Month: September 2016

Yes, You Are Paying Fees on Your Investments with Chris Ambridge

This episode is all about fees, because even though it paying fees on investments may seem like a little thing…it’s not. Like my guest Chris Ambridge, president of Transcend Private Client, mentions in the episode, surprisingly 2/3 Canadians don’t know their paying fees. Reality-check people, you are paying fees! Everyone pays fees on investments. How else do you think banks and wealth management firms make money?

But even though we are paying fees, and there really isn’t any way around that, it’s important to know how much you’re paying. That’s why we also discussed CRM2 and how this will will help clients like us know exactly how much, in dollars, we are paying. It’s great to see a percentage, but I think seeing the dollar amount will really help us all know whether we’re paying too much for what we’re getting.

Hey, I’m fine with paying high fees, if I’m getting a high return. But that’s usually not the case. That’s why it’s important to look over your investments every once in a while to check if you’re really get any bang for your buck. If you’re paying 2.5% on a mutual fund and only seeing a 4% return, it might be time to look into something else (perhaps Index Funds and/or ETFs?).

More Helpful Info About CRM2
We talked quite a bit about Client Relationship Model – Phase 2 (CRM2), but I wanted to make sure you really understood what all this is all about. CRM2 came into effect July 15, 2013 and has been phased in these past 3 years. Essentially, what these amendments mean is that beginning July 15, 2016, registered financial firms will need to:

Provide an annual report on charges and other compensation that shows, in dollars, what the dealer or adviser was paid for the products and services it provided – Ontario Securities Commission

Basically, these amendments are a way to evoke more clarity when it comes to fees, instead of making it hard for clients to truly understand how much they’re paying for their investments.

Link: http://jessicamoorhouse.com/yes-you-are-paying-fees-investments-chris-ambridge/

Pushing on a String

For some, desperate times will lead to desperate and somewhat speculative measures. After years of low interest rates have led to limited success in achieving meaningful economic growth, more central banks have recognized that this mechanism is not working. So whether it is insanity, impotence or desperation, a growing number of countries have slashed interest rates to below zero.

Interest rate policy is effective in cooling down an economy, but much less potent when the economy is weak and rates are already low. An economy can be pulled back from a high growth trajectory as if it is tied to a string; but you cannot push it forward significantly once the weapon of choice has been exhausted. Interest rate cuts do not necessarily induce banks to lend or to pass on lower rates to customers.

Historically, low interest rates would be highly inflationary; however with oil prices falling and global economic growth slowing, inflation is not a concern…yet. Interest rates are very important to savers and pensioners and they are being penalized. There are numerous long term consequences of zero interest rate policies: investors come under pressure to take on excessive risk which leads to investment errors; investors may take on more debt since it is cheap to do so; people may spend more and save less as fiscal discipline declines which will make the creation of wealth more difficult; and finally it can have a profoundly negative impact on currencies.

Whether the European Central Bank cuts rates below zero to reinvigorate the economy, Switzerland slashes rates below zero to slow the climb of its currency, or the unprecedented move by the Danish, Germans and Japanese to charge clients to park their money in commercial banks succeed is open to question. After all, people can bring their money home and stash it under the mattress. Then what will happen to all those banks’ glorious profits?

As the chart to the right and the data to the left show, low interest rates and zero interest rates in particular are growing trends. At the beginning of 2014, 40% of all government bonds offered less than 1% interest. Since then it has grown to 70% of all government bonds in circulation. Beginning midway through 2014, yields on government bonds started drifting into negative territory and today, 38% of government bonds have negative yields. Negative interest rates are now widespread and extend well beyond short-term bonds in many countries. As the table illustrates, even traditionally weaker nations such as Italy and Spain are getting into the game, but certain other countries are noticeable in their absence as the table to the left illustrates…for now.

The one good thing about zero rates is they reduce debtor’s interest expenses because borrowing costs are so low and the interest payment burden becomes essentially zero. But all in all, negative interest rates are not spurring economic growth. Unfortunately history shows how ineffective rate cuts are when widespread deleveraging occurs.

Zero interest rates are bad news since they are incompatible with a vibrant, growing economy. The only reason that central banks have been able to push rates so low is because growth and inflation are low. For an increasing number of investors who need a steady cash flow, the temptation is to start looking in dangerous places for that income. That will be the really bad news.

 

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This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.

While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.

 

Robo-advisers face new rival as the cheapest place to get investing advice

Robo-advisers have barely been around two years in Canada, but their run as the cheapest place to get investing advice is already being challenged.

A new investment firm called Transcend is offering light financial planning and portfolios built using equity funds that have a very low fee of 0.25 per cent. On top of that, the firm charges a quarterly performance fee that works out to 20 per cent of gains beyond the returns of benchmark stock indexes for its funds.
If the S&P/TSX composite index made 5 per cent over a quarter and the firm’s Canadian equity fund makes 7 per cent, 20 per cent of the two percentage points of outperformance go to Transcend.

“When we outperform the benchmark, then we earn our money,” said Chris Ambridge, who is president and chief investment officer at Provisus Wealth Management, which created Transcend as a subsidiary to broaden its customer base.

Investors, we are in a golden period of fee competition. Low-cost exchange-traded funds, online brokers and robo-advisers – they manage online for a modest fee – are a big part of the story. But the recent introduction of Transcend shows the innovation doesn’t stop there in trying to deliver investment advice and financial planning to clients at lower costs than the traditional financial industry.

None of these low-cost solutions is the killer app, mind you. Transcend’s reliance on active management for the most part, rather than low-cost ETFs, will be a turn-off to some, and its bond portfolio is no bargain. Still, there’s a theme here. Canada’s financial-industrial complex is under attack from new, low-fee competitors. This is going to be fun to watch in the years ahead.

Mr. Ambridge said Transcend reduces base investing fees on equity funds below what you’d pay as a do-it-yourselfer using ETFs or someone getting portfolio management from a robo-adviser. He pegs the average ETF management expense ratio at about 0.31 per cent, while robo-advisers’ fees typically start around 0.5 per cent, plus the cost of the ETFs used to build portfolios.

Your Transcend portfolio needs to be big enough to allocate at least $50,000 to the firm’s equity funds, but you can combine your account and your spouse’s to reach that level. The firm covers off bonds in client portfolios using a pooled fund of bond ETFs with an administration fee of 0.6 per cent (add 0.2 to 0.25 of a percentage point for the bond ETF fees). There is no performance fee for beating the benchmark on this fund.

The 0.25-per-cent fee for equity funds covers all costs for investing in the six in-house options the firm offers. Transcend will not make any money with a fee of 0.25 per cent, which explains the performance fee.

Linking fees to returns is commonly done in hedge funds, but rare elsewhere. Two examples of outfits that have this kind of fee arrangement are Avenue Investment Management, which cuts fees in half in the year after a client holding the firm’s equity portfolio loses money, and the ROMC Fund, a global-equity fund for high-net-worth investors with a version where clients pay a tiny administration fee and then a performance fee on returns above 6 per cent.

Transcend’s take on performance-related fees highlights the need for investors to consider the tradeoffs they’re making in exchange for low costs. With ETFs, for example, the low fees only apply if you run your own portfolio and don’t incur the extra cost of having an adviser. Robo-advisers run a portfolio for you, but for the most part they do minimal financial planning.

Transcend’s “direct” service provides a basic level of financial planning (more comprehensive planning is available). Clients complete a comprehensive questionnaire with one of the firm’s people over the phone, and then receive an investment policy statement laying out their objectives and a plan for managing their money on a tax-efficient basis. The firm also shows clients how well their portfolio is on track to meet their investing goals.

The tradeoff for clients of Transcend is that their returns are tied to the ability of the people managing the firm’s equity funds to match, never mind beat, benchmark indexes. That low 0.25-per-cent fee won’t do you much good if your results are well below indexes you can easily buy through cheap ETFs, such as the S&P/TSX composite, S&P 500 and MSCI Europe Australasia Far East (EAFE) indexes.

The firm itself has a lot riding on its ability to beat the benchmarks. Unless it manages this feat on a consistent basis, it won’t make any money from clients holding equity funds.

Five-year data to June 30 are published for the six funds and each has outperformed its benchmark over that period, with some misses in the shorter term. The Canadian equity fund lost an annualized 1.3 per cent before fees for the two years to that date, while the S&P/TSX total return index lost 0.7 per cent. For the five years to June 30, the fund made an annualized 7.6 per cent and the index made 4.2 per cent.

Mr. Ambridge said the firm tries to match the risk levels of the index using a select group of stocks chosen through proprietary analysis. “Rather than going for home runs, we’re going for bunt singles to add a little incremental return over time,” he said. “We don’t outperform every quarter on every fund, but we do on a year-in, year-out basis.”

In tying fees to performance, Transcend has adopted an idea that has never caught on in the world of retail investing aside from a few random cases. Most firms don’t like it because variable revenues aren’t a good match for an industry where the cost of doing business is steady. Investors may complain about having to pay fees when their funds lose money or underperform, but they don’t seem to be demanding performance-related fees, either.

Transcend’s novel spin on performance fees is to use them as way to present an attractively low base fee of 0.25 per cent on equity funds to investors seeking a modest level of advice. We don’t yet know if there’s a market for this, but the innovation it represents is significant because it shows that fee competition in the financial industry is gaining momentum. This is a very good time to be a fee-conscious investor.

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Source: Provisus Wealth Management, Transcend, company websites

 

 

Link: http://www.theglobeandmail.com/globe-investor/investment-ideas/robo-advisers-already-being-challenged-as-the-cheapest-place-to-get-investing-advice/article31935358/

Are Investment Fees for Suckers?

 

No! Not if (and this is a big if) clients receive value for their money. Value in this instance is defined as “the cost of something” and the key word is “cost” because the fee paid to own investments is not the end of the story. It is actually the starting point. t is actually the starting point. It is interesting to see the history of investment costs in Canada and how they may evolve.

For centuries, if an ordinary person had any liquid wealth the best they could hope for was some meager interest on their cash. Then, as the concept of companies came into being, the notion of profiting from equity investment emerged and stock exchanges were established in seventeenth century Europe to trade equities. Canada eventually got into the act with the incorporation of the Toronto Stock Exchange in 1861.

 

Commission Based

Once upon a time, being a stockbroker was a comfortable, genteel and very lucrative profession. By providing investors with access to markets, brokers earned commissions and also received trading fee rebates from exchanges. Brokerage commissions were fixed and it often cost 2% or more per trade. This lasted until May 1975 when negotiated commission was introduced. The development of investment funds increased competition and led to a decrease in direct share ownership. Currently only 17% of the Canadian financial wallet is invested directly in stocks, down from 30% in 1990 when it was second in importance only to short term deposits. As is often the case, nothing lasts forever. There were two significant changes to the commissions landscape that put downward pressure on trading costs. First, increased competition drove down then then standard commissions per share from the 14-16 cents per share in the late 1970s to just under 2 cents per share for institutions today. The second impact was the creation of discount brokers who gave regular investors access to very reasonable commission schedules.

 

Fee Based

Traditional asset managers charged investors significant fees, ranging from 1.0% to 1.5% of assets under management for high net worth clients, a practice that is still common today. For less well-heeled investors, the first modern mutual fund was created in Canada in 1932. They were slow to catch on and grew very little between 1930 and 1970. However this was reversed in the 1970s following the oil crisis. Equity and bond fund ownership continued to expand in the early 1980s but growth did not explode until the early 1990s, with average annual growth of 20-30%. Today, these investment funds now represent more than 30% of all Canadian investable assets, up from 6% in 1990.

The cost of owning mutual funds is made up of three parts: acquisition costs such as front-
end load commissions; ongoing costs both embedded and negotiated; and disposition costs such as redemption fees. The cost of ownership, rather than the Management Expense Ratio (or MER, which often contains trailer fees representing the commission paid to brokers and mutual fund dealers for advising clients to purchase the funds) is the most effective way to measure total investment expenses. The typical maximum front end load for a Canadian open end fund is 5%, although by 2011 98% of mutual funds did not have upfront charges or disposition costs. The typical investor in a Canadian fixed income fund pays an MER of 1.25% to 1.5% and for Canadian equity funds they pay MERs of 2.0% to 2.5%. MERs generally decline as the amount of fund assets increase. Specialty funds have higher expense ratios than equity funds, which, in turn, have higher expense ratios than bond funds. International funds have higher expense ratios than comparable domestic funds.

Recent developments have provided retail investors with the opportunity to lower investment costs due to the proliferation of no load funds, online/discount brokerage firms, fee based accounts and Exchange Traded Funds (ETFs) which have dramatically altered the investment landscape.

 

Success Based

Now a new fee concept is coming to the market and it is one that is long overdue. It shifts power to investors by aligning fees to investment results relative to benchmarks. Clients pay a low 0.25% fee for the Provisus Corporate “O” Class Equity Funds which covers basic costs. Investors do not pay any more unless the performance of the Provisus funds exceeds specific benchmarks, in which case they pay 20% of the outperformance relative to the benchmark. The investment manager earns income only after they deliver superior returns. This is how Provisus’ Pay-forPerformance™ works and it is revolutionizing the investment landscape.

There is more scrutiny on fees than ever before. Studies have shown many investors either believe they do not pay anything or have no idea what they do pay (Hearts & Wallets: Wants & Pricing — What Investors Buy & Competitive Ratings — 2016). But everyone understands nothing in life is free. Clients should know what they pay and their three most important objectives should be: fees that are clear and understandable; fees that are unbiased and put the client’s interests first; and fees that are reasonable for the service provided.

Most people are not experts in matters related to investing. They need professional advice and luckily there are many options available. One of these options is to use a robo advisors also known as a digital advice solution, and they are proving to be increasingly popular and disruptive to traditional wealth advisors. Robo advisors are automated investment services that offer low cost solutions through web based and mobile applications. They are designed on the concept of providing the lowest cost approach by relying on cheap passive allocations. Normally there is nothing wrong with making purchases as affordable as possible and we are conditioned to search for the best deal. For things like gas, groceries or low cost passive funds, cheaper is better. But active investing is not about being low cost; it‘s about getting the best value.

What is considered good value is subjective and depends upon each individual’s needs. What may be a good deal for one person might not have the same value for another. Robo advisors might be appropriate for someone who has simplistic investing needs or is new to investing but for most investors it is important to understand what you’re getting.

 

The service isn’t personal

Robo advice is not tailored to you as an individual. They are low cost because they use a one-size-fits-all approach and there is very little personalized service provided. This is a problem because what computers cannot account for is human intuition. Robo technology uses computer algorithms and software to automatically allocate your wealth across different asset classes. They are cookie cutter solutions based on simple questions to get a basic understanding of your financial situation. With a person as your advisor you have more opportunities to share your concerns, goals and plans. People are not identical so it doesn’t make sense to provide wealth advice based on automated solutions. For example, as a family grows financial complexities usually follow suit. Some clients need to determine whether children from previous marriages should be treated the same as children from the current marriage, and whether arrangements should be made to provide financial gifts to grandchildren. A real relationship with open conversation is vital for developing a tailored portfolio.

The options are limited Unlike a human, robos lacks the ability to consider how all of a person’s assets, tax liabilities and other factors correlate with each other. Estate, retirement and tax planning are just some topics for which people need expert guidance yet robo advisors are not designed to provide advice on these important issues.

 

Investors need coaching

Many people are not honest with themselves when it comes to self appraisal. When answering an investor profile questionnaire, many will say they can handle risk if it gives them more potential for higher returns. Yet in reality some investors get preoccupied and can’t sleep when their $500,000 account drops $100 in a day. Many need guidance and reassurance in order to have peace of mind. Financial advisors need to set expectations and help their clients plan ahead, but they also need to be able to help them adjust to unforeseen life events. Job changes, marriage, children, divorce, moving, family members with special needs, illnesses, accidents and the need for long-term care are some life circumstances that can cause dramatic changes in a person’s financial needs; not to mention their psyche. Professional advice is about more than investments. Humans can also have deep conversations with clients about their goals and are able to help with the emotional side of financial planning.

 

Build relationships

A computerized advisor will not ask clients about their kids or treat them to lunch or chat about their favorite hobby. Conversations may not add to performance numbers directly, but they build relationships and relationships build trust. Clients who trust their advisors have peace of mind, even when markets are volatile. Investors are not rational as numerous studies show that they get out of the markets when they shouldn’t get out and get into the markets when they shouldn’t get in. An advisor who has built trust can help clients stick to their tailored plan rather than make decisions based on emotion.

It is important to consider these factors when deciding between using a low cost robo advisor and a real financial planner. Robo advisors may be appropriate for those with small accounts who have uncomplicated portfolios and can get by on basic advice, but for many investors a cookie cutter approach does not work. A true financial planner is going to get to know you, your family and will focus on your goals and objectives. The right advisor will assist you with, not only your investments, but also with your taxes, retirement, and just about any financial consideration you may have.

When it comes to protecting your future and that of your family, do not base your decision solely on cost. Instead, select what has the best value for your needs. While it is important to consider your costs, it is more important to determine what you are getting for those low fees. What would be the benefit of saving 1% on fees if you are losing 15 to 20% in poor tax planning? We must be careful not to be penny wise and pound foolish.

The imposition of a fiduciary standard on financial advisors in Canada is looking more likely. Higher standards are already in effect in the U.K., where all registrants must act honestly, fairly and professionally in accordance with the best interest of their clients, and in Australia, which has a qualified statutory best interest standard.

More recently, a financial media firestorm erupted in the U.S. as their Department of Labor (DOL) released the final version of its Fiduciary Rule that will impose a best interest standard on those providing advice with respect to many retirement plans. Some have wondered why the Securities and Exchange Commission has been missing on this file. The reason is that the DOL oversees employee savings plans and they have been proactive in managing apparent conflicts of interest among brokers who were advising on the rollover of employer managed plans to broker-managed accounts. The equivalent in Canada would be an advisor advising on a Locked-InRetirement-Account (LIRA) which had previously been managed by a portfolio manager. If and when the fiduciary rule survives several legal challenges, the small and midsize 401 (k) plan market stands to be revolutionized in the U.S.

The new regulations will likely accelerate a number of challenging trends that advisors are facing, not just in the U.S. but in Canada as well. Morningstar, a Chicago-based rating agency, has thoroughly studied the effect of these new DOL rules and concluded that they will drive three primary trends. Firstly, it will shift customers away from commission based arrangements to fee based ones; Secondly, robo-advisers will likely pick up a large percentage of the $600 billion in low-net-worth IRA balances in the U.S. that are now being managed by full service wealth managers; Lastly it could lead to a significant increase in the use of passive investment products.

In October of 2012, the Canadian Securities Administrators (CSA) published a number of reports beginning with a Consultation Paper, The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients. The CSA has taken the view that the current Canadian registrant regulatory framework requires improvement and seeks to introduce a fiduciary standard in order to address issues they have identified in the clientregistrant relationship, “including to better align the interests of registrants with the interests of their clients, to improve outcomes for clients, and to clarify the nature of the clientregistrant relationship for clients.”

According to the financial press there is some apprehension among nonfiduciary advisors that their reputation may be tarnished if they are perceived as acting in their own interest. The requirements may cause an unintended focus on fees, particularly as the media has demonized the practice of charging commissions and deferred sales charges (DSC). Although it isn’t the intention of the regulations, some advisors may find themselves forced into a fee-based compensation structure and a relatively limited product selection. Advisors are divided on the implications for investment management fee structures, as those who are already feebased see the new rules as formalizing an inevitable market shift and some commission-based advisors are concerned that commoditizing their services puts them at risk of being undercut by cheaper automated advice services. The impact of technology, irrespective of what happens on the regulatory front, will continue to make it cheaper and easier for investors to get investment advice that’s not conflicted. That is a trend that will have a big impact on the investment industry over time.

The reforms under consideration also include amending rules to require firms and advisers to respond to identified material conflicts of interest in a manner that prioritizes the client’s interest, increases the requirement for an adviser to understand a client’s financial circumstances and risk profiles which may be extended to better quantify loss aversion, and limiting titles that can be used by advisers. Advisors are also concerned about the burden of internal scrutiny and compliance due to the increasing volume and scope of regulations which is leading to a feeling of being monitored rather than supported by their firms. At the end of the day, the burden of having to document all aspects of the advisory consultations could add an unintended toll on an advisors’ ability to work effectively on behalf of their clients. Both the proposed targeted reforms and proposed regulatory best interest standard, if introduced, would apply to all advisers, dealers and representatives, including those who are members of IIROC and the MFDA.

With so much at stake the CSA has sought further comments on the proposed regulatory action. They have confirmed that no final decision on the implementation of a best interest standard will be made without a thorough review of the comments received following their recent public consultation and discussion. The most recent comment period closed on August 26. Even within the CSA there have been concerns about the proposed legislation as the BCSC noted, “given the current regulatory and business environment, imposing an overarching best interest standard may not be workable and may exacerbate one of the investor protection issues identified, that being misplaced trust and overreliance by clients on registrants. Further, the introduction of a regulatory best interest standard over and above the proposed targeted reforms is vague and unclear and will create uncertainty for registrants.” This leaves open the possibility that some provinces, most notably Ontario and New Brunswick, may proceed with best interest standard legislation on their own.

 

 

 

Top 5 things you need to know about investment fees

In today’s cost-conscious world we’re inundated with messages about the lowest costs, the easiest options for convenience and the best value. Unless you have a background in finance, the investment industry can seem like a cloudy maze difficult to navigate. We’ve kept our eye on the markets, the news, and most importantly, investments. Here are the top 5 things you should know about investment fees:

Fees have long-term costs that impact investments

A few percentage points in fees on your portfolio don’t sound like a lot. Time, however, is key to investments bringing in returns and making money. That same factor, time, is also what compounds those few percentage points and turns fees into major obstacles to long-term investment success.

Take for example a $100,000 investment over 20 years with a 4% annual return. A 1% annual fee, after 20 years can reduce your portfolio value by $30,000. Even a 0.5% fee will reduce your portfolio’s value by $10,000. Be sure you understand and compare the fees charged. They can save, or take, a lot of money in the long run.

Investment fees will impact financial goals

Don’t get influenced by constant ETF messages that claim they are the cheapest and best investment option. Just because the ETF fees (Equity ETFs on average charge 0.32%) are on the lower end, does not mean they’re the best option for your goals.

For example, the construction of ETF portfolios are designed to simply mirror and not to beat the benchmark meaning the odds for gaining above average returns are slim. Save your money, shop around, and consider investment options with similarly low fees that are designed to outperform the benchmark and make you money.

As an example, we have changed the fee structure of our Provisus Pooled Funds to be, what we consider, the most client-friendly fee structure in Canada.  We charge some of the lowest base fees in the country (0.25% with a performance fee) and our portfolio management is designed to actively try to beat the benchmark for potentially  higher returns on your money.

Low fee investments aren’t always the best option

Don’t be fooled. Lately, there is a discourse pushing the belief that anything getting in the way of the lowest possible fees is not worthwhile. This type of thinking aligns with the emergence of robo-advisors and ETF popularity, which have done successful marketing in positioning themselves as the cheapest, best option for investments.

However, digging deeper to look at the stats and yearly performance can result in a different perspective. When you want to make money in the long- term, this is not the best option (not even close). Firstly, robo-advisors on average charge 0.63% and, because of their programmed algorithm, there is a focus on passive investment options such as ETFs. It may look like this is a great option, right? Low fees, low-risk, easy investments. But there’s a reason this option is so easy. They’re not designed to make high returns.  When you calculate the impact of the fees long-term, along with the opportunity cost of potential returns, your money and time is not well spent.

There are always hidden fees

Just because the listed fee price is what you see, it doesn’t mean that’s always what you get. Most investors have no idea that additional costs are coming out of their pocket. Certain costs are part of the total expense ratio (TER). The TER is a measure of the total costs associated with managing and operating an investment fund, such as a mutual fund. These costs can consist of operational costs like trading fees, legal fees, auditor fees and even marketing fees (to attract other shareholders to the fund).

One of the most detrimental hidden cost is based on lack of performance. For example, investing in an ETF (rather than an actively managed option) will likely not beat any stock market benchmark. The tracking difference is the difference between the results and the returns that could have made investing in a better option. This difference is a loss and one of the most misunderstood hidden cost within investment choices.

Taxes affect investment fees

Investments are no exception to the rule of taxation in Canada. There is a different rate of tax on investments, depending on the province. All investments in non-registered accounts are subject to tax, whereas registered investments are either tax-free (TFSA) or tax-deferred (RRSP), meaning you pay taxes upon withdrawal, giving you more money in your pocket.

As an investor with an open account, you’ll pay taxes on interest-bearing investments, dividend-paying investments, capital gains, and foreign investments. How much tax you pay depends on 4 things: the type of investment you made, the tax laws where you live, if your investments are in a tax-sheltered plan, and your income. Talk to a professional tax advisor to find out how taxation is affecting your investments and how you can manage your choices to pay the least tax possible.

When it comes to fees, shop around. Cheap isn’t always cheap. It’s important to know the affordable options out there, but knowing when to go cheap and when to take on more risk comes with time. Consulting an experienced professional can help to understand exactly what types of fees you are paying and how they will affect future investments. Ask questions and don’t be afraid to compare options.

Pushing on a String

For some, desperate times will lead to desperate and somewhat speculative measures. After years of low interest rates have led to limited success in achieving meaningful economic growth, more central banks have recognized that this mechanism is not working. So whether it is insanity, impotence or desperation, a growing number of countries have slashed interest rates to below zero.

Interest rate policy is effective in cooling down an economy, but much less potent when the economy is weak and rates are already low. An economy can be pulled back from a high growth trajectory as if it is tied to a string; but you cannot push it forward significantly once the weapon of choice has been exhausted. Interest rate cuts do not necessarily induce banks to lend or to pass on lower rates to customers.

Historically, low interest rates would be highly inflationary; however with oil prices falling and global economic growth slowing, inflation is not a concern…yet. Interest rates are very important to savers and pensioners and they are being penalized. There are numerous long term consequences of zero interest rate policies: investors come under pressure to take on excessive risk which leads to investment errors; investors may take on more debt since it is cheap to do so; people may spend more and save less as fiscal discipline declines which will make the creation of wealth more difficult; and finally it can have a profoundly negative impact on currencies.

Whether the European Central Bank cuts rates below zero to reinvigorate the economy, Switzerland slashes rates below zero to slow the climb of its currency, or the unprecedented move by the Danish, Germans and Japanese to charge clients to park their money in commercial banks succeed is open to question. After all, people can bring their money home and stash it under the mattress. Then what will happen to all those banks’ glorious profits?

As the chart to the right and the data to the left show, low interest rates and zero interest rates in particular are growing trends. At the beginning of 2014, 40% of all government bonds offered less than 1% interest. Since then it has grown to 70% of all government bonds in circulation. Beginning midway through 2014, yields on government bonds started drifting into negative territory and today, 38% of government bonds have negative yields. Negative interest rates are now widespread and extend well beyond short-term bonds in many countries. As the table illustrates, even traditionally weaker nations such as Italy and Spain are getting into the game, but certain other countries are noticeable in their absence as the table to the left illustrates…for now.

The one good thing about zero rates is they reduce debtor’s interest expenses because borrowing costs are so low and the interest payment burden becomes essentially zero. But all in all, negative interest rates are not spurring economic growth. Unfortunately history shows how ineffective rate cuts are when widespread deleveraging occurs.

Zero interest rates are bad news since they are incompatible with a vibrant, growing economy. The only reason that central banks have been able to push rates so low is because growth and inflation are low. For an increasing number of investors who need a steady cash flow, the temptation is to start looking in dangerous places for that income. That will be the really bad news.

MARKET DATA

 

 

 

This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.
While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.

Bargain Hunting

The financial markets are producing very few bargains these days for investors. Everybody likes a bargain but with current valuations across the financial markets ranging from fair to very expensive, the keys to success are in choosing the right entry point and the best securities.

Investors are forever searching for cheap securities; unfortunately not all types of cheap are equal. Cheap can always get cheaper; and cheap has gotten cheaper in recent years. Meanwhile the seemingly expensive markets like the U.S. stock market have continued to appreciate.

Attempting to measure value is useful for investors because it provides an indication of whether they are buying into a stock at a price that is higher or lower than its historical value. Most successful indicators do a far better job forecasting the market’s direction over the intermediate and longer terms. Additionally, higher valuations generally mean greater downside risk, but anytime securities move above their fair value or become overvalued, it is smart to be suspicious.

By using percentile analysis investors are able to put today’s market valuation in a historical perspective. A percentile is a measure that indicates the number of observations that fall below the percentage indicated. For example, the 20th percentile is the value below which 20% of the observations can be found. Markets that are above the 75th percentile should be considered expensive on a historical basis, while those below the 25th percentile can be considered cheap. The 50th percentile indicates an average value since data will normally range between the 75th and 25th percentile. The chart to the right and the data to the left (which are based upon information provided by BlackRock, MSCI and Thomson Reuters) illustrate the valuations in percentile terms for various markets and security types on June 2016 versus historic information.

Government 10 year bonds are very expensive compared to their history, as a very large portion of this universe is offering low or negative yields. Valuations for equities on the other hand appear more reasonable on a relative basis. Canadian equities in particular are currently in the 58th percentile. This means that Canadian equities are trading at a valuation that is equal or greater than 58% of their history. This means they are not too expensive nor are they true bargains at this stage.

Holding bonds makes sense in a portfolio as a hedge against risk, but low or negative yields on bonds come with a hefty cost. Investors are becoming nervous about what lies ahead and rightly so. The yield on bonds have sunk in most cases to record lows, with central banks either holding off raising rates or maintaining an unprecedented stimulus. Low and negative yields are a problem for investors that rely on bonds to generate income. Still, the latest turbulence provides a stark reminder that having some fixed income can have defensive benefits.

Searching for cheap investments is important and can be very rewarding. However, as with any other hunting, it is critical to know the target, its behavior and its risks. An investor who focuses on the right kind of cheap for his or her goals can do well in the market, but it is just as important to avoid the wrong kinds of cheap securities.

MARKET DATA

 

 

This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.

While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.