Managed Money Reporter Newsletter — Issue 248, December 2008

Editors: Carl Spiess & Allan McGlade

Featured Articles

2008: The year in review

Carl Spiess

By Carl Spiess, CFP, CIM, FMA, FCSI, MBA, Director, Wealth Management

2008 will be going down as the worst year in memory for investors. And in the last four months, your investment team has worked harder than we ever have. It has felt like the rush of RRSP season but it is not even RRSP season yet. The need to do more due diligence on investments, help clients who enjoyed taxable gains over the last 3 years with tax loss selling before year end, keep up with the ever changing government rules on RRIF withdrawals, and help set up new Tax Free Savings Accounts has kept us very busy indeed. Annual Returns - 183 Year HistoryWe have also been pleased to help referrals from current clients, and we welcome those new clients to our newsletter.

This newsletter has a large number of items, as there has simply been so much going on. If you are entering holiday mode, please skip down to the heartfelt seasons greetings and photo from your investment team, and file this for future reading. Many of you however may find Allan's feature article on Socially Responsible Investing to be of interest, and our firm's document "Finding Direction in Uncharted Waters" is recommended reading.

We wish you the best for 2009, and you can guess what we are all wishing for from Santa; yes, better investment returns for everyone next year! When looking at the past 70 years of returns (see chart, left), there has only been one other year with returns as poor as 2008, it seems unlikely to be repeated.


Where Did Our Savings Go?

Economist coverI have been in this business since 1990. We have seen good and bad times and many crises.

I've attached the very best article I've read about the current situation, from a very reputable source, The Economist, and with good recommendations to boot. The author talks about how frustrating the last 10 years have been, and what we may all be tempted to do, and what maybe we should be doing. If you feel like equity investing is just throwing good money after bad, please read.

Short version:

A longer more detailed version:

Have We Changed our Beliefs?

Recently, I had a candid conversation with several colleagues who, like me, bring many years in the business. We were unanimous in our views that this has been the most difficult and disappointing year in our careers. It is in years such as this one that challenge our convictions and everyone's confidence. Certainly, there have been moments in the last twelve months when the bad news seemed to be as overwhelming as at any point in my 18 years as a financial advisor.

As a result of the events of the past year, over the past four months, my team and I have spent many hours taking a hard look at the core philosophies that guide our approach to investing. We've re-examined the fundamental premises on which we build portfolios. And we've expended many, many hours exploring alternative investment directions that might hold promise. Fundamentally, however, this process has reaffirmed our convictions about the long term soundness of our existing approach, one that has historically delivered a good balance between risk and return for our clients. The simple but solid rule, your age as percentage in guaranteed investments, will remain a cornerstone as a starting point for portfolios. Our investment philosophy remains unchanged:

A New Area of Opportunity

Corporate Bond YieldsWhile our underlying philosophy remains unchanged, we did notice during our analysis that these strange market conditions are presenting some interesting new opportunities. One such area of opportunity for investors for 2009 is in corporate bonds. The current gap between interest rates on government and corporate bonds has widened to record highs (see chart, right). Today, investment grade corporate bonds yield 9%, the same rate that junk bonds did eighteen months ago and for the first time in a long while, we are including corporate bonds in our portfolios.

Of course at current valuations, the stock market looks attractive as well. In some cases, the cash that companies hold is greater than their value on the stock market – meaning you are getting the business and it's future dividends for free. I am convinced that when we look back years from now, we’ll see today as an exceptional opportunity for investors with the discipline and fortitude to look past today’s bad news on the economy and take advantage of the outstanding values available.

If we haven't talked to you about corporate bonds, or opportunities in the broader stock market, do not hesitate to contact me, Allan or one of our team members about your portfolio.

More on corporate bonds

Tax Loss Selling

The Deadline for tax loss selling in non-registered investment accounts is 1pm on December 24th. We have been in contact with many clients who had large taxable gains on their investments in 2005, 2006 and 2007, as shown on line 127 on their income tax returns. By selling investments that are in a loss in 2008, some of those taxes can be recaptured. Please contact us if you have any questions; we have even more tax tips, below.

RRIF Rule Change

The conservative government has proposed that individuals be allowed to reduce their 2008 minimum RRIF withdrawal by 25%. While this has not been passed, CRA is indicating to firms like ScotiaMcLeod that we can allow this even without legislation. The process we recommend is that clients take their full RRIF minimum, and then repay the 25% to their RRIFs in January (or February when the measure is hopefully actually passed.) The reason for taking the full amount now, is that it will reduce the year end value of the RRIF, and thus also reduce the 2009 minimum withdrawal amount.

Of course, if a client needs to make a withdrawal from his or her RRIF, and does not want to sell a security that is down in value, at higher end firms like ScotiaMcLeod, we can always accommodate a "withdrawal in kind" meaning that securities do not actually need to be sold. If all firms were like ScotiaMcLeod, in fact, the government would not have needed to make this kind of arbitrary rule change.

Monitoring the Managers

Our Conference Call With Shane Jones, Scotia Fund Manager

Shane JonesWe are pleased to have recorded one of our due diligence conference calls with one of the many investment managers that Allan, Andrew and I meet with regularly.

Shane Jones,
Managing Director Canadian Equities,
Scotia Cassels

Scotia Canadian Dividend

To listen to the recorded phone conference, call 416-695-5800 or 1-800-408-3053, and enter 1023171# as the passcode. This recording will be active until January 11, 2009.



More Market Reading

For those of you looking for some holiday reading, I've attached a number of articles on the current economic situation.

ScotiaMcLeod on 2008 and the Outlook for 2009:


Other thoughts:






Season's Greetings from the Spiess McGlade Team

In this very trying year for investors, we would like to thank you, our clients, for your continued faith in us and for allowing us to serve your investment needs. We wish you and your families a happy holiday season and all the best for 2009.

Season's Greetings from the Spiess McGlade Team

As many of you know, for many years we have been strong supporters of the United Way. You may recall that Carl chaired Scotia's 2007 United Way campaign for our Wealth Management division.

The United Way is an organization that does outstanding work with some of our most needy Canadians, as well as helping to build strong communities here in Toronto. Their job becomes that much harder during tough economic times, when demand for services increases and fundraising revenues decline. We are all poorer this year but for those who were already in need, the impact is even greater. With this in mind, we have once again made a substantial donation to the United Way on behalf of all of our clients.


Socially responsible investing

Allan McGlade

By Allan McGlade CLU, CFP, Senior Wealth Advisor

Capitalism With A Conscience

Mutual funds that focus on Socially Responsible Investing (SRI) have been around for several years. In the beginning these funds were mainly offered by credit unions and used by individuals who were also most likely to support the activities of Green Peace. After attending an SRI certification course recently, I learned that much has changed in the SRI investing landscape. Rather than excluding industries and companies that are considered to be detrimental to the environment and society at large, SRI funds now invest in most industries, with the exception of tobacco, arms and nuclear, and engage companies in discussions about ways to be better corporate citizens. This new approach has resulted in improved returns for SRI funds and successful engagements with companies to incorporate practices and policies that promote social and environmental sustainability.

Selecting the right SRI fund for you

It wasn’t long ago the concept of socially responsible investing (SRI) was a foreign one to most Canadians. But times have changed. People are becoming more and more conscious of their environment and ways they can take action to improve it. As a result, SRI has become more mainstream and a way for average investors to make a difference.

Today investors can choose from a growing array of socially responsible options, which is good news. More Canadians investing in SRI means greater influence on companies to make positive change.

But how do you choose the SRI investments that are right for you? How do you ensure your investments are working to make the world a better place without sacrificing your financial needs to do it? The information below will help you make some of those decisions and hopefully give you a better understanding of how socially responsible investing works.

Dispelling the myth of sacrifice

For many investors unfamiliar with SRI, there is the immediate assumption that social benefits come with financial sacrifices - that a portfolio focusing on environmentally sound companies might exclude some of the market’s most profitable ones. This assumption would be a myth. It's becoming increasingly clear that a company's financial performance cannot be separated from its impact on the environment or the people it affects. In other words, companies must operate in the knowledge that decisions they make have an effect on their environment and also their own bottom lines. Socially responsible investing seeks to ensure there is no trade-off between financial performance and social responsibility—and to promote more sustainable companies over the long term.

"84% of Canadians think financial analysts should incorporate social and environmental performance when they value a company's shares."
- GlobeScan 2007

Choosing the right approach to SRI

There are many different approaches to socially responsible investing and each create social change in different ways. One of the most commonly used approaches is portfolio screening.

Portfolio screening is considered a lower-impact strategy because the change created is limited in scope. The idea behind it is to either seek out companies in sectors or industries that promote certain activities (like green energy) or avoid companies in which poor social or environmental performance could adversely impact the company's financial performance. Most SRI funds apply a selection process to screen out companies that don’t meet their investment guidelines and identify companies that are acceptable. Some funds use outside research sources to make these determinations.

Going a few steps further are what is known as shareholder advocacy strategies. In simple terms, you can't change a company you don't own. Owning common stock — whether in a mutual fund or on its own — provides investors with an opportunity to improve corporate social responsibility. Investors use their shareholder rights to positively influence key decision-makers within corporations via strategies of corporate engagement, shareholder resolutions, and proxy voting. This approach is considered higher impact because it seeks to actively change corporate behavior. They rely on stringent screening methodologies to identify areas of concern. Then, using the power inherent in being a shareholder, they will use engagement tactics to make a company's management aware of the issues—and often propose solutions.

The Ethical Funds is an example of a fund family that uses a shareholder advocacy program. Now a part of the newly formed Northwest & Ethical Investments L.P., the Ethical Funds have been at the forefront of the SRI industry for over twenty years and use one of the most robust shareholder advocacy programs in Canada.

Engage for change

Finding the right companies to invest in is just the beginning. To create real change, it’s important to engage the companies in which you invest. Maintaining dialogues with management, filing shareholder resolutions, and voting proxies at annual general meetings, drives companies to improve their environmental, social, and governance practices on your behalf.

In 2007 for example, The Ethical Funds Sustainability Team engaged more than 2,400 companies – both Canadian and international – at various levels of intensity, covering three main themes: climate change, human rights and corporate governance. Twenty four of their 37 intensive dialogues with companies generated positive or progressive results, most notably on working conditions and waste management in the electronics sector and on incorporating climate change into lending procedures with several major Canadian banks.

A sea of change begins

The good news is that more and more companies are showing a willingness to respond to concerns and make socially responsible change. Companies are recognizing that the integration of ESG practices is not only good for public relations, but also for the bottom line. The growth of socially responsible investing has helped accelerate that process and allowed the average investor to make change in a meaningful way without ever losing sight of their own financial goals.

If you have any questions about socially responsible investing in your portfolio, please don't hesitate to contact me or one of our team members.

More on socially responsible investing


Year-end tax tips

Are you giving to charity?
Two years ago, the Conservative government eliminated tax on "in-kind" donations of securities, mutual funds and segregated funds to registered charities. If you're planning to give cash, property or securities, it is important to make sure that all donations are made by December 31st in order to realize the tax benefits on your 2008 return.

Do you have any non-registered mutual fund purchases planned?
Many mutual funds distribute their earnings at the end of the year, meaning that investors who purchase them in December will be liable for taxes on those earnings as if they had been invested for the entire year. We can get an estimate of what this year's distributions will be to determine if it might be worthwhile to postpone non-registered mutual fund purchases until January.

Did you open a tax-free savings account?
While you can't add cash into this new TFSA until January 2nd, it's a good idea to open the account before December 31st so you can start saving as soon as the banks re-open after New Years. In 2009 you can save up to $5,000 in a variety of investment options and, if you need those dollars at any point, you can pull them out tax-free.

Can you benefit from tax-loss selling?
Losses on certain assets — mainly stocks — can be offset against capital gains that have been realized during the previous three years. Now is the time (Deadline: 1pm on December 24th) for us to review your portfolio to determine if there are any equities for which you want to lock in the losses before year-end.

Have you made all the payments you need to?
In addition, final payments must be made before December 31st in order to claim a tax deduction in 2008 for various items including alimony payments, child-care expenses, interest expenses on money borrowed to earn investment income and investment counseling fees.

Attached are items with more detailed information on these and other tips. If you would like to book an appointment to discuss these or other potential tax-saving strategies, please don't hesitate to contact any member of our team directly.

More on the year-end tax tips


Vengrowth closing redemptions in favour of annual distribution

Vengrowth has approved a change to the Vengrowth I and Vengrowth II funds to cease weekly redemptions and move to an annual distribution strategy for all investors. Under the new policy, investors will be paid an annual distribution of proceeds as the funds exit their existing portfolio companies.

Due to volatile market conditions, the Boards of the funds felt it was in shareholders' best interest to manage the outflow of capital from the funds in this way. It will ensure the funds have enough liquidity to execute the venture process: manage private portfolio companies to maturity; seek optimal exit events for portfolio companies once market conditions improve; then distribute proceeds from those events to investors.

The funds hold many successful private companies, but don't currently have the environment in which to take those companies public ("IPO") or sell them to strategic purchasers to generate returns and cash to the fund. The IPO market has essentially been shut down to private companies since the beginning of 2008, while large companies are delaying any acquisitions of smaller companies as they preserve cash in this environment.

The fund managers are confident that the ability to exit portfolio companies will return once stock market and economic stability is in place and has shown sustainability.

If you have any questions on the change or how it affects your portfolio, please don't hesitate to contact us.

More on Vengrowth announcement


2008 Canadian Investment Awards

Canadian Investment Awards

Annual awards recognize leaders in the financial services industry.

The Canadian Investment Awards were presented on December 3rd, 2008 at the 14th annual event held at The Fairmont Royal York Hotel in Toronto. The awards recognize innovation, leadership and commitment to long-term investing in Canada. All of which more important than ever in these turbulent times. This past year has been a humbling experience for portfolio managers and fund companies (See article Hardware and humble pie: The 2008 Canadian Investment Awards, by Ray Luuko,

Some of the highlights include:

Morningstar Fund Manager of the Year Award — Gerald Coleman of CI Investments Inc.
This award honours the Canadian mutual fund manager who Morningstar analysts believe has done the best job over the past twelve months but also has provided significant performance for investors over a long period of time, maintains a sensible investment strategy consistently, and is a good steward of investor portfolios. Gerald is the first fund manager in 14 years to have won this award twice, indicating his extraordinary long term vision. He manages the CI Harbour Growth & Income Fund, one of Carl and Allan's Recommended Funds.

Analysts' Choice Favourite Fund Company of the Year Award — Dynamic Funds
The award is given to a company that excels in 9 key areas such as performance, management, breadth of core fund category representation, community investment, service to industry, investor and advisor education, volatility/risk, fund governance and communication to unit holders. Two of Dynamic's funds are listed on our Recommended Funds list: Dynamic Focus + Balanced Fund and Dynamic Dividend Fund .

Advisors' Choice Investment Fund Company of the Year Award — AGF Funds Inc.
Winners are chosen by a closed survey where Canadian Advisors cast their vote for their favourite fund company. While voting, they judge based on quality and range of products, performance, MER, service, education, community investment and management. The AGF International Stock Class Fund is one of our favourites and is on our Recommended Funds list.

More on 2008 Canadian Investment Awards


Recommended Link of the Month

Financial Forum

The Toronto Financial Forum & Wealth Management Expo presents a unique educational platform for investors where leading financial experts, industry keynote speakers, and media personalities share their insights, and knowledge for the latest developments in wealth management. Tickets are free to clients of Chartered Financial Planners (i.e. you - Carl, Allan and Andrew are all CFPs).



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