Managed Money Reporter Newsletter — Issue 263, May/June 2011


Editors: Carl Spiess & Allan McGlade


Featured Articles



Q1 Recap—Off To A Good Start

Stock markets in North America and many other major regions posted positive returns for the first quarter of 2011. In Canada, the TSX was buoyed by positive returns from Financial Services (+9.1%), Energy (+8.7%) and Industrials (8.7%). The Materials and Consumer Discretionary sectors dipped into negative territory after a sizzling performance in 2010. US equity markets also got off to a good start, posting a return of 5.2%. When the return for the S&P 500 index is converted to Canadian dollars, however, it declines to 2.83% due to the continued appreciation of our dollar against the US dollar.

The MSCI World index also posted positive returns despite the significant decline in Japan's Nikkei stock market resulting from the recent natural and nuclear disasters. See our comment about Japan at the close of this article. The following attachment from Russell Investments provides more details on the first quarter performance of the major equity indices.

Russell Market Commentary - Q1 2011

The fixed income (bond) markets did not fare as well as the equity markets in Q1. The DEX Bond Universe index declined 0.3% for the period ending March 31.

With the expectation of higher inflation on the horizon, bond prices in general declined on the assumption that higher interest rates would naturally follow. Not surprisingly, the media picked up on this and once again the buzz would lead you to believe that all bonds are bad in the current environment.

Note that I say once again. Predictions of rising interest rates have been around for a few years now. If you bought into the chatter two or three years ago, you would have missed out on some decent bond returns compared with short-term deposit rates. It could be argued that a period of above-average inflation is bad for equities as well. Higher interest rates tend to dampen economic activity.

So what's an investor to do? One solution we don't recommend is to sell everything and sit in cash until inflation and interest rates reach their peak. Why? Not all investments perform poorly during a period of rising interest rates. Specifically, we believe there is still value in high yield bonds and convertible bonds. And real-return bonds are designed to keep up with inflation by adjusting the price of the bond (and its interest payment) upwards.

For conservative investors, we continue to recommend a ladder of bonds or GICs that will rotate some maturities annually over the next three to five years. As interest rates rise, each year's maturing bond/GIC can be invested at the going yield. If rates move up, the ladder can be extended; if rates stay the same, simply maintain your ladder and wait for the upward move.

For information on the different types of fixed income securities we invite you to visit the bond page on our website as well as ScotiaMcLeod's Guide to Fixed Income.

The Spiess McGlade Team's bond page
ScotiaMcLeod's Guide To Fixed Income

The short-term outlook for equity markets appears to be negative. The markets are vulnerable to a correction after the big run-up that started in late summer of 2010. However, our medium-term outlook continues to be positive. We continue to recommend staying invested and riding out the short-term fluctuations of the equity markets. As mentioned, inflation can be problematic for equity markets in general. The attached commentary from Edgepoint Wealth Management provides insights on how to navigate the equity markets in an inflationary environment. Stock selection is a major key to success, they say, and a passive indexing approach may underperform active stock selection.

EdgePoint's 2011 Q1 commentary

We are also pleased to provide you with the spring edition of Investment Portfolio Quarterly. Happy reading!

Investment Portfolio Quarterly - Spring 2011

On a final note, our hearts go out to the people of Japan. Let these events remind us of what is truly important in life. May we all enjoy safety and good health, and the ability to do the things that fulfill us most.

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Your Financial Plan— It's Review Time!

Now that your tax return has been filed and you have received your Notice of Assessment (hopefully with a refund cheque), May is an excellent time to review your financial plan. Prioritize your saving, debt reduction and discretionary expenses for the next twelve months. Soon the warm weather will arrive and our focus will shift to summer activities and vacations.

If you have not taken the time to create a financial plan for yourself, we strongly encourage you to do so. A financial plan is the foundation of your future financial well-being. The Spiess McGlade Team has four Certified Financial Planners on staff, and we are exceptionally well equipped to help you create a plan. If your financial situation is complex, ScotiaMcLeod's "Team of Experts" is also available to assist and recommend solutions that meet your needs.

Are you a hands-on type who likes to use Internet resources? Our Tools web page, below, has more information on the benefits of a financial plan plus links to sites that will allow you to create a plan for yourself. We also encourage you to read the two attached articles from the Financial Planning Standards Council (FPSC) on the do's and don'ts of building a financial plan.

The Spiess McGlade Team tools page
"Building a Financial Plan", FPSC
"Managing Your Finances - Mistakes to Avoid", FPSC

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The Basics of Registered Disability Savings Plans (RDSPs)

In 2008, the Federal Government introduced this new registered savings plan to help individuals with severe disabilities save for their long-term financial security.

RDSP accounts may be opened by:

  • Parents or other family members of disabled minor children
  • Disabled adults from age 18 to 59

Beneficiaries of an RDSP must also be eligible for the Disability Tax Credit, have a valid Social Insurance Number, and be a resident of Canada.

Contributions to these tax-sheltered accounts will attract the Canada Disability Savings Grant (CDSG)–up to $3,500 per year and also the Canada Disability Savings Bond (CDSB)–up to $1,000 per year depending on the beneficiary's family income.

The entire package can give some lower income Canadian families the potential to receive $4500 in government assistance for just $1,500 in contributions, all of which can grow tax-sheltered for the beneficiary. Here are the details on CDSG payment rates:

Beneficiary's
family income
Contribution Grant Maximum

$81,941*
or less
On the first 
$500
$3 for every 
$1 contributed

$1,500
On the next 
$1,000
$2 for every 
$1 contributed

$2,000
More than
 $81,941*
On the first 
$1,000
$1 for every 
$1 contributed

$1,000

*CDSG rates for 2010

Contributions to the plan are not tax-deductible, just like contributions to TFSAs and RESPs, though funds may be contributed by just about anyone on behalf of a disabled beneficiary, up to a $200,000 lifetime limit.

Withdrawals must begin by the end of the year the beneficiary turns 60. Grant monies and investment growth are taxable in the hands of the disabled individual, but contributed capital is not taxed at withdrawal.

The RDSP does have one curious feature. Grant and bond monies that have been in the plan less than 10 years must be repaid to the government if they are withdrawn. This is a potential drawback if the disabled person has a reduced life expectancy, or even has very low income and cannot wait to access the government assistance.

To learn more about RDSPs, visit the CRA and/or Scotia web pages below:

Canada Revenue Agency's RDSP web page
Scotia RDSP web page

If you have any further questions about these accounts or would like to set one up, please give us a call!

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Election Results

Now that the dust has settled on the Canadian federal election, we went looking for opinions on what the new conservative majority governemnt means for Canadian markets. Reactions are generally favourable. Analysts are predicting the recent election of a Conservative majority will be good for business in Canada and, as a result, good for the markets. Accelerated CCA rules will favour investment, corporate tax rate changes will help valuations, environmental policy will be advantageous for energy and industrial sectors and pension reform may benefit financial companies. However, potential ownership changes may negatively impact some protected industries (telecom and broadcasting).

For more, read this analysis from Credit Suisse:

"Canadian Election - A majority decision", Credit Suisse

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Investment Industry Update

Fidelity loses two managers...

Bob Swanson has departed to join CI's Cambridge Advisors group of funds. Derek Young and Geoff Stein have been appointed as co-heads of Fidelity's Canadian Asset Allocation Committee for Fidelity Canadian Asset Allocation Fund (CAA). The funds affected by the change are Fidelity CAA, Fidelity Monthly Income, Fidelity Income Allocation, and Fidelity Dividend.

Brandon Snow has also chosen to join CI's Cambridge Advisors group of funds. Daniel Dupont assumes responsibility for the Fidelity Canadian Large Cap.

We are comfortable with these changes, and continue to have confidence in the bench strength of the portfolio management team at Fidelity. Nevertheless, we will be monitoring the affected funds closely over the coming months to ensure that the management transitions go smoothly.

...and gains three new funds.

Fidelity Investments has just launched three new global funds: Fidelity Global Large Cap, Fidelity Global Small Cap, and Fidelity Tactical Strategies.

Of most interest to us is the Tactical Strategies fund, managed by Jurrien Timmer, Director of Investment Research for Fidelity Management & Research Company, and Andrew Dierdorf. Andrew was previously responsible for Fidelity ClearPath portfolios. The Tactical Strategies fund will use technical, fundamental and quantitative analysis to allocate across a wide range of asset classes and world markets. It will also use macroeconomic trends to tactical advantage.

For more information on these new funds, visit Fidelity's website or give us a call.

Fidelity website

Dynamic managers shared with Scotia

Following its recent acquisition of Dundee Wealth Management, Scotia Asset Management has appointed some of the leading portfolio managers at Dynamic Mutual Funds to Scotia fund mandates. The following funds will now be managed by Dynamic managers:

Scotia Global Opportunities Fund - Lead Manager, David Fingold
Scotia International Value Fund - Lead Manager, Chuk Wong
Scotia Global Small Cap Fund - Lead Manager, Alexander Lane
Scotia Pacific Rim Fund - Lead Manager, Chuk Wong
Scotia Canadian Blue Chip Fund - Lead Manager, Adam Donsky
Scotia Canadian Growth Fund - Lead Manager, Rohit Sehgal, Co-Manager, Alexander Lane
Scotia Canadian Small Cap Fund - Lead Manager, Alexander Lane
Scotia US Blue Chip Fund - Lead Manager, Adam Donsky
Scotia Resource Fund - Co-Managers, Robert Cohen and Jennifer Stevenson
Scotia US Value - Lead Manager, David Fingold

Market niche for Invesco Powershares

Invesco (formerly AIM Trimark) launched Powershares ETFs and funds in November 2009. Powershares Funds allow investors with smaller balances to access the ETF market without incurring the trading fees associated with accessing ETFs directly on the stock exchange. In the short time that Powershares have been available in Canada they have accumulated $2 billion in assets from investors. If you are interested in finding out more, visit Invesco Powershares' website, below, or give us a call.

Invesco Powershares website

New commodity ETF at Claymore

Claymore Investments recently launched a Broad Commodity ETF. For more information on the ETF and the merits and risks of investing in commodities we encourage you to visit Claymore's website, below, or contact us.

Claymore commodities ETFs

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Investment Team News

Please join us in congratulating Senior Investment Associate Sharon Calvert for attaining a significant career milestone. Sharon will celebrate her 25-year anniversary with our team and ScotiaMcLeod on June 15th. Our clients often tell us how nice it is to deal with the same people every year. Sharon is a shining example of our consistency in service, and that means a lot to us. Thank you Sharon for all your hard work and dedication over the past 25 years!

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Recommended Link of the Month

Interested in finding out more about financial planning? Our link of the month is the financial planning page of the Financial Planning Standards Council. The FPSC is the governing body for Certified Financial Planners (CFP), to which Carl, Allan, Andrew and David belong. Not only do they have to satisfy the requirements of various investment regulators, but they must also obtain 30 hours of continuing education credits each year to maintain their CFP designations.

If you have any questions or would like to start a plan, please do not hesitate to contact us.

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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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