Managed Money Reporter Newsletter — Issue 251, May/June 2009


Editors: Carl Spiess & Allan McGlade


Featured Articles



Two months of strong market rebounds

April and May saw significant rebounds in the Canadian and global equity markets. Oil, and the Canadian dollar have risen significantly as well.

Despite the recent bankruptcy of GM, many other companies are seeing their way through the recession. Canadian banks, all of whom reported earnings late in May, showed strong results – Scotiabank even had record revenues. And some US banks are looking at paying back their bailout money early.

It will definitely be some time before we see the markets back to levels where they were in 2007, but it seems that the widespread concern about the economic world coming to an end have subsided. While unemployment may wind up rising from 5% to 10%, and cause major disruption to individuals and many companies, the reality is that 90% of the population will continue to go to work, spend their paycheques and keep moving the economy forward.

The big concern will be whether the huge levels of government spending will cause inflation, or just remain on the books for decades for our children and grandchildren to pay off. If inflation comes back, expect interest rates to rise, and the investments that seemed safest like government bonds, may wind up showing negative real returns.

As an alternative bond investment, for those concerned about inflation, we also have inflation indexed bonds and bond funds available. Inflation indexed bonds and bond funds are an innovative and unique way to ensure that if inflation does come back, a portion of your portfolio will be increasing in real terms.

What this means for your portfolio is that a diversified approach will continue to be appropriate. Please contact us if you have questions about your accounts, and we hope that you have a terrific summer.

More on markets

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Dynamic Dollar Cost Averaging Fund

If you have cash sitting on the sidelines, and if you are not sure when to move back into the market, Dynamic Dollar Cost Averaging Fund (DCAF) may be the innovative solution for you.

What is DCAF?

Dynamic Funds offer a great service for investors who are looking for a systematic process to move from cash or money market funds into the market on a gradual basis. DCAF enables you to move into the market on a weekly basis over the next year.

Your initial purchase is used to buy a money market fund (holding government guaranteed bonds) and each week 1/52nd of your investment is moved into the fund of your choice. There are over 50 top-ranked mutual funds to choose from in the DCAF family with Dynamic Funds.

DCAF is a simple solution to help you through a tough decision. If the market declines in the short-term, you buy more units with your weekly investment and haven’t committed your whole investment. As markets recover, you’ll be participating with the amount that you have begun to move today. You are also able to move the full amount into the fund of your choice at anytime (ahead of the 52 week schedule)


Download whole powerpoint file

Why consider DCAF?

  1. Control Risk – no need to try and time the market (up or down!)
  2. Security – the money market portion of your DCAF fund holds government guaranteed bonds
  3. Access to top ranked fund managers in Canada
  4. It’s simple

Record amounts cash are sitting idle on the sidelines and investors across Canada are waiting for confirmation that the worst is over. With interest rates at historic lows, guaranteed investments are not offering an attractive alternative for long-term growth.

Over the past three months, investors have gained some confidence that the worst may be over, but are hesitant to re-commit to a market that has been so cruel over the past year. We believe that dollar-cost averaging into the market is one of the best ways to invest versus timing a lump-sum investment decision.

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Canadian fund industry earns "B" in global survey

In Morningstar's Global Fund Investor Experience report, Canadian Investment Funds scored well in several categories, ranking Canada 7th out of the 16 countries surveyed.


Full document

In the chart below, we can see that Canada scored very well in Investor Protection, Transparency, and Choice, but taxation and fees hurt the overall score.

As always, it is dangerous to over generalize. Saying “funds protect investors but are expensive” would be a gross simplification. Some funds in fact do a poor job of protecting investors, and some others have very low fees. As your advisors, we will continue to recommend investments that are appropriate for your account for a variety of reasons, and one of our many considerations when making recommendations are the level of investment management fees vs. portfolio manager value added.

More on Global Fund Investor Experience report

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HST to raise fees for investors

In a serious issue related to fees on Canadian Investment Funds, the proposal to harmonize the GST and Ontario’s PST could seriously impact investment costs. Specifically, we could see Management Expense Ratios on mutual funds, exchange traded funds and other managed account programs rise by 8%, if the proposal to harmonize taxes goes through as planned.

Please contact your Ontario MPP or the Premier or Minister of Finance to ensure they know that investors are against this plan to systematically tax and reduce our hard earned savings:

The Honourable Dalton McGuinty Premier of Ontario Legislative Building, Queens Park Toronto, Ontario M7A 1A1
email: dmcguinty.mpp.co@liberal.ola.org

The Honourable Dwight Duncan Minister of Finance and Revenue 7 Queens’ Park Crescent, 7th floor Toronto, Ontario M7A 1Y7
email: dduncan.mpp.co@liberal.ola.org

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ETFs continue to innovate — and become more complicated

All investments have advantages and disadvantages. There is never a single “best” investment or style of management; each will have its place. Exchange traded funds have some great advantages, and continue to innovate, and in the media at least, are quickly challenging mutual funds as the easy way to build a diversified portfolio. However, we have mixed views on ETFs, just as we do with most investments. For a primer on ETFs, we have long had a page on ETFs, where we outline some of their Pros and Cons. Here are 3 recent developments in the ETF field:

  1. Claymore ETFs now offer dividend reinvestment
    One of the major disadvantages of ETFs is quickly being solved. Historically, ETFs only paid out cash dividends. If you hold the Claymore Family of ETFs at ScotiaMcLeod, they are now eligible for a Dividend Reinvestment Program, (DRIP), so that un-invested cash does not build up dragging down returns. Some day, SWP and PAC programs on ETFs will replicate a major advantage that Mutual Funds currently provide very conveniently. We are excited about this feature and please contact us about setting up an ETF DRIP in your account.
  2. Bid ask spreads wider than they appear
    One of the hidden costs of ETFs is the bid ask spread. When you buy an ETF or a stock, at any given time, there is a different price in the market for buyers vs. sellers. This is known as the bid ask spread. In a March 2009 test of identical buy sell transactions, even the most liquid ETF, XIU, saw a difference in price of .5% on simultaneous buy and sell orders, and 1.7% on the illiquid XGR. (The bid-ask on the screen at any minute shows a much smaller spread, but like Heisenberg’s Uncertainty Principle, once you actually measure the market by putting in a real buy or sell, the market moves.) Add in commissions on the buy and sell, and for short holding periods, an index mutual fund, will yield a better return for holding periods of under a year. Longer term, the lower MER of the ETF will usually make it a better performer over the index mutual fund – if you can re-invest dividends.
  3. Doubly volatile ETFs don’t track well long term
    Recently, the best and worst performing securities on any given day, week or month have been the Exchange Traded Funds (ETFs) that have double the volatility of the index or commodity they follow. The best known funds are the Horizon’s BetaPro series. So for people with a strong opinion on the short term direction of the market, they can be an interesting tool. However, as with many investments, the theory becomes more complicated in practice, and due to tracking error over longer periods, the doubling of daily volatility, does not translate into doubling of the long term price trend. So our recommendation on these ETFs is definitely use with caution, and unlike the majority of articles in the press touting ETFs as the best thing since sliced bread, these doubly volatile ETFs are not the right investment for novice investors.

As always, please contact us if you have questions about how any type of investment may fit into your financial plan.

More on ETFs

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Canadian Medical Discoveries fund wound up

Canadian Medical Discoveries Fund (CMDF) has been merged into GrowthWorks Canadian Fund effective May 22nd, 2009.

Merger shares will be priced weekly on the last business day of the week. In order to allow GrowthWorks to more accurately forecast and manage its liquidity post-merger, the merger shares distributed to CMDF shareholders will be subject to a maximum permitted redemption, with 11% redeemable in the 1st year, 15% in the 2nd year, and 20% in the 3rd year.

For complete details please contact us, or visit:

www.growthworks.ca

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Scotiabank one of Canada’s Top 100 Diversity Employers

We continue to be proud to work for a terrific investment firm. Scotiabank was recently selected as one of Canada's Best Diversity Employers 2009. Scotiabank creates opportunities that enable all employees to reach their potential regardless of nationality, race or colour, language, gender, abilities, family status, age, sexual orientation or religious beliefs. This results in a diverse employee base and workforce.

Scotia is committed to providing an inclusive and accessible workplace for all our employees. Some of the ways in which we do this include our website and networking series for women employees, regular measures of progress toward women's representation targets in senior-level positions, recruitment targets for aboriginal employees, a disability support management team and employment services to recruit employees from under-represented groups.

More on Canada's Best Diversity Employers 2009

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Recommended Link of the Month

Rogers communications has a new site targeted at baby boomers, but frankly, it has enough variety that it is interesting for almost everyone. Called EverBetter.ca, it focuses on health, travel, living, relationships and giving back. Naturally there is also a money section that is full of articles, and the other sections promise exciting reading as well:

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T.  416.863.RRSP (7777)
     1.800.387.9273
F.  416.863.7479
E. carl.spiess@scotiawealth.com
    allan.mcglade@scotiawealth.com

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

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