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About DH&A
About Norm
In the press
Contact Info
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 I'll include a few editorial comments in [square brackets] to correct out of date info.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
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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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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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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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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 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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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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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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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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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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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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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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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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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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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: ,br> 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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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 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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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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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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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 se |