Random thoughts –early January 2014
"Everyone is a genius in a rising market." This has become a sort of ear bug I can't seem to shake. I sense that it is important somehow, but will write about this later.
---
January - traditional gathering of paper
Investors are starting to receive their annual avalanche of 2013 year-end mutual fund statements.
These statements are important as they summarize the personalized performance (after all costs) of your mutual funds. It will likely include an accounting of your total deposits, total withdrawals and net gain/loss in dollars. Some of the better ones also include a personalized rate of return (ROR) calculation.
Additionally, year-end statements include important tax information such as the Adjusted Cost Base, (ACB) which you may need for some income tax calculations if a fund is sold in a taxable account. Please preserve the sanity of your tax preparer or accountant and give him or her a copy of your statement now rather than wait for the tax deadline of April 30th!
As you peruse your statements, you may want to read my 2013 Review for a short summary of the important investment news items of the year that just passed. Please note the warning about lofty markets!
As mentioned in my review, 2013 was quite the turnaround year for international and global mutual funds. Lest we forget, the U.S. is still considered to be a foreign country. Here is my take on the winners:
Almost anything with the abbreviation, U.S. (as in United States) did extraordinarily well. Many U.S. equity funds earned 30% to 40% returns in 2013[1]. The S&P 500 Index (the primary benchmark of U.S. stocks) did almost 30%,[2] and U.S. dollar appreciation, due to Canada's nose-diving currency, added several more percentage points of return.
In second place, almost anything global did exceptionally well much to the consternation of business reporters everywhere.
[Editor's note: a personal thanks to all the “info-tainement” business news services for supplying me the many contrarian buy signals.]
In third place is a surprise. It is Canada. Despite a "mediocre" Canadian stock market index return of just 9.6%.[3], many Canadian equity mutual funds are enjoying double-digit returns over and above the index.[4]
Although stock markets did very well in 2013, bond markets in North America did not. Many bond mutual funds (funds containing just bonds) were flat or negative in 2013.
All told, 2013 goes down in history as an exceptional year for most stock markets.
[1][2]Sources for TSX and S&P500 data:
http://www.1stock1.com/1stock1_766.htm
http://1stock1.com/1stock1_141.htm
[3][4]Sources for Canadian Equity and U.S. Equity :
---
Cognitive Dissonance Award of the Year (2013)
"Even if it (the fees) were a little more expensive, the advice would be pure, would be tailored to that person and be in their interest."
In order to protect the guilty, no names need to be mentioned but suffice to say, the above quote is attributed to one of Canada's most well-known investor advocates! I must confess that most consumer watchdogs rarely cheer for higher costs to the consumer. But this one does. I have re-read the quote a large number of times - perhaps excessively so. I do a double take each time.
Although, I have written extensively about adviser remuneration, I have yet to change the minds of the Globe & Mail newspaper, the Financial Post or MoneySense magazine. However, I have not given up yet and 2014 is a new year.
Speaking of giving up, many advisers have reluctantly given up the fight for lower costs for investors and are reluctantly pursuing the fee-for-service model. They have seen the writing on the wall, they said. The regulators and popular press want to eliminate low commissions and replace them with higher fees. Our local TD mutual fund rep has indicated that slightly more than 50% of the advisers he services in the Kitchener-Waterloo area have already gone over to the fee-for-service model. Given the intense pressures, I really can’t blame them but I will resist charging the higher fees as long as I am able.
[Editor's note: As a recap, the regulators are suggesting that commissions might be eliminated and replaced presumably, with fees. As an example of how this could be done, a bond fund paying a fixed 0.5% commission could instead, be replaced with a 1% fee. Evidently, by doubling the costs to the investor, the advice would, of course, be more pure and be in the best interest of the investor. Re-read quote as stated above.]
Related articles:
http://wealthadviser.ca/newsletters-8/218-a-short-history-of-mutual-fund-fees-and-commissions.html
http://wealthadviser.ca/newsletters-8/214-a-fee-is-a-fee.html
http://wealthadviser.ca/newsletters-8/209-more-discussion-about-fees-and-commissions.html
http://wealthadviser.ca/newsletters-8/203-adviser-fees-the-pain-of-paying.html
http://wealthadviser.ca/newsletters-8/206-cognitive-dissonance.html
---
Series D Funds and lower MERs
In a conciliatory gesture, a few Canadian mutual fund companies have thrown the regulators a bone. They have introduced a new series of low cost funds (Series D) specifically to the no-help, no-advice discount brokerage channel. I vaguely recall a MoneySense article thanking the discount firm for lowering costs but there was no thank you to the fund company who offered the product to the discount firm.
As explained to me, the fund company wanted to offer the regulator a concession now in hopes of getting a possible concession from the regulator later.
Hmm... this sort of sounds like hand feeding a shark in the hopes of not getting eaten next time you jump off the dock for a swim.
The first two fund reps in my office after the Christmas break both announced (without much fanfare) lower MERs across the board and lower costs for accounts with +$100,000. No surprise as this continues the long term trend of lower costs in the mutual fund industry.
---
How do you advertise a mutual fund company?
In the past, you could take out a full page in the newspaper showing some sort of competitive sport team with a catchy byline about teamwork. Expensive ad, nicely done - but entirely forgettable.
If you watch 60 Minutes, you may have seen Invesco's ( U.S.) clever but hilarious TV spots. The commercial says what no adviser would ever dare to say to a client. What a hoot!
http://www.youtube.com/watch?v=xITYuqwyfmc&feature=c4-overview-vl&list=PL4029EFB973E9828C
---
Canadian economy lagging?
December's (2013) abysmal economic and employment report was an unpleasant surprise. Canada's neighbour, the U.S., has finally sparked back to life and their economy is gaining momentum.
However, in Canada, we are doing the opposite - we seem to be slowing down. Is this just a onetime anomaly or a sign that our economy is stalling due to spent-out, indebted Canadian consumers?
A year ago, our dollar was at par. Today we are barely at $0.90 U.S. Certainly, cross border shopping trips will thin out somewhat and everything from iPads to winter vacations will cost 10% or more based on currency fluctuations alone. There is hope that a recovering U.S. and world economy will pull Canada up by the bootstraps and the current dip is merely a "soft landing".
---
Real estate
The Canadian residential real estate market is blithely ignoring the not-so-great economic numbers with remarkable gains approaching 10% year-over-year in some markets with little sign of any imminent crash.[5].
Despite falling sales volumes, prices seem unaffected by the laws of gravity, economics or anything else for that matter.
---
