blog18apr2008

Hot Off the Web
Financial Times’ Rebecca Knight in “Exchange traded funds gain a guiding hand”  quotes PowerShares’ Bruce Bond that introduction of active ETFs is a watershed event, as these will compete with other actively managed funds. PowerShares had to accept assorted restriction from the SEC because the conflict between ETFs requirement for daily disclosure of holdings versus actively managed mutual funds need to disclose only semi-annually, thus putting ETFs at a disadvantage due to potential “front running”. Also mentioned are other strikes against active ETFs: likely significantly higher fees than index based ETFs, lower transparency makes them more like Closed End Funds (which unlike ETFs you can often buy at a discount), and lack of performance history. And then how can you tell if your manager brings any sustainable skill to the table. “Active management means more for the industry than it does for the investing public,” he says. “It gives them the ability to charge higher management fees, and make the same promises we’ve seen with hedge funds and mutual funds.” Time will tell how successful these active ETFs will be for investors, though for my money I’ll continue using the lowest cost index based ETFs in the core of my portfolio to achieve global diversification. In a blog on the same topic “Will active ETFs force fund companies to offer F class funds through discount brokers?”  Jon Chevreau indicates that “Now the pressure is on for Canadian mutual fund companies to offer F-class funds through discount brokers—as they almost did in 2004”. Frankly, I suspect that they’ll have no choice, but it will be too little too late. Investors are getting pretty educated and they increasingly understand that the correct way to build the globally diversified core of one’s portfolio is from low cost ETFs.
In Financial Post’s “Rogers team seeks the right mix”  Jon Chevreau discusses how the Rogers Financial Group is transitioning to a “fee-based (still different from fee-only”) model and away from older transaction and commission model of advisor compensation”. For new clients without legacy positions they would build portfolio “100% F-class mutual funds (no-trailers), individual stocks, and GICs”. The sample portfolio quoted by Jon was 0.84% for investment product and 0.53% for the advisory fee. While that’s a lot cheaper the typical Canadian mutual fund, you might want to understand what value is derived from the 0.84% investment product when index based ETFs can do still better. The advisory fee sounds reasonable given that it appears to include an Investment Policy Statement and custom portfolios for each client, factoring in the considerations of pension plans, transitioning from the existing portfolio and help customers to optimize withdrawals from a tax perspective.
The following quote from Martin Wolf’s “Why financial regulation is both difficult and essential”  in the Financial Times may entice you to read the whole article on the coming increased financial regulation “But competition does not work well in finance. The “product” of the financial industry is promises for an uncertain future, marketed as dreams that can readily become nightmares. Customers are readily swept away by exaggerated promises, irrational beliefs, misplaced trust and sheer skulduggery. So, too, are practitioners: basing risk management on limited data and inadequate models is a good example. Emotions count wherever uncertainties loom.”
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