Managed Money Reporter Newsletter — Issue 258, September 2010


Editors: Carl Spiess & Allan McGlade


Featured Articles



Back to school RESP edition

Allan McGlade

By Allan McGLade, CLU, CFP, CIM, Associate Director, Wealth Management

For many parents, putting money aside for post-secondary education is difficult after incurring all the other expenses of raising children. Because of this, and because of the continually rising cost of education, the federal government and some provincial governments operate programs to help parents save for this worthwhile purpose.

The best vehicle for education savings is the Registered Education Savings Plan, or RESP. Contributions are made with after-tax dollars, and investments grow tax-free while inside the plan. Investment principal can be withdrawn tax-free, and withdrawals of investment growth are usually taxable in the student's hands — which often means that no tax is payable at all. There are group and individual RESPs on the market, which can make things confusing. We can recommend the best RESP for your individual situation.

The federal government will also support your contributions with the Canada Learning Bond and/or the Canada Education Savings Grant (CESG). The amount you can receive varies according to your family net income each year. The provinces of Alberta and Québec have recently announced education savings programs that work together with the federal RESP. Other provinces could follow suit in the future.

For more information, follow this link to the RESP page on our web site:
http://www.managedmoneyreporter.ca/resp/

Or, for government sponsored information, follow this link:
http://www.canlearn.ca/eng/index.shtmll

Investing for education

Now, to the investment side of education saving. The significant factor about saving for education is that you will have a time horizon of 17 to 18 years at most. You will need the money sooner than your retirement savings, and that means you should invest more conservatively. The last few years have served as a reminder that short-term market losses can rapidly erode years of hard earned savings.

Is there an investment solution for education savings? We are finding that the "target date" funds people like to use for retirement can also be ideal for education savings. In fact, RBC has introduced a series of three target date funds they call Target Education Funds. The longer funds provide early exposure to the growth potential of equities, but the asset mix becomes progressively more conservative over time as the target date nears — either 2015, 2020 or 2025 for these funds. This approach preserves capital when you need it most.

The IA Clarington Target Click Fund family of global balanced mutual funds also uses the target date formula and adds another level of protection we like very much.

With IA Clarington Target Click Funds, you are guaranteed to receive the highest month-end value the fund has achieved during your ownership, regardless of current market conditions. The catch? To be eligible for this guarantee, you must continue holding the fund right to its target date.

Additional benefits include:

  • Four available funds that mature in June (2015, 2020, 2025 and 2030) right before the school year begins
  • A guaranteed value that can rise over time with the value of your holdings, while protecting your initial investment

To learn more about the RBC and IA Clarington funds, follow these links:
http://www.iaclarington.com/products/target-date-funds.aspx
http://funds.rbcgam.com/investment-solutions/portfolio-solutions/rbc-target-education-funds.html

Education saving tips:

TIP: Save enough each year to draw the maximum federal grant (and provincial grants if applicable). Ask grandparents to help contribute when the kids are very young, because the monthly amounts required will not be large.

TIP: If it's hard to find extra money, contribute only the Canada Child Tax Benefit. If you start early enough, even that makes a nice nest egg.

TIP: Make your children financial partners in their own education. Tell them you will support them in school by "matching" their summer job savings one-to-one, or two-to-one as appropriate.

Funny finale

To gain some perspective on saving for your child's education, check out this humorous one-minute video. (It's on our featured link of the month!):
http://www.getsmarteraboutmoney.ca/en/managing-your-money/planning/investing-basics/Pages/video-a-game-plan-for-your-childs-future.aspx#.Ub6n85ymU4c

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2010-2011 Mutual Fund Recommended List

The 2010-2011 edition of the Mutual Fund Recommended List bears a lot of resemblance to last year's list. This consistency reflects both our long-term focus and our repeatable process. In total, three funds have been added and three have been removed from the list. Two more have been placed on Performance Watch. Those changes have been identified below.

There are many variables when analyzing funds for inclusion in our Recommended List (see The Inside Story), but we are confident that our selections are "best-in-class" funds for their respective categories.

These recommendations are general guidelines and a good starting point for many of our client portfolios. However, each each investor has his or her own specific financial objectives. Many portfolios will have a combination of the recommended funds, along with other investments suited to the client's individual investment goals. For recommedations tailored to you specific situation or for a review of your portfolio, please contact the Spiess McGlade Team at 416.863.RRSP(7777) or 1.800.387.9273.

2010 MUTUAL FUND RECOMMENDED LIST
LIFECYCLE FUNDSPAC NUMBER
Fidelity ClearPath Income Port Series BFID777
Fidelity ClearPath 2005 Port Series BFID705
Fidelity ClearPath 2010 Port Series BFID710
Fidelity ClearPath 2015 Port Series BFID715
Fidelity ClearPath 2020 Port Series BFID702
Fidelity ClearPath 2025 Port Series BFID725
Fidelity ClearPath 2030 Port Series BFID730
Fidelity ClearPath 2035 Port Series BFID735
Fidelity ClearPath 2040 Port Series BFID740
Fidelity ClearPath 2045 Port Series BFID745
EQUITY FUNDSPAC NUMBER
AGF Canadian StockAGF781
CI Canadian InvestmentCIG7420
Northwest Canadian EquityNWT108
IA Clarington Canadian Small Cap ACCM520
Bissett Canadian Equity Class ATML202
Fidelity Canadian Opportunities Sr BFID215
Acuity All Cap 30 Canadian EquityCEM443
Scotia Canadian IndexBNS381
BALANCED FUNDSPAC NUMBER
Invesco (AIM) Canadian BalancedAIM597
Manulife Monthly High IncomeEPL583
Scotia Canadian BalancedBNS378
Dynamic Focus+ BalancedDYN202
CI Harbour Growth & IncomeCIG691
Fidelity Canadian Asset Allocation Sr BFID281
TD Monthly Income - ATDB821
Dynamic Power BalancedDYN001
BOND FUNDSPAC NUMBER
Fidelity Canadian Short-Term Bond Sr BFID285
Mac Sentinel BondMFC432
Scotia Canadian IncomeBNS377
Bissett Bond Class ATML200
PH&N Bond Fund - C PHN3110
SHORTH TERM (CASH EQUIVALENTS)PAC NUMBER
Scotia T-BillBNS358
Scotia Money MarketBNS357
GLOBAL FUNDSPAC NUMBER
Capital Intl-Global Equity Cl ACIF843
Mac Cundill Value Series CMFC736
Fidelity NorthStar Sr BFID253
Templeton International StockTML735
Manulife (Mawer) World Investment ClassEPL8521
Templeton Global Smaller CompaniesTML707
Templeton Growth*has been placed on performance watch
AGF International Stock Class*has been placed on performance watch
NON-REGISTERED/TAXABLE ACCOUNTSPAC NUMBER
Dynamic DividendDYN048
Scotia Canadian DividendBNS385

For detailed side-by-side performance comparisons of the recommended mutual funds and more information on the fund categories, follow this link to the Spiess McGlade Team's recommended investment options page:
http://www.managedmoneyreporter.ca/options/recommended.pdf

For a PDF file of this listing and our rationale, follow this link:
2010-2011 Recommended List (.pdf 307kb)

Funds added

FUND NAMEINVESTMENT STYLE
PH&N Bond Fund - CCredit Selection
TD Monthly Income Fund - ALarge Cap Blend
Manulife Mawer World Investment ClassLarge Cap Blend

PH&N High Yield
With the highest nine-year return among all bond funds, this fund tempers high yield with a large allocation of investment-grade. Now that RBC owns PH&N, $25,000 minimums have fallen to $500 for lump sum purchases and is available for payroll contributions on group plans.

TD Monthly Income
Money management has been consistent for years from a pair of veterans. A recent retooling has made the approach slightly more conservative.

Manulife Mawer World Investment Class
Younger co-manager takes over from seasoned veteran, but this succession has been planned for a long time. Careful, well-researched stock picks prevail in a tough category.

Funds removed

FUND NAMECLASSIFICATION
Acuity High IncomeCanadian Equity Balanced
Trimark Global BalancedGlobal Equity Balanced
Mac Maxxum DividendCanadian Dividend & Income Equity

Acuity High Income
The performance of the fund has been inconsistent over the past four years and we feel there are less expensive alternatives in the category with better performance metrics.

Trimark Global Balanced
Results have sagged for too long now, and manager turnover at Trimark is draining the talent pool.

Mac Maxxum Dividend
Overstacked with financials and with a large foreign component that's not in the title, this fund has become a bit of an odd hybrid we're not pleased with.

Funds on performance watch

FUND NAMECLASSIFICATION
Templeton GrowthGlobal Equity
AGF International Stock ClassInternational Equity

Templeton Growth
This fund has struggled to get back on track after a manager change in 2006. Traditionally we like Templeton, but patience is running thin.

AGF International Stock Class
The concentration in Europe has proven to be a challenge for the fund and it's returns. We like the managers but wonder if the investment strategy is adding more risk than is necessary.

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Mutual Fund Recommended List: The inside story

Even though we research the many new investment products that spring up every year, the Spiess McGlade Team continues to utilize actively managed mutual funds in many client accounts. Why? We have reviewed client returns of actively traded individual stock portfolios, exchange traded funds, and esoteric investments like flow throughs and commodity futures. While these may be appropriate for some investors, or for a certain portion of a portfolio, we have found that a portfolio of good active managed funds, in combination with guaranteed investments, has generated the best risk adjusted returns for clients. By blending low cost guaranteed investments with the active funds, overall account management fees wind up being lower than most "wrap" or separately managed account programs. Having a good active manager dealing with the day to day changes to the equity markets also helps clients avoid the temptation to make frequent investment changes, that have been shown to reduce long term returns.

Our aim in producing the Recommended List is to find excellence in money management, and to isolate it for the benefit of our clients. We believe the Recommended List is core to our professional advice, so we put a lot of work into repeating the periodic process of analysis and review, always taking a long-term view.

Rationale for fund additions

There are many factors to consider when adding a fund to the Recommended List, including making sure the overall Recommended List includes a well-diversified representation of asset classes, market capitalization sizes, and investment styles.

Our process begins with a detailed quantitative analysis of attractive fund investment options. Starting with data from the Canadian mutual fund universe, we apply a proprietary multi-factor model to identify those funds that are most "quantitatively attractive".

Once this process is complete, we then focus on the qualitative side of the analysis. This involves face-to-face meetings with fund managers where we learn the human element behind the returns generated by these funds.

We continue to close in on "best-in-class" mutual funds by focusing on what we call the "Four Ps": People, Philosophy, Process, and Performance.

People: Tenure of fund managers, organizational resources and support, competitive advantage(s).

Philosophy: Focus on understanding the investment style and the consistency in its application over time, patience and conviction in investment beliefs over time, and the consistency within the firm with respect to its investment philosophy.

Process: Criteria for buy/sell/hold decisions, and the consistency in which these are applied, risk management.

Performance: Consistent longer-term track record versus benchmark(s) and peers. Risk-adjusted performance over time. Understand how the managers have generated the returns. Focus on the value-add of the managers and justification for the fees they charge.

Rationale for fund removals

There are a variety of factors (individually or in combination) that could lead to a fund being removed from the Recommended List:

  • Poor and/or inconsistent performance over time, particularly in instances where the manager is not delivering on stated objectives over the long term,
  • Depending on how the fund is managed, turnover in the fund's management considered significant,
  • In some cases, the reason is simply that there are better alternatives available, and it makes sense to take advantage of these opportunities.

Since every fund has its own unique characteristics, it is difficult to list all possible reasons why a fund would be removed from the Recommended List. As a rule, short-term performance is not by itself a significant issue, but if a fund is showing an inability to turn its performance around over time, or shows a lack of consistency in delivering on its stated objectives, it is our responsibility to consider dropping it from the Recommended List.

Rationale for Performance Watch

Finally, funds on the "Performance Watch" list are those funds that have been temporary put on hold for new purchases. These funds are still technically on the Recommended List but we will not endorse them for new purchases until they demonstrate a turnaround in performance.

If you have an existing position in a fund that has been placed on Performance Watch, we recommend continuing to hold the position until further notice. We will continue to closely monitor the fund and will restore its former standing if performance improves. Should we remove any of these funds from our recommended list, we will advise you and ask you to contact us for a suitable replacement.

For more information on our process and the recommended mutual funds, see our investment options page: http://www.managedmoneyreporter.ca/options_f/.

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Surveys reconfirm the value of professional investment advice

A 2010 survey of Canadian investors has overwhelmingly reconfirmed the value of professional investment advice.

The survey was conducted by pollster Ipsos Reid for The Investment Funds Institute of Canada and presented in May 2010. Financial advisors were the primary source of investment information for 50% of respondents. The next most popular source, general media, was preferred by only 14% of respondents.

Source of advice - Ipsos Reid

Seventy-four percent of households with an advisor feel confident about having enough money to retire comfortably, compared with 52% of households without an advisor. Households with an advisor are more than twice as likely to have RRSPs, and about twice as likely to have TFSAs.

Value of advice vignette

It was concluded that advisors add value for their clients by:

  • setting planning targets
  • setting investment strategies
  • choosing the right investments, vehicles and plans
  • contributing to their financial literacy
  • encouraging early adoption of a savings and investment culture
  • avoiding common behavioural investment errors
  • understanding the value of a financial plan

In June, the Financial Planning Standards Council (FPSC) released the initial results of a five-year study on the value of financial planning. The study explores the value of comprehensive planning and professional financial advice, and provides empirical evidence of the value of financial planning.

During a particularly difficult economic period (August 7, 2009 - January 21, 2010), the study surveyed the English-speaking population in Canada (ex-Quebec) through an extraordinarily large online panel of 7,383 respondents.

Early results indicate that Canadians who have engaged in comprehensive, integrated financial planning are more optimistic about their wellbeing. They feel better prepared to manage through difficult economic times, and are more confident about reaching a wide spectrum of life goals — even their ability to afford an annual vacation.

FPSC is also the governing institute for financial planners that offers the opportunity to earn the designation Certified Financial Planner, or CFP. David Hillier of the Spiess McGlade Team just earned his CFP this year, raising our contingent of CFPs to four. The team is now even better equipped to help clients with overall financial planning.

For more information on the surveys mentioned, visit:
Investor Research: The Value of Advice (Ipsos Reid presentation to IFIC, May 20, 2010)
Individuals with Financial Plans Feel Better Prepared... (FPSC Press Release on Financial Planning Study, June 16, 2010)

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Team News

In the summer, when most of us were thinking about deck chairs and cold drinks, our David Hillier dug in and got his Certified Financial Planner (CFP) designation — a very deep and valuable accomplishment in our profession. Congratulations David, and thank you for adding that extra depth to our team!

Likewise, congratulations are in order for Claudia Ochoa who recently graduated from the Canadian Securities Course (CSC)! CSC is no easy feat for those not familiar with it, and we are very happy to add Claudia’s new knowledge to the team. Claudia is currently working on her Conduct & Practices Handbook (CPH) course.

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Industry roundup

AIM Trimark becomes Invesco Trimark

AIM Trimark has rebranded itself as Invesco Trimark. If you hold any AIM Trimark funds, you may find that they have been renamed Invesco [fund] on your next statement. Some funds will retain the Trimark name, some will be renamed Invesco, and some are called PowerShares.

PowerShares is the Invesco Trimark suite of "intelligent" indexed solutions — funds and ETFs. Buying into this product line just got easier for individual investors, because initial minimum investments have dropped from $2000 initial/$500 subsequent, to $500 initial/$50 with pre-authorized chequing (PAC).

RBC introduces Emerging Market Bond Fund

No stone is left unturned in today's investment industry, and RBC has isolated emerging markets bonds as a fixed-income alternative in today's unpredictable equity markets.

Why emerging market bonds? Higher yields. For moderate to high credit risk, like U.S. high yield bonds, emerging market bonds paid almost 4% higher returns than U.S. high yield from 1994 to 2009. Returns were even better during periods of rising interest rates.

Although we are not necessarily advocating this fund right now, we are interested and investigating this opportunity for diversification purposes.

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Recommended Link of the Month

One item that has recently caught media attention is the amount of personal debt Canadians are accruing relative to their incomes. Several articles about managing debt are coming from a web site called GetSmarterAboutMoney.ca. It's a very interesting plain-language site with tools, tips, calculators and more.

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Contact Us

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

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