- Created on Thursday, 09 August 2012 08:33
- Written by glenn szlagowski -financial adviser
I thought I would try out a new format in this recent series of articles. As we all seem to be pressed for time these days, these condensed content articles should appeal to everyone. You may just peruse the articles that interest to you by just clicking on the hyperlinks below.
Although the focus will be on investing, I will also include links to other interesting news stories from time to time.
ING web bank for sale in Canada? The Canadian operations of ING may be up on the block as the ING Dutch parent needs to repay government bailout money due to the U.S. Financial Crisis in 2008. Full article here:
The list of Canadian owned big box stores may get a lot shorter with a surprise bid for RONA by U.S. home improvement giant Lowe's. More details here:
Fixed income managers everywhere are excited at the prospect of floating rate notes issued by Uncle Sam - the U.S. government. As a colleague pointed out, why on earth would a government obligate themselves to paying out higher interest rates at the bottom of the interest rate cycle? Good question. Details here:
We are entertaining our 8 year and 9 year old great-nieces who of course, are Apple equipped. I had to give them my WIFI?,WiFi? password and still not sure if it was a request or a demand. I was impressed that I actually remembered it. However, Apple fans everywhere are wringing their hands anxiously about a big change coming. See article below:
News flash! TD Asset Management (TDAM) known on the street for their fixed income (bond trading) expertise dropped this bombshell in their publication "Forward Perspectives" - July 2012 edition. Are they actually recommending stocks rather than bonds?
Sorry - unable to source a hyperlink in the public domain.
TDAM quote: "...investors may need to move away from fixed income and expand the role that equities play in their portfolios."
Canadian MERs too high? [Op-Ed]
Over the past number of months I have read some news articles highly critical of Canada’s mutual fund internal costs (referred to as MER costs) from at least two very well known Canadian business columnists.
In reading one article, I found a number of errors. I contacted the source of the original MER report - well known mutual fund rating agency [Morningstar] and took them to task about their findings. Morningstar acknowledged that perhaps some of the findings may be "inaccurate" with respect to Canadian MER numbers.
Despite the mea culpa from Morningstar about their flawed report, the same sort of article usually entitled "Canada's failing grade on MERs" refuses to die and regularly appears like clockwork every few months or so and sadly, is parroted by business columnists that should know better, didn’t do the research or failed to properly check their sources. Sorry, this is just bad reporting from what normally would be from reputable news sources.
My personal observation is that equity fund MERs correlate poorly to actual investment returns. What I do know for sure is that investor behavior - what we do with our investments after we bought them - is the prime determinant of investment success. It is not MERs.
However, some business columnists insist that MERs[internal mutual fund costs] are the singularly most important criteria for selecting mutual funds but in my view, ranking mutual funds based solely on MER internal costs is just plain wrong.
Related article: "The Truth about MERs" http://wealthadviser.ca/index.php/mutual-funds/32-the-truth-about-mers
Searching for investment returns in a 2% world
Some research comments passed on to me in early August recently by RBC GAM (RBC Global Asset Management).The author of these comments were from Hanif Mamdani, Head of Alternative Investments at RBC Global Asset Management.
“At some point, the market for government and high-quality
bonds will face a much more hostile environment. We sit here
today with 10-year yields near 1.5%, which is less than 1/10th
of where they were in September 1981. Moreover, 1.5%
doesn’t even cover current inflation and on an after-tax basis,
for most individual investors, the economic rewards of owning
a 10-year government bond today are quite poor.”
Bonds yields have reached historic all time lows recently meaning that bond prices are reaching all time highs. The author is likely referring to:
In response to the question: Then, what should 10 year bonds be yielding?
“…when deflation is no longer a threat, one would expect yields
on longer-term government bonds to approximate nominal GDP
growth. For instance, if in this “new normal” world where the stiff
headwinds of deleveraging are a fact of life, 2% real growth may
be about all we can muster while the U.S. Federal Reserve is likely
to achieve its target of 2% inflation. Adding these two figures
results in an expected nominal GDP growth rate of about 4%.
This is probably as good a marker as any as to where 10-year
yields should eventually gravitate to in the longer term.”
“Clearly investors face a daunting task right now. They’re
trying to balance investment portfolios in a world where
“riskless” bonds have become somewhat risky as removal of
the Fed policy safety net at some point could lead to a bear
market in bonds…”
Pay attention to the following table –guaranteed to raise eyebrows to those that believe bonds are a safe investment. The table answers the question, what if rates go back up to “normal” in 1, 2, 3 or 4 years from now?
Bonds – projected loss table
Years to “normalization” (i.e., 4% yields)
Approximate annual return on
10-year [U.S.] government bonds:
1 yr -20%
2 yr -8%
3 yr -4%
4 yr -2%