blog02dec2007

Hot Off the Web
WSJ’s Jonathan Clements in “Invest it all in stocks…no way” re-emphasises that 100% stock asset allocation is not a good idea, as most investors (especially those near or in retirement) wouldn’t be able to deal with the resulting volatility; 20-40% drop in asset value is possible, and many countries have histories of stock markets that have closed for extended periods due to war or political upheaval. Even a small dosage of fixed income allocation can reduce volatility significantly while preserving a significant portion of the equity gains (For U.S. markets historically 10% and 25% government bond allocation still delivered 97% and 91% of the S&P 500 return!)
Andrew Barry of Barron’s discusses how an individual could achieve high yields in “Doing the Abu Dhabi” by forgoing some of the upside just like the recent Abu Dhabi deal in Citigroup stock. This is achieved by buying the Citigroup shares (at $33) and selling the January 2010 (35-40) call option spread (i.e. selling the 40 call at $36.50 and buying the same dated 35 call at 4.50, netting $2.00/share of option contract). This increases the annual $2.16 (assuming it’s not cut) Citigroup dividend to $3.16, or about 9.6% annual yield. In exchange you give up the appreciation of Citigroup between 35 and 40 (and you still have the risk that Citigroup may drop below your 433 cost for the stock). A complex, but interesting, manoeuvre for the sophisticated investor.
Tim Cestnick in Globe and Mail’s “Charitable gifts can also benefit loved ones” discusses how you can use a testamentary trust (established through your will) to leave some of your assets to charity, but your spouse receives the income from those assets during his/her lifetime, with asset going to charity after his/her death; you would still get a donation tax credit in the year of death, though not a tax receipt in that year. Same mechanism works if trust is established during your lifetime. Talk to your tax advisor for details.
Rob Carrick in the Globe and Mail shows how to implement a “Do it yourself PPN”  and eliminate the high fees and the liquidity restrictions associated with PPNs (Principal Protected Notes), while still preserving the invested principal. Using a combination of a strip bond, which you buy at a discount from the maturity value, and then invest the residual funds associated with the discount in a more risky asset with higher expected return. Your principal is still fully protected, as you’ll receive the (pre-discount) face value at maturity; although you may have done better with a GIC if the riskier portion of your investment returns less than the GIC would.
Financial Post’s Jonathan Chevreau in “The ABCs of alpha and beta”  quotes Christopher Holt of AllAbout-Alpha.com  that mutual funds have much to fear from ETFs and hedge funds. He also explains the difference between “alpha” (the excess returns that a manager is trying to achieve by stock selection) versus “beta” which are the returns offered by the market (index) as a reward for just participating in the market. “Investors may be better off holding a core portfolio of ETFs for beta exposure, then paying hedge fund managers for their pure alpha exposure.”
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