Managed Money Reporter Newsletter — Issue 237, May 2007

Editors: Carl Spiess & Allan McGlade

Featured Articles

Scotia Hires New Fund Management

By Carl Spiess, CFP, FMA, FCSI, MBA, Director

We have been fans of a few of the Scotia Family of funds for years. The Scotia Canadian Dividend fund has been on our list and has served clients very well over the years. The Vision Target Date funds are innovative, and the low cost, no load Scotia Index offerings are also convenient options. But it is no secret that for other mandates, we were pleased to be able to offer fund families beyond Scotia to our clients.

Recently, Scotiabank has hired three industry veterans to spearhead a new initiative to broaden and strengthen the Scotia family of funds. Joining Scotia Cassels Investment Management will be John Varao as President, CEO and CIO, Shane Jones as Managing Director of Canadian Equities and Senior Portfolio Manager, and John Kellett as Senior Advisor to Mutual Fund Business Development.

John Varao joins Scotiabank with 16 years of experience and is regarded as one of the leading mutual fund managers in the country. Shane Jones comes to Scotiabank with 20 years of experience, with a record of strong performance while managing some of the biggest income and dividend funds in Canada. John Kellett has 37 years of experience in the investment business and in 2003 was named Mutual Fund Manager of the Year by Investment Executive Magazine. All three of these individuals are former employees of RBC Asset Management.

We will continue to review and recommend all the best investment options available in Canada for our clients both from Scotia and beyond. We look forward to a strengthening of the fund offerings and information available to help manage our clients' accounts.

More on Scotia Funds and the Management Change

Scotiabank Online Security Guarantee

With increasing concern about online security, Scotiabank is pleased to announce an innovative guarantee for our Scotia Online clients. See the link to learn more and use Scotia Online with confidence to see your investment accounts (and other Scotia accounts) consolidated, all on one screen. Please contact us if you wish to sign up for Scotia Online or have any questions about online security.

More on the Scotiabank Online Security Guarantee

Understanding Average Cost

One of the most frequent questions we get about investing is "what does adjusted average cost and adjusted book value mean?" Are they good indicators of your investment performance? In short, the answer is no. In our statement guide, we note:

Both the average cost and book value have been adjusted for dividend reinvestments, Pre-Authorized Contribution Plans and mutual fund distributions where applicable. For that reason, we caution against using the average cost information alone to assess investment performance.

The reason for this is simple. A fund's return is made up of additional shares you receive (distributions) and/or price appreciation. Some funds only pay distributions, and their price doesn't change, a few funds pay no distributions and only show gains in unit price, and most generate returns as a combination of the two.

A money market fund, whose price is stable at $10 from month to month, simply pays additional shares (units) which are then reinvested at the same $10 price. So the average cost will always be $10, and the only growth would be the additional units you receive. So after a year, a $10,000 investment in a money market fund (1,000 shares at $10) which returns a typical 3.5% would now show as a $10,350 investment, (1,035 shares at $10) with a book value of $10,350 as you have 35 additional shares that were received and reinvested at $10. So looking at your change in book value would lead to an incorrect conclusion that there was no growth over a year.

A fund that doesn't pay any distributions (notably many in the AIC family of funds) would be the only ones where the average cost indicates the original investment. Here there are no distributions, and the change in unit price reflects the growth of investment (say 15% over the last year). (Of course, if you have switched within the fund family, or from the Deferred Sales Charge – DSC version of the fund to no load, then the cost would reflect the price at the time of the last switch).

Most funds' returns are combination of unit price growth and reinvested distributions. For example, balanced funds typically pay a quarterly distribution. In this way, most accounts show an average cost that is much higher than the original investment amounts:

The reason for this non-intuitive "accounting" is that funds are often held in taxable accounts where CRA requires the fund to distribute interest, dividend income and taxable gains through to unit holders annually. In RRSPs, we wish funds didn't have to pay distributions, but for now we'll have to live with the fact that your average cost rarely represents your actual investment value. This is true of your paper statements and online account pages and it is not just limited to mutual funds. It is also true of individual stocks or income trusts you hold in your account with us as well. A stock like BCE, which traded right around $30 for 4 years, while not showing any growth in share (or book) value, did at least pay out a regular dividend which is also a (tax effective) return.

For more information, please see our statement or dividend pages. Or contact us for a performance review of your individual funds and overall account performance.

More on Understanding Average Cost

New NexGen Funds Offer Choice of Distributions

NexGen Financial, founded by Jim Hunter, the former CEO of Mackenzie Financial, has designed a new patent pending fund structure that addresses a weakness of normal funds: distributions which can be unexpected and result in taxation which ultimately affects your after-tax return in non registered accounts. (See article above.)

Just when we thought there was nothing new under the mutual fund sun, NexGen has focused on a unique structure that is based on the fact that different income types and different types of investors are taxed at different rates. With that knowledge and NexGen's Funds, a portfolio can be organized so that a client will pay less tax on their investment portfolio over the long term.

Within each mutual fund, NexGen Registered Funds and separate Tax Classes are selected based on each client's individual tax situation.

  • Capital Gains Class is designed to provide a capital gains distribution on an annual basis at year end. This is useful for investors who want to receive income that is taxed at a lower rate. It can also be used to reduce a capital loss from other investments or as a technique for a more efficient means of income splitting with lower income family members.
  • The Dividend Tax Credit Class seeks to pay monthly income that is taxed as Canadian dividends. Canadian Dividends, are the most tax-efficient source of income in Canada for lower and middle income investors. This class is a good fit for clients who are seeking tax efficient income and who wish to take advantage of the Provincial and Federal dividend tax credits. In Ontario, for example, one can receive as much as $46,000 tax free in Canadian taxable dividend income, if there are no other sources of income.
  • The Return of Capital Class provides 7.5% annualized distributions paid monthly by returning capital while deferring capital gains and other income distributions. Returning an investor's original capital in a planned way to defer taxes into the distant future is an important tactic in reducing current taxable income.
  • The Compound Growth Class endeavours to maximize a client's after tax return by minimizing taxable distributions to maximize the compound growth of the investment. Younger investors can easily utilize this class because many do not require or want taxable income distributions on a regular basis. (And their average cost would reflect their original investment!)

NexGen has several well known investment managers in their fund line up to manage the underlying funds. Bob McWhirter, John Zechner, Jonathan Baird, and Jeff Young are all respected in their fields.

The process for investing with NexGen is the same as other Funds with one additional step – the investor and the advisor first select the funds that best suit the investor's needs and second, which is unique to NexGen, select the Tax Class that provides the best after tax outcome. NexGen Funds and Tax Classes can be exchanged for another class or Fund at any time, completely tax free. This ability to rebalance portfolios and tax planning objectives without tax consequences is another feature of NexGen's innovative Funds (while similar to other capital class funds). While the funds are relatively new, if you are seeking innovative tax planning strategies, please contact us for details or see:

More on NexGen Funds

Recommended Reading: Spring Investment Portfolio Quarterly

In the Spring Edition of Investment Portfolio Quarterly (IPQ) is focused on retirement. We see this as very topical as the first of the baby boomers will reach age 65 in 2010. The feature article by Barry LaValley, Special Advisor to the Scotiabank Group, highlights the redefinition of retirement as the baby boomers begin their lifestyle transition. While you are thinking about retirement, why not check out Scotia's online retirement assessment tool (see link, below). From a portfolio and investment perspective we provide some thoughts on lifestyle asset allocation, preparing for and dealing with economic cycles and managing your investments preretirement and within retirement.

Fund News: Templeton Global Smaller Companies Fund Capped

Templeton Global Smaller Companies fund has been closed to new investors effective April 30th, 2007. As this is a "soft cap", existing clients can continue to make additional investments into the fund. By limiting the size of the fund, the managers feel they can continue to seek out small companies and maintain the performance of the fund.

More on Templeton Global Smaller Companies

Spiess McGlade Team joins the Rat Race in support of United Way

Several of us are participating in the 2007 Scotiabank Rat Race for United Way of Greater Toronto. The money raised will help United Way agencies build a better, safer, stronger city for us all. Strengthening neighbourhoods, creating opportunities for youth and fulfilling the potential of newcomers are just a few of the ways this fundraising effort will make a difference in Toronto. We invite you to join us, either through sponsorship or by running yourself, in making our city a better place.

To donate online, go to:

If you would like to participate in the Rat Race, you can register online at:

Thank you. Without you, there would be no way.

Mutual Fund Reporter Recommended Web site of the Month

And for those of you looking for a lighter look at Canada Revenue Agency, check out Rick Mercer's "commercial" from the March 13th episode:

  • Rick Mercer Show: Canada Revenue Agency: Taking your money old school


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.

Security | Privacy Policy | Legal Information | Important Information | Site Map




® Registered trademark of The Bank of Nova Scotia, used under licence. ™ Trademark of The Bank of Nova Scotia, used under licence. Scotia Wealth Management™ consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc. ("SCI"). Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of SCI. Insurance services are provided by Scotia Wealth Insurance Services Inc., the insurance subsidiary of SCI. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Underwriters (Financial Security Advisors in Québec) representing Scotia Wealth Insurance Services Inc. SCI is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.