single-purpose RRSP that will hold the
shares of just one company. The annual trustee fee is $40 at CIBC Mellon.
Broker DRIPs are available at full-service and discount brokers, with the notable
exception of E*Trade Canada. Broker plans vary widely, but they share a drawback in
that you won't be able to top up your dividend reinvestments with new cash. For that,
you'll need to deal directly with the company and its transfer agent.
Here are some questions to ask a broker about the DRIPs it offers:
How many stocks do they offer DRIPs on? The answer to this one varies widely.
ScotiaMcLeod and Scotia Discount Brokerage have a list of about 80 Canadian stocks,
while RBC Dominion Securities and Action Direct offer any dividend-paying stock on the
TSE 300 composite index and the Standard & Poor's 100.
Can fractional shares be purchased? According to the Directions Web site, CT Securities,
Charles Schwab Canada and Sun Life Securities offer fractional shares.
Are there any charges? No-cost DRIPs are available at CT Securities, Royal Bank Action
Direct, Scotia Discount Brokerage, HSBC InvestDirect and Bank of Montreal
InvestorLine, according to Directions.
How is the DRIP administered? At Scotia Discount, for one, a DRIP stock can a
segregated holding within a larger investment account. At some other brokers, you'll need a
DRIP-only account.
You'll have the easiest time if you have a big portfolio and use a full-service broker.
Expedient, no-charge DRIP setups are just the sort of thing that justifies the big
commissions that are charged.
Comments and suggestions are welcomed at
rcarrick@globeandmail.ca
WEB SITES
Related Web Sites:
http://www.cibcmellon.com/drips
www.montrealtrust.com/mt/English/SecurityHolders/DRPLibrary/index.html
www.ndir.com/stocks.drips.html
http://www.canadianmoneysaver.ca/reg_drip.htm
HOW DISCOUNT BROKERS DO DRIPS
Broker Cost
BMO InvestorLine* None
CT Securities None on most stocks
CIBC Investor's Edge* $1/dividend
E*Trade No DRIPS offered
HSBC InvesDirect* None
National Bank Invest Net* None
Schwab Canada Initial $10/stock
+ $2.50/dividend
Scotia Discount* None
Sun Life Securities Initial $10/stock
+ $2.50/dividend
TD Waterhouse* $1/dividend
-* Whole shares only
Source: The Directions Web site,
http://www.ndir.com
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The National Post
We need an 'open sky' policy for Canadian investors:
There's no need to block access to cut-rate U.S. brokers and funds
Anyone who just briefly watches business news on CNN or CNBC can't miss it -- the onslaught of American Internet brokers
advertising dirt-cheap commissions.
But try closing your higher-commission Canadian brokerage account to take advantage of these deals, and you'll be running afoul of
provincial securities regulations, known as the blue sky law. Something is definitely wrong here.
The term "blue sky" reflects the law's intent to protect investors from the sale of securities a judge once called as worthless as "lots in the
blue sky." First enacted in 1911 by the Kansas legislature, and brought to Canada a year later by the Manitoba government, the law has
evolved to require that any securities offered for sale within a state or province, and any brokers doing business with its residents, be
registered with local regulators.
The goal is to ensure public disclosure of all relevant information about securities. The rules are also meant to render brokers fully subject
to jurisdictional authority, keep known stock swindlers away from investors, and restrict the brokerage business to individuals who have
demonstrated satisfactory knowledge of the securities markets, as well as their duties to clients.
The problem is, U.S. online brokers are generally not registered to operate in Canada. Nor are the U.S.-based mutual funds that are
available through these brokers. Still, the U.S. Securities and Exchange Commission doesn't prohibit foreigners from opening brokerage
accounts. Online brokers execute trades only when adequate funds have already been deposited, so they don't have to worry much
about the legal hurdles involved in collecting debts from someone in another country. Thus, according to the detailed listings at Norman
Rothery's popular Directions Web site, Canadian clients are welcome at 29 American discount brokers. Accounts are easy to open, and
no U.S. address is needed.
An increasing number of Canadians are signing up. Mr. Rothery has noticed a surge of interest among visitors to his site. The Ontario
Securities Commission has had to post a warning about the illegality of the cheap Internet brokers on its Web site, and it is exploring
whether U.S. state regulations bar foreign accounts. Canadian discounters are definitely worried about losing customers. They are
lobbying securities regulators to relax the "know-your-client" (KYC) rule, which requires all trades to be monitored for their suitability
with customers' circumstances and objectives, in order to better meet the American competition.
Those taking their money southward are not in sore need of legal protection. No one is being solicited to buy anything; most want to buy
stocks they have researched on their own. Aside from being drawn by lower commissions -- $5 to $15 in the U.S., as opposed to $24
to $30 in Canada for the same Nasdaq and NYSE-listed issues (all figures U.S. dollars) -- investors prefer the faster trade executions
made possible by the absence of the KYC rule in the U.S. For active traders, slow executions are costly because they exacerbate
slippage, the difference between the price at which one plans a trade and the price one actually receives.
Long-term investors such as Bylo Selhi (a pseudonym) are attracted by U.S. registered mutual funds for the low management expense
fees, which average 1.25% compared with 2.15% in Canada -- a small difference that adds up over time. Mr. Selhi particularly likes the
large number of index funds offered by Vanguard, because these provide greater opportunities for diversification and track the indexes
better than equivalent Canadian funds.
Consider, too, that U.S. discounters are members of the Securities Investor Protection Corp., which insures all customer accounts up to
$500,000, and that like U.S. mutual funds, they operate within the most rigorous securities laws in the world. The only thing Canadians
give up is the protection offered by the KYC rule, which hasn't done much to make brokers accountable for touting a risky mining play
like Bre-X to the Canadian investing public.
The real beneficiaries of the blue sky laws are the regulators, who rely on them to preserve their power and garner registration fees, and
even more, the Canadian brokers, who are shielded from competition. American firms shy away from registering in Canada, not just
because of the costs involved, but because of the need to have staff take all the exams necessary to operate here.
Instead, why not institute a system in which North American regulators recognize a registration filed in any one jurisdiction? At a
minimum, American discounters should be granted a registration exemption. And relax the KYC rule for Canadian discounters to give
them an even playing field.
Then, watch as aggressive American players corrode the gentleman's code that keeps fees high in the Canadian securities industry.
Expect lower transaction costs to increase the liquidity of domestic equity markets and make active traders excited about fast-moving
growth stocks, enabling promising companies to raise capital more easily in Canada. Investors will also acquire additional incentives to
educate themselves about the financial markets -- the best defence against fraud.
With the Internet already narrowing the information advantage traditionally held by brokers over investors, and rendering geographic
boundaries meaningless, these changes will help keep securities laws in line with the times.
George Bragues is an economics and philosophy instructor at Toronto's Humber College.
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The Globe and Mail
So you want to open a U.S. broker account and trade on the Internet
A weak dollar has just about killed the appeal of cross-border shopping,
except if you do a lot of stock trading over the Internet.
The spreads between Canadian and U.S. on-line trading commissions
are so big in many cases that they look good even after factoring in the
onerous exchange rate.
Minimum Canadian on-line commissions are commonly in the $27 to
$29 range. In the United States, it's not hard to find $9.99 (U.S.) trades,
which translates into roughly $15 (Canadian). This differential is huge if
you're even a sporadically active investor, and it's all the more attractive
when you factor in the faster order execution at U.S. brokers.
There's nothing to stop Canadians from opening U.S. brokerage
accounts save the unwillingness of these brokers to accept the business.
But that doesn't mean the process is entirely above board. Technically, a
broker is not supposed to accept clients in a province unless it's
registered to do business there. A quick glance at the Ontario Securities
Commission's list of registered dealers didn't turn up any of the cheap
U.S. Internet brokers.
The OSC is just now getting around to the question of how to enforce
this rule. As a first step, commission staff are researching which U.S.
states have regulations preventing brokerages registered there from
trading securities on behalf of foreign clients.
If Canadian provincial regulators could persuade U.S. state regulators to
get tough on this matter, it might be much harder in the future to find a
stateside broker who will accept your business. For now, though, there
are plenty of U.S. options for Canadians.
An ideal place to start the search for a U.S. broker is the Directions site
on the World Wide Web. It contains a listing of 68 U.S. discount
brokers and notes which firms will deal with Canadians. Toll-free phone
numbers and links to the Web sites of the listed brokers are also
included.
Norman Rothery, who runs the Directions site, said some of the brokers
who won't deal with Canadians indicated it was because they were not
licenced to do business in this country.
It seems that prohibitions on dealing with Canadians aren't sacrosanct,
however. Some of the brokers who are down in the Directions list as not
accepting such business said they would do so when contacted late this
week.
To open an account with a U.S. firm, you'll need to fill out a W-8
Internal Revenue Service form, which is a certificate of foreign status.
Some U.S. firms said it's also necessary to complete a 1001 form, which
pertains to withholding tax on income-producing investments. Copies of
both forms can be downloaded on Suretrade Inc.'s Web site, providing
you have Adobe Acrobat software.
The biggest challenge in opening a U.S. account has to be picking a
broker. A good place to start is the March 15 issue of Barron's, which
contains the financial weekly's annual ranking of on-line brokers.
If you're looking to a U.S. broker primarily to save money, be aware
that Barron's ranking of 21 brokers emphasizes trade execution,
reliability and range of services more than low commissions.
That explains why three of the four top-ranked brokers, DLJdirect,
Discover Brokerage Direct and National Discount Brokers, all have
minimum commissions no lower than $19.75 (U.S.). The fourth, Web
Street Securities has an interesting proposition -- a $14.95 base
commission and free on-line Nasdaq trades of 1,000 or more shares
priced over $2.
The best combination of low prices and solid reliability on the Barron's
list is Datek Online, which has a minimum $9.99 commission.
Definitely don't pick a U.S. broker without visiting a Web site called
Online Investing Services. Twice a month, this site reviews 80 different
companies according to cost and overall service. It also has a summary
of rankings by business magazines, including Barron's, as well as links to
the on-line broker bulletin boards of The Motley Fool and Silicon
Investor.
The ratings on Online Investment Services are divided into three
categories -- deep, mid- and high-cost discounters. The top five stocks
among deep discounters go to Brown & Co., Datek, Trading Direct,
Muriel Siebert and ForbesNet.
Online Investment Services also has a special section evaluating brokers
for their service to day traders, and it looks at the best brokers for
novice and more experienced investors as well.
The OSC points out that in using a U.S. broker a Canadian investor is
giving up certain protections. U.S. firms aren't members of the Canadian
Investor Protection Fund, which covers client money lost in the collapse
of a broker. As well, there's no enforcement of the know-your-client
rule, which requires trades to be checked against a client's investing
objectives.
Of course, the absence of the so-called KYC rule is one of the reasons
why U.S. brokers can deliver faster, cheaper service.
RATING THE ON-LINE BROKERS
Barron's tested 21 brokers through their "Net connections." They ranked
them in the following categories: Trade execution, ease of use, reliability
range, amenities, commissions, weighted total and stars, but gave extra
weight to trade execution, reliability and range of services.
DLJDirect ****
Discover ****
National Discount Brokers ****
Web Street Securities ****
Datek ***=
E'Trade ***=
A.B. Watley "Ultimate" ***=
SureTrade ***=
Charles Schwab ***
Muriel Siebert ***
Waterhouse Securities ***
Quick & Reilly ***
Wall Street Electronica ***
Brown & Co ***
Fidelity ***
AB Watley "Trader" **=
Jack White **
Wall Street Access **
Mr. Stock **
Accutrade **
Net Investor **
Ameritrade **
Source: Barron's
WEB SITES
Here are the addresses of the Web sites mentioned in this column:
http://www.ndir.com (Directions)
http://www.suretrade.com
http://www.sonic.net/donaldj (Online
Investment)
Comments and suggestions are welcomed at rcarrick@globeandmail.ca
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The Globe and Mail
Physics PhD bones up on his investing strategies
Between penny-pinching and an acumen for attracting scholarships,
Norman Rothery managed to emerge from university clutching a PhD, yet
unencumbered by the usual other student fixture, a mountain of debt
that the government would like paid back.
Toss in a propensity for saving and some profitable investing, and the
thoughtful yet talkative Mr. Rothery has more than enough to live and
play. While taking a break from school, he is residing with his folks
at their Oakville, Ont., home, and getting set to look for work.
But don't expect to see Mr. Rothery, 29, who spent a good deal of time
bouncing light off hydrogen particles for his doctorate in physics,
tossing the basic building blocks of life around on a science channel
anytime soon. He's decided he's going to "branch off" and combine his
other big loves - computers and finance - in some fashion when he
enters the working world.
How he does it: Mr. Rothery has been actively investing for
more than five years. In the beginning, family members pushed him
toward mutual funds, but Mr. Rothery thought there were far too many
funds to choose from, and not enough relevant information to do that
choosing. Conversely, if he limited himself to individual stocks on
the Toronto Stock Exchange 300-stock composite index, he could not
only greatly cut down on the sheer number of possible investments, but
also have a lot more real and reliable data on which to base his
investment choices.
"With mutual funds, you can really go on three things - the past
history, the fund management style and maybe, if you're lucky, you
know something about the managers." By comparison, he says, " You can
get a company's annual report and you're presented with its entire
balance sheet." Throw in a little research into how management
expense ratios charged by funds can add up, and Mr. Rothery became
convinced that "if I could do reasonably well at picking stocks, I'd
be well ahead."
To give himself a reasonable chance at doing reasonably well, he boned
up on investing, and found himself a defensive strategy. " I follow
the classic value approach," he says, adding that he draws much of his
inspiration from the famed U.S. investor, Benjamin Graham, who wrote
The Intelligent Investor.
Following Mr. Graham's advice, Mr. Rothery begins by screening out
many companies that don't meet several criteria. These include a
price/earnings ratio of less than 15, and a price to book value of
less than 1.5. He also likes the multiple of the P/E and the price to
book value to be less than 22.5. "That provides you with an adequate
margin of safety."
Other standards he requires is that a company have a history of regular
dividend payments, earnings that are stable if not increasing, and
financial stability. For example, he likes industrial concerns that
have a ratio of current assets to current liabilities of 2.0 or
higher.
Mr. Rothery applies these screens to somewhere between 100 and 200
stocks yearly, going over annual reports, which he gets electronically
from the SEDAR Web site (www.sedar.com) or by contacting the
individual companies.
Because he uses a computer to compile his numbers, and he is
technologically-literate, Mr. Rothery took what he calls an easy step,
and offered up much of his analysis and number s on a Web site, called
Directions (www.ndir.com). In
addition to daily-updated numbers and ratios on dozens of stocks,
Mr. Rothery also offers explanations and the numbers for different
investment strategies, such as the Dogs of the Dow approach applied to
TSE stocks.
As to what's making his cut these days, not very much, he says. He
likes the looks of EdperBrascab Corp., "but unfortunately they're
partly a resource play, and I don't particularly like resources." He
also likes Bank of Nova Scotia and National Bank. "They are something
of a bet of interest rates, but they are good businesses."
As for those market gurus who speak of a brave and higher-priced new
world where P/E ratios of 25 or more will be the norm by which to
judge value, Mr. Rothery just isn't buying it. "whenever there's talk
of a new world, historically it just doesn't last. High P/E ratios
might last for five years but not 20."
As for market novices, Mr. Rothery recommends two books. First , he
says, people should read A Random Walk Down Wall Street. "
That will scare the bejesus out of a lot of people and scare them into
indexing," he says. For the antidote, he advises checking out The
Intelligent Investor [ed. Actually if was What Works on Wall
Street and then I.I.].
His best Moves: One of Mr. Rothery's first picks was BCE Inc.,
which he purchased at a split-adjusted $22 in February, 1995. The
stock closed yesterday at $64.45. Another strong performer has been
Imasco Ltd. Bought at a split-adjusted $13.90 in July, 1996, it
closed yesterday at $33.85. "During the period that I held them, they
both outperformed the TSE 300 and the S&P 500."
His worst move: One stock that failed to fly was Hummingbird
Communications Ltd., which he purchased at $43.90 in July, 1988, and
shrank to $28.30 before he bailed out in December. "That pick was
regrettably not done with my normal system," he says.
He also bought Corel Corp on the way down - at just over $6. The
stock then fell all the way to less than $2 before climbing back up,
when Mr. Rothery sold for essentially what he paid for the stock.
That pick, he says, was really just speculating on a story he couldn't
help but be drawn to.
"They'd been beaten down, and I liked the idea of a plucky Canadian
against Microsoft," he says. "It was a good lesson that basically I'm
not very good at speculating." Learnings lessons in the stock market
is the only way to gain first-hand experience, he argues. "I actually
think mistakes are very important."
Advice: "Read up before wandering into investing. Become educated."
Inset:
The Investor: Norman Rothery
Occupation: Job-hunting PhD.
Age: 29
Investment personality: Disciplined stock picker
Portfolio makeup: National Bank, Bank of Nova Scotia, BCE, CP, Imasco, Trilom
Portfolio size: 'Five figures'
Rate of Return: 1995 +13.6%, 1996 +23.9%, 1997 +26.2%, 1998 +6.5% [Ed. For comparison on December 31 1998 the one year TSE 300 total return index was down 1.6% and compounded returns for 2,3 and 5 years were +6.4%, +13.2% and +10.7% respectively.]
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OnTV: Investors Online
Online Brokers
Check out Investors Online Feb 6 for a few tid bits of Norm! In
Toronto it plays on channel 11 at 1pm. You can go to www.ioltv.com to view the broadcast.
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The Canadian MoneySaver
Year-End Conglomerate
...
I always like to pass along reference materials that I think might be
of use to you. This month I would like to consider two sources; first
the writings of James O'Shaughnessy, and then a Canadian investment
website. O'Shaughnessy has written three books,
Invest Like the Best (1994),
What Works On Wall Street, Revised Edition (1998)
[ed. Excellent book], and
How To Retire Rich (1998). While all of
these should be part of any serious investor's library, I would
particularly recommend How To Retire Rich for individuals who are
beginning their portfolios. His message is simple: you and you alone
are responsible for the quality of your retirement; the best
time-proven way to provide for the future is equity investment; the
most successful approach to equity investment is to select a strategy
that works and to stick with it no matter what. Readers of this
column will recognize that these are the basic convictions that I have
been emphasizing over the years. A real advantage of O'Shaughnessy's
work is that he examines a number of different strategies (low
price-to-sales, 'Dogs of the Dow', utility stocks, etc.) and gives
data as to how they have performed over the years. Allowing for the
fact that O'Shaughnessy's universe contains only U.S. stocks, I think
Canadian readers will profit from his disciplined approach to
investing.
Now for a Canadian website. If you log onto www.ndir.com you will arrive at
Directions, a site designed and maintained by Dr. Norman Rothery, a
physicist from York University. The site was started in early 1995 as
a resource for novice and small investors. Dr. Rothery's interest in
investing has resulted in a great deal of information and links that
are useful and informative for Canadian individual investors. Some
examples:
book selections,
events calendar,
stock-picking strategies,
mutual fund contact information,
independent no-load brokers and
discount brokers,
fund rates,
mutual fund MERs,
an equity commission calculator,
DRIPS, SPPs and
no-load stocks,
gadgets and games,
Canadian annual reports and
data,
historical data,
financial links,
and discussion forum,
plus a lot more.
Visitors will note that Dr. Rothery and I are currently having a
discussion concerning his TSE 35 information, but that should not
distract you from your enjoyment of this site.
...
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The Globe and Mail
Let the discount brokerage on-line price wars begin
Canadians are used to paying more for things than Americans and yet
there's still a lot of complaining about how much higher our on-line
brokerage fees are than theirs.
"It's not as competitive in Canada as it is in the United States,
that's pretty obvious," said Norman Rothery, an active stock trader
who maintains a site on the World Wide Web that compares discount
brokerage fees in Canada (http://www.ndir.com/stocks.broker.html)
Mr. Rothery said TD Green Line Investor Services will execute an order
received over the Internet for as little as $29 [US]. A
comparable trade can be made for $12 (U.S.) at Waterhouse Securities
Inc., a U.S. discount brokerage owned by Green Line's parent,
Toronto-Dominion Bank.
Not that Waterhouse is the cheapest U.S. on-line brokerage service
around. Investors who have spent even a little time on the Web will
be familiar with Datek Online and its $9.99 commissions.
Mr. Rothery has been monitoring discount brokerage fees for his Web
site for about two years now. He said there were some innovative
pricing schemes for on-line trading when it was first introduced, but
now most providers are in the $29 (Canadian) range. A notable
exception is Scotia Discount Brokerage, which has a minimum on-line
commission of $20.
Most Canadian discount brokers offer customers a choice of trading
over the Internet, or through a live agent on the telephone. Prices
are higher for dealing with a human, but the variation between
brokerage houses is far greater.
There are a couple of theories about why $29 or so is the benchmark
cost for on-line trading. TD Green Line, which outs its leading
position among discount brokers at between 60 to 70 per cent of the
market, says everyone else is following its lead. Others say E*Trade
Canada set the trend with its minimum commission of $28.88.
People in the discount brokerage industry say the difference between
U.S. and Canadian on-line commissions is the result of:
- Know-your-client regulations in Canada that require each Internet
trade to be vetted by an investment professional for its consistency
with the client's stated investing objectives. U.S. discount brokers
don't have to worry about this.
- The great economies of scale available in the U.S. market, because
of its larger population and the higher percentage of homes with
Internet-capable computers.
- Differing levels of service. Canadians can generally speak to a
live human if they have problems while trading on-line, while some
cheap U.S. services don't offer this option.
- The willingness of some U.S. players to forsake profitability so
they can build market share with low prices.
The ferocity of the price competition in the U.S. market is striking.
In a recent report, investment dealer Piper Jaffray Inc. said the
average commission fee at the top 10 discount brokers was $15.95
(U.S.) in the fourth quarter of last year, down from $52.89 in the
first quarter of 1996.
Price isn't everything, of course. The No.1 discount broker in the
United States is Charles Schwab, which charges a commission of $29.95
for on-line trades.
Schwab's dominant market share suggests investors are willing to pay
more for the reliability ad service that larger companies can provide,
not to mention the peace of mind that comes from dealing with a
well-established brand name.
Service may keep customers, but it's clear that price attracts them in
the first place. That's why it's likely Canadian on-line brokerage
fees will decline in the future.
John See, president of TD Green Line, said one way to get prices lower
would be to at least partly ease the know-your-client rules for
on-line brokers.
"Prices probably won't come to the same as the United States, but
certainly we will get closer to it."
How close? For now, the best indication is Scotia Discount
Brokerage's $20 (Canadian) minimum fee. The firm lowered its rate
from $22.50 about a month ago, but so far hasn't made much noise
beyond informing its existing clients.
"As the season for RRSPs and investments begins to gear up, you'll
certainly see more profile given to this," said Bruce Dixon, Scotia's
senior vice-president and national sales manager.
Good. Let the price wars begin.
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The Toronto Star
TIPS or no TIPS: the debate rages
The latest round in a price war has put index mutual funds back in the
news and the Internet chat groups this week.
But every time I write about the advantages of these funds and these
welcome fee reductions, somebody says my advice is stupid.
Why, the critics usually ask, would anyone pay mutual fund management
fees and expenses when there is a cheaper alternative?
These smarty pants prefer the TIPS 35, TIPS 100 and similar
index-participation shares, which are indeed cheaper to hold if you
have enough money to invest.
The problem is that they're not cheaper when you're first starting out
with these type of instruments and they can be a pain in the posterior
when it comes to reinvesting dividends.
It's timely to address the critics after Altamira Investment Services
Inc., the largest direct seller of mutual funds after the banks and
trust companies, undercut the former price leader in index mutual
funds, Royal Bank of Canada.
Royal, also new to the index game, quickly matched Altamira. But the
two biggies in the field - CIBC Securities Inc. and TD Asset
Management Inc. - are holding off, for now.
The three new Altamira index funds - one Canadian, one American and
one international - will take 0.5 per cent of your investment dollars
each year to cover expenses.
That's about one-third of the average charge for index funds and a
quarter of the average for actively managed funds, most of which have
failed to beat stock market indices and index funds over time.
Clients will be able to get into the funds with as little as $50 per
month if they set up an automatic contribution plan. But the minimum
for a single investment is $5,000, versus $2,500 at Royal.
My critics would say that Altamira's and the Royal's charges are 10
times what the Toronto Stock Exchange charges for its
index-participation shares, which give investors an indirect stake in
the country's 35 or 100 most valuable and actively traded companies.
Altamira's equity fund merely mimics the TIPS 100 index.
There's more to the story than management fees, though. Buying fewer
than 100 of the TIPS 100 shares, for example, will cost about $22.50
to $58 in sales commission with a discount brokerage, and more at a
full-service broker.
(You can check out the prices yourself at a calculator on the Internet
at www.ndir.com/stocks.map.html.
The site is maintained by [Ex-]York University graduate student
and job seeker Norman Rothery.)
If you hold the TIPS 100 shares in your retirement savings plan,
Scotia Discount Brokerage, for example, will charge you $75 a year
until you have $15,000.
But your investment returns on TIPS can fall behind low-fee index
funds for several reasons:
There are the fees just mentioned. There is the time you have to wait
to buy a decent number of TIPS to make the fees worthwhile. There is
the ongoing delay for reinvesting quarterly dividends.
With some advice from University of Toronto finance Prof. Eric
Kirzner, I constructed a computer spread sheet to compare the relative
performance of TIPS and index funds.
My calculations were simplified and approximate, but they gave TIPS
every possible break. TIPS do eventually win out over the mutual
funds. The more money you put in, the quicker TIPS pull ahead. If
you've got $10,000 or $15,000 to put in right away, your TIPS shares
will be off to the races.
But say you could afford $2,000 for Canadian equities in the first
year and more as your income rises. You would make a single investment
each year, plus whatever money you picked up in dividends from your
earlier TIPS investment.
It takes about a 10 years before you had more money in TIPS than if
you invested annually in the Altamira index fund, which automatically
reinvests dividends earned.
It should also be noted that someone who needed to cash their TIPS
sooner would lose money to a second sales commission.
Kirzner of U of T, and Bruce Cohen, who is the author of The Money
Adviser, support my general comments. Altamira officials note there
are other advantages to being able to balance your portfolio and
switch among funds within a mutual fund family.
The message: TIPS rule, but not for everyone right away.
Money Talk appears Tuesday, Thursday and Saturday. James Daw can be
reached at Money Talk, Your Business, The Toronto Star, 1 Yonge St.,
Toronto ON M5E 1E6; at (416) 869-4817; (416) 865-3630 by fax; or at
jdaw@thestar.ca by E-mail.
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The Globe and Mail
It pays to be a stingy investor
Meet Norman Rothery - a quiet and polite voice of dissent amid the
current roar of advertising for registered retirement savings plans.
The graduate student of physics at Toronto's York University spends
his days making fantastically accurate measurements of the light
emitted by hydrogen.
But in his spare time, he's been doing another sort of measuring:
Checking the damage that fees - particularly mutual fund expenses -
inflict on the value of investors' retirement savings.
"It's really shocking," the 28-year-old says. "For the people who
have some understanding of what's going on, mutual funds become at
best a short-term trading vehicle. You wouldn't want to use them for
a long-term investment."
Mr. Rothery is one of a growing band of cost-paring investors who are
realizing what has long been everyday knowledge for investment
professionals: Costs and expenses can be the most important
determinant of investment returns.
...
Mr. Rothery, the physicist, runs an Internet Web site called
Directions that offers an Aladin's cave for a tight-fisted investor
who wants to save money.
It includes a catalogue of discount brokers and a calculator that lets
you compare their rates, a list of mutual fund dealers across the
country that will sell you just about every mutual fund with no
commissions, and a detailed breakdown of Canadian dividend
reinvestment plans (DRIPs) and stock purchase plans (SPPs) that let
you buy shares directly from companies with no brokerage commissions.
...
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The Globe and Mail
Net addresses to check for investment candy
Do you find the market getting a little scary? Is your broker's laugh
beginning to remind you a bit of Count Dracula?
It's probably the approach of Halloween that puts a shiver in the air.
And if you're out trick-or-treating on the Net, we have some
investment candy for your bag.
...
Directions (http://aries.phys.yorku.ca/~rothery/stocks.html [now at www.ndir.com])
has a compass as its logo. Norman Rothery, who runs the Web site, is
a physicist at York University in Toronto.
There is a section on Canadian discount brokers, where you can compare all their fee schedules on one page, with links to their home pages.
He selects and rates investment books in a straightforward way, and
allows you to rate the investment book of your choice and have it
added to the list. The interactive stock picks page lets you add your
recommendations as well.
He lists companies that participate in dividend reinvestment plans
(DRIPs), and provides links to other Web sites, such as Cemil Otar's
(http://www.inforamp.net/~otarc/ [now at Canadian MoneySaver]),
which give more detailed information on DRIPs and stock purchase plans
(SPPs).
Directions has diverse and practical information. It rates 3.5 out of 5 stars.
...
If you visit each of these sites, you probably won't have to read this column ever again.
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