Smart ways to invest .
It is definitely a good idea to have bonds in your RRSP to provide regular income or to balance out the risks of holding equities. But many Canadians make costly mistakes in how they invest in bonds.
The "hand-in-your-pocket" TV ads definitely apply to the advice on bond investing that most banks and investment advisors provide.
Investors are usually encouraged to own bond or balanced mutual funds. The problem is that the annual mutual-fund management fees, which benefit the advice-givers, draw away a substantial amount of the annual return to investors.
Take, for example, the Talvest Bond Fund, which Globefund.com says returned 5.32 per cent annually in the past 10 years. The fund has an annual management expense ratio (MER) of 2.12 per cent, which is approximately the amount by which it lagged the Scotia Capital Universe Bond Total Return Index, which had an annual return of 7.49 per cent over the decade.
In the case of balanced funds, bonds are mixed in with equities. Yes, it is a convenient, one-fund solution to having a balanced portfolio, but the high MER is applied to the bond component as well as the equity component.
A good example is the Fidelity Canadian Balanced-A Fund, with its 2.36-per-cent MER applying to its 45-per-cent holding in bonds. With Canadian yields for high-quality bonds in the 4-to-5 per-cent range, almost half of the expected yield-to-maturity on the bonds is being drained away by fees.
Unfortunately, Canadians choosing bond or balanced funds may be attracted by the decent long-term returns. However, historical bond returns were boosted by capital gains on bonds as interest rates fell gradually over the years. With interest rates expected to be stable or to rise slightly in the future, investors should expect only the coupon return on bonds and that makes it all the more important that fees be minimized.
The smart approach, therefore, is to invest directly in high-quality bonds (or GICs). This is fairly easy to do. One can replicate the work of a fund manager simply by buying a package of bonds known as a bond ladder (one bond maturing in each year for the next 10 to 15 years).
The only time it makes sense to use a bond fund is when you want to invest in high-yield, risky corporate bonds. Studies show you need to diversify into 20 such bonds in your portfolio to effectively insulate against a bankruptcy or two, and unless you have a very large portfolio, this can only be achieved through a fund.
One can also easily own real return bonds directly. These inflation-protectors are ideal for an RRSP since they provide a real return, currently about 1.5 per cent, plus the rise in the CPI.
For anyone preferring instead the simplicity of a fund for their core bond holding, the best choice would be one of the iUnit exchange-traded funds (ETFs) offered by Barclays Global, given their low MERs of 0.35 per cent a year or less.
Barclays offers the iUnits Short Bond Index Fund (symbol XSB on the TSX), which mimics the Scotia Capital Short Bond Index, the iUnits Canadian Bond Broad Market Index Fund (XBB), which replicates the Scotia Capital Universe Bond Index, and the iUnits Real Return Bond Index Fund (XRB), which approximates the return of the Scotia Capital Real Return Bond Index.
Even these low-fee funds, however, can't provide the benefits of owning strip bonds in your RRSP. Strips, also known as zero-coupon bonds, are bond principal and coupons sold separately and the advantage is not only convenience, since you don't need to reinvest coupon interest each year, but also the insurance factor.
If stock markets fall apart, bond yields would likely eventually decline and the resulting capital gains in bonds would offset losses on equities. In the case of strips, a decline in yield produces a bigger capital gain.
For example, if a regular 10-year bond (with a 4-per-cent coupon) drops in yield from 4 to 3 per cent, the capital gain would be 8.8 per cent. The same yield decline for a 10-year strip would produce a 10.5 per cent capital gain. For a 30-year term, the gain would be 17 per cent for a regular bond versus 34 per cent for a strip.
You can work out any comparative scenario you please using the bond calculator at www.smartmoney.com.
Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoffyahoo.ca.
Sunday, February 26, 2006
Friday, February 10, 2006
If you have Money
Starting out in building your Wealth
Vast legions of financial companies will fall at your feet if you’ve got a big amount of money to invest, but what if you or one of your children is just starting out?
Investing newcomers have two ways to go – try to build up an investing fund the safe-but-slow way using a savings account, or find a way to invest in the markets with next to nothing. Let’s say you or one of your kids wants to put some money in a registered retirement savings plan right away, with just a few hundred dollars in hand.
An obvious place to go would be your bank. Almost every bank branch has someone who can sell funds, and it happens that most bank fund families include some pretty good products, notably Canadian equity, Canadian dividend and income funds. At TD Canada Trust branches, you can buy into TD Canadian Equity, a very solid performer, for as little as $100 in a registered retirement savings plan account, or $1,000 in a cash account. You can buy BMO Dividend and Scotia Canadian Dividend for as little as $500 upfront in either an RRSP or cash account, while RBC Dividend requires $500 for an RRSP and $1,000 for a cash account.
A pair of insurance companies, Great-West Life and London Life, have a $300 minimum for their funds. The mainstream fund company with the lowest upfront minimum is AIC Funds, at $250. Companies such as AIM-Trimark, CI Funds, Dynamic, Fidelity and Mackenzie Financial have $500 minimums.
The challenge isn’t just finding a fund company with a low minimum. If you’re dealing with a fund company that doesn’t sell directly to the public like the banks do, then you also have to find an investment adviser willing to accept a tiny start-up account. For young people or those just starting out in the workforce, the best approach is to hook up with the adviser their parents use. Alternatively, new investors may find they can only interest an adviser in their account if they commit to making sizeable and regular contributions. Small independent advisers may be most open to this sort of account, whereas advisers at big firms would likely be much less interested.
Another option is to buy funds through an on-line broker, where you have access to hundreds of funds and the commissions are minimal or non-existent. Be sure to check to see if there are any minimum account sizes – some firms have them, others don’t.
If you decide to save up before getting into the markets, use the sort of no-fee, high-interest savings account offered by ING Direct, Altamira Investment Services, President’s Choice Financial, Citizens Bank of Canada and many others. The returns aren’t great at 2.5 to 3.25 per cent, but at least you’re doing better than a regular bank savings account.
Vast legions of financial companies will fall at your feet if you’ve got a big amount of money to invest, but what if you or one of your children is just starting out?
Investing newcomers have two ways to go – try to build up an investing fund the safe-but-slow way using a savings account, or find a way to invest in the markets with next to nothing. Let’s say you or one of your kids wants to put some money in a registered retirement savings plan right away, with just a few hundred dollars in hand.
An obvious place to go would be your bank. Almost every bank branch has someone who can sell funds, and it happens that most bank fund families include some pretty good products, notably Canadian equity, Canadian dividend and income funds. At TD Canada Trust branches, you can buy into TD Canadian Equity, a very solid performer, for as little as $100 in a registered retirement savings plan account, or $1,000 in a cash account. You can buy BMO Dividend and Scotia Canadian Dividend for as little as $500 upfront in either an RRSP or cash account, while RBC Dividend requires $500 for an RRSP and $1,000 for a cash account.
A pair of insurance companies, Great-West Life and London Life, have a $300 minimum for their funds. The mainstream fund company with the lowest upfront minimum is AIC Funds, at $250. Companies such as AIM-Trimark, CI Funds, Dynamic, Fidelity and Mackenzie Financial have $500 minimums.
The challenge isn’t just finding a fund company with a low minimum. If you’re dealing with a fund company that doesn’t sell directly to the public like the banks do, then you also have to find an investment adviser willing to accept a tiny start-up account. For young people or those just starting out in the workforce, the best approach is to hook up with the adviser their parents use. Alternatively, new investors may find they can only interest an adviser in their account if they commit to making sizeable and regular contributions. Small independent advisers may be most open to this sort of account, whereas advisers at big firms would likely be much less interested.
Another option is to buy funds through an on-line broker, where you have access to hundreds of funds and the commissions are minimal or non-existent. Be sure to check to see if there are any minimum account sizes – some firms have them, others don’t.
If you decide to save up before getting into the markets, use the sort of no-fee, high-interest savings account offered by ING Direct, Altamira Investment Services, President’s Choice Financial, Citizens Bank of Canada and many others. The returns aren’t great at 2.5 to 3.25 per cent, but at least you’re doing better than a regular bank savings account.
Sunday, February 05, 2006
Global Funds
Three Global Funds for 2006
Article By: Gordon Pape
International funds invest most of their money outside of North America but global equity funds can invest around the world. That gives the managers a huge amount of freedom in making their choices.
You'd think that would translate into good returns. Unfortunately, it hasn't. Over the past five years, the average Global Equity fund has lost 1.62 per cent annually, according to Globefund. That's a sorry record.
Part of the problem has been the rise of the Canadian dollar. Many global funds invest heavily in U.S. stocks, which have been hardest-hit in currency exchange terms by the soaring loonie.
Of course, the degree of currency exposure in global equity funds will depend on how heavily weighted they are to the U.S.
The Canadian dollar has not appreciated as dramatically against other major currencies like the euro or the pound and I don't see that changing in the coming year. If currency risk is a concern for you, check the asset weightings for the global funds in which you are interested before buying.
From an economic perspective, I anticipate some slowing in world growth in 2006 due to high oil prices and rising interest rates. Therefore, I am placing my emphasis on funds that have a proven ability to maintain value in such markets, although there are a few growth-oriented entries on our list for more aggressive investors.
With that, here are three global funds that I feel are worth considering for your portfolio in 2006. All performance numbers are to Nov. 30.
Fidelity NorthStar Fund.
This outstanding new entry from Fidelity just passed its third anniversary and I am giving it my top $$$$ rating. It is unusual for me to put a fund into our highest category so quickly but the numbers leave me no alternative. In its first three years, the fund posted an average annual gain of 12.7 per cent compared to an average of 6.5 per cent for the peer group. Part of this can be attributed to fortunate timing – the fund was launched just as the bear market of 2000-2002 hit bottom, thus enabling the managers to buy stocks cheaply. But they didn't have that advantage over the latest one-year period yet they still outperformed the category by a good margin with a gain of 10.9 per cent. All the while they were keeping their risk level well below that of the Global Equity group. High return and low risk add up to a very strong combination in my book.
Mackenzie Cundill Recovery Fund.
Here's a fund that is perfectly in tune with the Peter Cundill philosophy of looking to buy a dollar for 50 cents. Its mandate is to invest in companies that are underperforming, in turnaround situations, or which have low credit ratings — or any combination thereof. You've heard of junk bond funds? This might be described as a junk stock fund. But if you are comfortable with this contrarian investing concept, Cundill and his team are probably the best in the business at pulling it off. The fund has never lost money in a calendar year since it was created in 1998. It came through the bear market unscathed (the worst year was a 1.7 per cent gain in 2002) and managed to turn in great profits even when the loonie was surging against the U.S. dollar. The performance numbers are astounding. Over most recent five years this fund gained an average of 17.1 per cent annually while the category as a whole was showing an average annual loss of 1.6 per cent. The latest one-year number is a gain of 19.6 per cent, more than double the category average. How can you argue with that?
Saxon World Growth Fund.
Manager Robert Tattersall brings a value-oriented stock selection criteria to this multi-country entry. The mandate directs the manager to look for small-to-mid-cap companies trading outside of Canada however some of the companies in the mix are anything but small, such as Pfizer, the pharmaceutical giant. Geographic and sector allocation is secondary to the main focus of identifying value stocks. The fund gained 8.2 per cent in the latest year, slightly below average for the peer group, but shows stellar longer-term performance figures. The three, five, ten, and fifteen-year numbers are well above average. The fund held up very well during the bear market, so risk is low. You'll need $5,000 to take a position. It's a no-load fund.
Talk to a financial advisor before purchasing any of these funds.
Article By: Gordon Pape
International funds invest most of their money outside of North America but global equity funds can invest around the world. That gives the managers a huge amount of freedom in making their choices.
You'd think that would translate into good returns. Unfortunately, it hasn't. Over the past five years, the average Global Equity fund has lost 1.62 per cent annually, according to Globefund. That's a sorry record.
Part of the problem has been the rise of the Canadian dollar. Many global funds invest heavily in U.S. stocks, which have been hardest-hit in currency exchange terms by the soaring loonie.
Of course, the degree of currency exposure in global equity funds will depend on how heavily weighted they are to the U.S.
The Canadian dollar has not appreciated as dramatically against other major currencies like the euro or the pound and I don't see that changing in the coming year. If currency risk is a concern for you, check the asset weightings for the global funds in which you are interested before buying.
From an economic perspective, I anticipate some slowing in world growth in 2006 due to high oil prices and rising interest rates. Therefore, I am placing my emphasis on funds that have a proven ability to maintain value in such markets, although there are a few growth-oriented entries on our list for more aggressive investors.
With that, here are three global funds that I feel are worth considering for your portfolio in 2006. All performance numbers are to Nov. 30.
Fidelity NorthStar Fund.
This outstanding new entry from Fidelity just passed its third anniversary and I am giving it my top $$$$ rating. It is unusual for me to put a fund into our highest category so quickly but the numbers leave me no alternative. In its first three years, the fund posted an average annual gain of 12.7 per cent compared to an average of 6.5 per cent for the peer group. Part of this can be attributed to fortunate timing – the fund was launched just as the bear market of 2000-2002 hit bottom, thus enabling the managers to buy stocks cheaply. But they didn't have that advantage over the latest one-year period yet they still outperformed the category by a good margin with a gain of 10.9 per cent. All the while they were keeping their risk level well below that of the Global Equity group. High return and low risk add up to a very strong combination in my book.
Mackenzie Cundill Recovery Fund.
Here's a fund that is perfectly in tune with the Peter Cundill philosophy of looking to buy a dollar for 50 cents. Its mandate is to invest in companies that are underperforming, in turnaround situations, or which have low credit ratings — or any combination thereof. You've heard of junk bond funds? This might be described as a junk stock fund. But if you are comfortable with this contrarian investing concept, Cundill and his team are probably the best in the business at pulling it off. The fund has never lost money in a calendar year since it was created in 1998. It came through the bear market unscathed (the worst year was a 1.7 per cent gain in 2002) and managed to turn in great profits even when the loonie was surging against the U.S. dollar. The performance numbers are astounding. Over most recent five years this fund gained an average of 17.1 per cent annually while the category as a whole was showing an average annual loss of 1.6 per cent. The latest one-year number is a gain of 19.6 per cent, more than double the category average. How can you argue with that?
Saxon World Growth Fund.
Manager Robert Tattersall brings a value-oriented stock selection criteria to this multi-country entry. The mandate directs the manager to look for small-to-mid-cap companies trading outside of Canada however some of the companies in the mix are anything but small, such as Pfizer, the pharmaceutical giant. Geographic and sector allocation is secondary to the main focus of identifying value stocks. The fund gained 8.2 per cent in the latest year, slightly below average for the peer group, but shows stellar longer-term performance figures. The three, five, ten, and fifteen-year numbers are well above average. The fund held up very well during the bear market, so risk is low. You'll need $5,000 to take a position. It's a no-load fund.
Talk to a financial advisor before purchasing any of these funds.
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