Hot Off the Web- May 11, 2008
In Globe and Mail’s “Flaherty closes in on new PPN rules” Kevin Carmichael indicates that Finance Minister Flaherty will be releasing new regulations on Principal Protected Notes. (You can read about PPNs at Canadian Securities Administrators’ website. You can also read about Structured Products, of which PPNs are a subset, at this website in my series of blogs on Structured Products and their Evaluation. PPNs suffer from inadequate disclosure of the high fees (believe it or not even higher than plain vanilla Canadian mutual funds!), thus creating unrealistic return expectations, and they are difficult to value (because of inadequate liquidity) prior to maturity. (Sounds like it’s about time for improved rules.)
WSJ’s Palash Ghosh reports in “Mutual funds give some investors pause now” about the results of a recent survey showing that wealthy investors are rethinking their earlier faith in mutual funds , not just because of high fees (which are about half of those in Canada), but also question if fund managers focus is performance for customers or on gathering assets under management. However, the funds continue to pull in assets. (Time will tell if trend will continue.)
Jonathan Chevreau defines “The 3 stages of retirement- two of them are expensive” . In his Financial Post blog, after reviewing the debate about what percent of pre-retirement income (50%,70%, 80% or 100%) is required in retirement, he defines the 3 stages of retirement: (1)early retirement, when one may want to travel extensively, 100+% may be required, (2) mid-retirement, when health issues may slow down travel related and other spending, perhaps 50-70% would be adequate, and (3) late-retirement, when increased personal assistance and potentially nursing home may be required, resulting in significant annual expenses being incurred. (I discussed the shape of the spend rate in retirement in one of my very early blogs at this website “How much will you need in retirement?” and at one point even suggest that perhaps it is “bathtub” or U-shaped, which is similar to what Chevreau suggests here.)
InvestmentNews’ Rita Shidler report in “Target date funds criticized over risk” that the debate continues on what is the appropriate level of risk, defined as the non-fixed income portion of a retiree’s portfolio. Some feel that the average of 68% equity in the typical target date fund is inappropriate, especially for retirees. Though target-date funds are a relatively new phenomenon, they have accumulated over $180B. (I suspect risk may have more to do with the individual investor’s risk tolerance than his age, certainly for the portion of the assets that will not be required for the next 10 years.)
Globe and Mail’s John Partridge reports that “Canadians (are) sitting on $45B cash” . Quoting Benjamin Tal, he warns that timing re-entry into the market is very difficult (almost impossible) and just as in 1987 and 2001 investors ended up missing out on much of the recovery.
Jon Chevreau reports in his blog “ASL Direct’s problems with the OSC and the MFDA” that ASL Direct , which refunds all trailer fees on mutual funds to investors, has received a cease trade order from the OSC. He quotes customers who question, if ASL is hounded by regulators, who are perhaps in cahoots with the fund industry, trying to prevent this lower cost distribution model taking hold for Canadian mutual funds.
And finally, in a Chevreau blog on “Pension contribution limits too small to fund retirement, ACPM tell Ottawa” he reports that according to the Association of Canadian Pension Management, “current (contribution limits to registered pensions) are uncompetitive relative to higher amounts enjoyed by Americans or British”. They also say that today less than 25% of private sector employees have a registered plan. But Chevreau says that the ACPM does not support government mandated plans. (That’s too bad, because urgent action is long overdue. Canada’s private sector pension “system” has essentially disintegrated. Other developed countries, like Netherlands, Australia and New Zealand have recently implemented models that Canada could emulate. You may also be interested in reading my recommendations on how to band-aid the current and a straw-man for the future system to the Ontario Expert Commission on Pensions)