blog12jun2009

Hot Off the Web- June 12, 2009

Let’s start with a couple of articles about dissatisfaction with advisors, NYT’s Ron Lieber suggests ways to reduce the chance of being taken for a ride by crooked financial planners in “Finding financial advice in an age of bad behaviour” . “You can do a couple of things to lower the odds of bad apples damaging you personally. Planners don’t much like my notion of paying for their investment advice but then executing the trades yourself. But I still think it’s a good idea for many people. There are a few who work this way all the time, and others who may let you keep the reins on the account all to yourself. Check the legitimacy of planners’ credentials, and ask them to sign a fiduciary oath, promising to act in your best interests at all times. And read every word of every account statement. If you see something, say something. You should never be confused by jargon, strange numbers or anything else on your statements.“ (That’s actually a good model of working with a fee-only financial planner if you are one inclined to be a do-it-yourselfer.) Continuing on the same topic, a good read (sent to me by LH) is Jeffrey Goldberg’s “Why I fired my broker” in The Atlantic. “With his 401(k) in ruins, our correspondent visits investment gurus, hedge fund managers, and a freakish Arizona survivalist with one question in mind: How can the ordinary investor recover?” Here are some select quotes: Robert (son of George and who now runs his famous hedge fund) Soros- “‘Wall Street is a place where whatever can be sold will be sold.’ You are the consumer of their dreck. What they can sell to you, they will sell to you.” Pimco’s Bill Gross- “The system is rigged,” he said. “It’s difficult for the average investor to even conceptualize what we’re talking about.” (If you are surprised to read this from venerable insiders- you don’t understand.)

On housing related matters, Alan Abelson in Barron’s “No bottom in housing” quotes a T2 partners’ report that real estate has at least another 5-10% to drop. This is because peaks for three of five waves of losses are still ahead of us: prime mortgages, jumbo/seconds/HELOCs and commercial real estate. And for those stuck with unsellable vacation homes, Suzanne Barlyn in WSJ discusses “How to make money off a vacation home”. Suggestions include: “becoming a landlord”, donate time at the vacation home to a charity to auction off (you may get a tax receipt), appeal property taxes, “finding a partner to purchase an interest in the home and contribute to expenses”. (Not sure if these are all applicable in Canada as well.)

A series of pension related articles in the Financial Times had the following insights: In “In open architecture will die” Steve Johnson quoted from a recent European survey that “Respondents were also gloomy about the prospects for both state and privately funded pension provision, with one predicting a “breaking point that no one has yet really tested”, and “riots in the streets”. In “Plunging assets cast gloom over UK pensions” Sophia Grene quotes a consultant that ““Active management has delivered poor performance in the last 12 months…Asset flows have been to passive mandates and I see no reason why that trend would be broken.” In another article “Tough year sees few winners” she writes that “The winning formula for UK pension fund managers in 2008 was to focus on strategies to help pension schemes match their assets and liabilities” and quoting a consultant “Allocation to LDI (liability driven investing) is a trend we’ve been seeing for the last several years” (unfortunately not the case in US and Canada).

Also on pensions, Scott Blythe in Benefits Canada’s “Pension crisis centre stage” looks at both the small percent (20%) of Canadians covered by private pension plans and the disastrous state of funding of those plans: 60%! (…and can you believe that some people still believe that  Nortel pension is funded at 69% as of December 2008?…I would be surprised; 50-60% is more likely and the 60% quoted here just reinforces my suspicion.) What’s even worse is that there appear to be few visible steps toward rectifying the situation (outside of BC and Alberta who have at least committed to action). Quoting Janet Rabovsky, the indications are that “16% of the underfunding is due to market losses and …..11% is due to decline in interest rates”. (When assets and liabilities are mismatched, declining interest rates result in increases in value of liabilities without corresponding rise in assets.)  Sponsors/members face increased contributions and/or reduced benefits. (That is unless the sponsor is under bankruptcy protection, in which case pension plan members are seriously exposed, as in the case of Nortel. Just shows you how systemically flawed is Canada’s pension system and the regulatory infrastructure intended to protect Canadians in their old age. I have described some of the issues in an earlier blog at Systemic Failure in Canada’s Private Pensions: Who could have prevented it? What could be done now? ) And on a related story the Globe and Mail reports that “Nortel says it won’t appear before MPs” to explain why performance/retention bonuses are being paid while pensions are cut and severance payments go unpaid- what a joke and what a surprise!?!

The Financial Times’ Steve Johnson in “Lipper critical of surfeit of funds” criticizes European fund proliferation now around at 35,000 and growing compared to 8,000 in the US because it can lead to: (1) “funds to be sold on the basis of what is fashionable, rather than what is most appropriate for an investor”, (2) “fund proliferation increases annual fees and expenses to investors as the average fund size falls”. (Even with fewer funds, no doubt that this is a problem in US and Canada as well.)

WSJ’s Shelly Banjo looks at “The best online tools for personal finance”  on budgeting (e.g. Mint), financial plan (e.g. SimpliFi), checking for fraud (e.g. Finra.org/BrokerCheck), and other topics. (I haven’t tried them, but I’ve have heard of satisfied users.)

WSJ’s McQueen reports 5-15% increases in term insurance prices in “Insurers raise premiums on term life” . This will eliminate the option of taking out a new policy every 5 years or so for lower premiums as premiums were trending downward. (Don’t be surprised that even though Canadian premiums were always higher than in the US, they will increase here as well.)

Russell Napier in Financial Times’ “Get ready for inflation” warns readers that “Whatever comes next as the financial crisis plays out, it cannot be disinflation.” He thinks that inflation may only rise moderately and stabilize there for a while or may accelerate strongly if governments decide to use it as a way to deal with the growing debt. Some protection mechanisms suggested by the author are: forestry/timber(?), overseas assets in general and Asian in particular.

With the recession hitting (U.S.) seniors in full force and they can’t sell their homes, demand for government backed reverse mortgages surged 20% over last year in the US. (You can read about concerns about Reverse Mortgages at this website) Recent changes are higher maximums, lower origination fees and lower mortgage rates). Nick Timiraos in WSJ’s “Seniors drawn to mortgages that give back” mentions that with falling real estate prices have disqualified many homeowners and the lenders risk that when home is sold it may be worth less than the loan. But financial advisers still caution about rushing into reverse mortgages because they are relatively expensive and they often come with variable interest. The Herald Tribune’s In reverse mortgages, benefits and pitfalls” quotes a homeowner that “It’s eating up all the equity in my home…At the time, they said the interest rate would never go up that much.” Regulators are also warning seniors about shady practices persuading those taking reverse mortgages to then buy very expensive annuities with the proceeds, as in Reuter’s “US regulator sounds alarm about reverse mortgages”

The latest S&P SPIVA report “Index versus active funds scorecard for Canadian funds” indicates that only 46%, 25% and 8% of the Canadian Equity category funds outperformed the S&P/TSX  Index over 1,3 and 5 years respectively. (If skill could consistently overcome the cost of actively managed mutual funds, this past year was the one to do it in. Not that there were no exceptions, but you had to identify them a priory; good luck. This past year there was no need for in-depth  analysis of individual companies/stocks; all one had to do is move some portion of the assets under management into cash, an option not available to index funds which had to stay fully invested by definition. Active investment management is one tough game!)

Tim Cestnick in Globe and Mail’s “Swapping assets with family can save on taxes”describes how it may be to your future advantage to swap at market value income producing assets from higher taxed family member non-income producing asset like your home with lower taxed member. He recommends that you do this only with professional help.

ETF proliferation continues. First in the Globe and Mail’s   “BMO joins ETF frenzy, launches four funds” ; these sound like me too products. (Perhaps slightly cheaper than Barclays’ products, but there is not much new here. Unless BMO plans to add to these products and/or use these as building blocks for something more interesting like a “balanced ETF” with automatic re-balancing, they’re unlikely to overcome Barclays’ first mover advantage just by offering a me too product a couple of basis points cheaper.) At the other end of the same/different spectrum Reuter’s Joseph Giannone reports “Flood of ETFs promising hedge fund-style returns” . New firm Index IQ initiated two tracker ETFs MICRO.P (hedge macro strategy focused on emerging markets and global trends) and QAI.P (multi-strategy tracker). Other firms mentioned were Wisdom Tree (planning Real Return, Managed Futures and Long-Short funds),Grail Advisors, AQR Capital (Arbitrage and diversified arbitrage mutual funds- for  US residents only). (I haven’t had a chance to at these offerings as yet.)

Also on ETFs, WSJ’s Jonathan Burton in “Spice up the index formula” discusses indexes based on equal weighting rather than market capitalization weighting. In periods when small company stocks outperform their larger brethrens, an equally weighted index also outperforms, as it has done so far in 2009 (Ryder’s RSP 17% vs. SPY 6% so far this year). But not everyone agrees that it’s worth the cost incurred in higher management fees and higher transaction cost due to increased transactions required to maintain equal weighting as prices change.

And finally, in Financial Times’ “Count us in, maths experts tells UK regulator” Clive Cookson reports that mathematicians want in to help regulators who had “misplaced reliance on apparentlysophisticated math”. As many have found out recently, the Gaussian (normal) distribution underestimated the likelihood of a serious market swoon that we have just lived through. “The really interesting issue is how much is fixable by using better math, and how much is inherently uncertain and beyond the scope of mathematical modeling,” (This is no doubt a question in many people’s minds, and can’t wait to hear the new insights of these mathematicians.)

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