Hot Off the Web- June 8, 2008
A couple of great articles in the WSJ, one by Shefali Anand “Riding the retirement wave”  and the other by Kelly Greene “Turn your nest egg into cash” provide a fairly thorough review of the available options to retirees to transform their assets into retirement income. (I say fairly thorough because they both missed the emerging longevity insurance or delayed payout annuity option, which I consider a key element in the retirees’ toolbox.) The articles discuss: immediate fixed annuities, target-date funds, target-distribution or payout funds, the (currently less than suitable due to low interest rate) bond-ladder, the (high fee) variable annuities with guaranteed minimums (you may also want to read my related blog on Guaranteed Minimum Withdrawal Benefits.)
Barry Critchley in the Globe and Mail’s “Rate-reset preferreds catch on”  presents new twists to preferred shares that may renew interest in them in an environment of expected upward move in interest rates. These reset preferreds, by Scotia and TD Banks provide an initial 5% yield, adjusted after 5 years to reflect then prevailing interest rates. There are two options after five years, either lock in another 5 year fixed rate at the same spread to the 5 year Canada bonds as when the security was originated or a floating rate of 160/170 bp spread on the then prevailing 3-month treasury bills. Sounds like an improvement to previous preferreds.
Globe and Mail’s Rob Carrick came out swinging against investment advisors in “PPN sellers need to fix the problem” . He is holding advisors responsible for the popularity of “this parasitic type of security”. Finance Minister Flaherty just introduced new disclosure requirements for Principal Protected Notes (PPNs). While advisors should know better about how poor investments these PPNs are because “the chance of consistently making good money in the markets with a guarantee against losses is prohibitively small”, they continue selling them. (I wonder why???)
Kevin Burke in Financial Times’ “ETFs: Dilemma for mutual fund managers”  shows that ETFs are becoming thorn in the side of mutual funds and some have started to originate their own ETFs, reluctantly. Reluctantly, since ETFs are a relatively low margin business, though a far superior mechanism of delivering returns offered by the market than actively managed mutual funds. Even actively managed ETFs are starting to appear (but I am not rushing to buy one). Jonathan Chevreau in “ETFs dominate Canada Cup- and a looming threat to Canada’s mutual fund industry”  also suggests that ETFs are starting to nudge aside mutual funds in Canada. He even hints that Vanguard may enter the Canadian market with ETFs. Now that would be a wake-up call to Canada’s mutual fund industry- Vanguards 0.1-0.3% ETF fees side by side with Canada’s 2-3% mutual fund fees. Well, the sooner the better! (Barclays iShares are starting to eat mutual fund’s lunch and Vanguard would further increase ETF profiles and acceptability.)
Jonathan Chevreau in Financial Post’s “Efficient way to build wealth”  still continues to pound away on the value of a fee-only financial advisor. He also quotes Gordon Stockman a fee-only advisor ( that while RRSPs are great for those in the highest tax brackets, TFSAs are a better mechanism for those in lower tax brackets.
A couple if interesting articles on inflation and interest rates are Julian Jessop’s “Higher bond yields”  in the Financial Times and Ellen Freilich’s “Stagflation recipe missing one key ingredient”  from Reuters. The former argues that the bond market is justified not reflecting the current inflationary expectations of consumers, because he believes that the “the economic downturn will be longer and more severe than generally anticipated, which will pull yields lower again.” The latter echoes the sentiment, in that there is little danger of the return to the stagflation of the 70s (inflation with no growth), due to the missing ingredient of the powerful unions which held corporations hostage to compensate workers for increased prices; today instead workers have to adjust their spending habits accordingly. Thus “the U.S. economy will likely escape the vicious spiral of rising costs leading to wage increases and still higher costs.”
In the Financial Post, Bill Hanley expects little enthusiasm from Canada’s mutual fund industry for Keith Ambachtsheer’s excellent pension reform proposal. In “Who can solve the pension puzzle?”  he is not encouraging in his expectation that Mr. Harper will pick this up and run with it, because of the reluctance of Conservatives to “further inserts government in citizens’ financial affairs.” Pension reform is urgent and this is not necessarily a case of government doing it for/to the people; this can be implemented entirely in the private sector framework and without coercing anyone into participation; the government just needs to act as an enabler/initiator. I for one suggest that every one of you to write to all the party leaders and encourage them to pick up the ball and run with it in a non-partisan way for the good of Canadians. (Don’t expect the mutual fund industry to drive this anywhere, except into a ditch.)

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