Hot Off the Web– July 27, 2010
Personal Finance and Investments
Brett Arends’ lists “Ten Stock-Market myths that just won’t die”in the WSJ. Among the myths are: (2) “stocks on the average make you about 10% a year” (except that includes inflation and you had to buy at average valuations), (6) “The market is really cheap right now. The P/E is only about 13” (Look at other valuation metrics as well like “cyclically adjusted PE ratio” or “Tobin’s q”), (8) “We recommend a diversified portfolio of mutual funds” ( what you should be diversifying across is “cash, bonds, stocks, alternative strategies, commodities and precious metals”), (9) “This is a stock picker’s market” (“the lion’s share of investment returns has typically come from asset classes they have chosen rather than the individual investments”)
The Globe and Mail has a book excerpt from Robert Keats’s Border Guide on Out-of Country medical coverage. His book is a must read for Canadians who travel to, snowbird in or consider retiring in the U.S. (My last week’s blog mentioned another related Globe article “Health bill opens doors to Canadians seeking U.S. retirement”)
In the Globe and Mail’s “The truth about family trusts”Chaya Cooperberg reports that trusts can be useful in moving taxable income from high to lower taxed family member and to secure the needs of a beneficiary with disability. She specifically discusses myths associated with trusts, like: they are inflexible, are just for the very wealthy, and are complex to manage.
I don’t usually comment on mutual fund related matters, other than suggesting that you implement your portfolio by using much lower cost ETFs, GICs and bonds. However Ken Kivenko asked me to look at the latest proposed mutual fund Fund Facts framework description and it is not very impressive. The minimum requirement of such a document would have also included: (1) after all fees/commissions annual performance against (passive) benchmark for past 10 years and for the life of the fund, (2) a meaningful explanation of ‘risk’ such as annual volatility for the past 10 years , (3) an indication why this fund would be preferred over a passive option ,and (4) a statement indicating if the ‘advisor’ for this mutual fund sale is acting in a sales or fiduciary role. So no, it is not an adequate disclosure.
John Heinzl in the Globe and Mail’s “How do investing costs hurt returns? Let us count the ways” reminds readers that “Consider that $100,000 invested at 8 per cent for 25 years will grow to $684,847. Take off just 2 per cent in fees and that same $100,000 will grow to $429,187 – a difference of $255,660.” He then points out that many investors don’t even know that they are paying fees on their mutual funds. Heinzl then lists 18 different fees plus taxes (the 19th) which all eat into returns.
Tim Cestnick in the Globe and Mail’s “It pays – literally – to invest with the taxman in mind”tables some ATM (Active Tax Management) strategies for readers: asset allocation (for highest tax brackets, in order of increasing tax efficiency are interest, dividends, capital gains while foreign dividends are taxed as interest/income), asset location (tax-deferred or pre-taxed, taxable, corporations, trusts…), and watch for “portfolio lock-up”(in taxable account trigger capital losses to offset gains, then reinvest to bump up cost base).
In the NYT’s “Will you be my fiduciary” Tara Siegel Bernard discusses the meaning and importance of the ‘fiduciary’ role. Just in case the latest U.S. financial services reform law does not end up requiring fiduciary standard for all financial services providers, she includes a simple ‘Fiduciary Pledge” that you can ask your prospective vendor of financial services to sign before you sign up with them. The Financial Post’s Jonathan Chevreau also discusses the need for fiduciary role in “Investors stuck in the middle of the debate over the ‘F’ word” and concludes “If this summer’s shaky markets retest 2008’s lows, we’ll be hearing much more about how the “F” word, as in “fiduciary,” might have saved investors while they still had capital to preserve.” (But this is not just about short-term market losses, but about investors being led like sheep into mutual funds with punishing high management fees and expenses which guarantee lower than available returns using passive vehicles, without corresponding benefits of higher returns and/or appropriate advice.)
“Factored structured settlements” or “secondary-market income annuities” are attacked by Jason Zweig in WSJ’s “Another can’t miss deal that can miss spectacularly”. These are packages of predetermined income annuities resulting from the settlement payments to a plaintiff in a wrongful death or injury lawsuit. The potential problems range from lack of liquidity (no tertiary market and at times no right to re-sell) to questions about legal right to resulting income stream (sometimes fraudulently sold multiple times).
In WSJ’s “How to pick a target date fund” Anne Tergesen reports on a Morningstar study that looked at factors which influenced whether a fund family “on average, beat or trailed the benchmark. Here, Morningstar examined the impact of three factors: fees, asset allocation and manager “selection” skill….Of the three factors, fees are the most likely to generate a lasting performance edge….Given that most investors are probably going to own these funds for decades, cost becomes even more important.”
The May S&P Case-Shiller Home Price Indicesare just out this morning. “The 10-City Composite is up 5.4% and the 20-City Composite is up 4.6% from where they were in May 2009… While May’s report on its own looks somewhat positive, a broader look at home price levels over the past year still do not indicate that the housing market is in any form of sustained recovery,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Since reaching its recent trough in April 2009, the housing market has really only stabilized at this lower level. The two Composites have improved between 5 and 6% since then, but this is no better than the improvement they had registered as of October 2009. The last seven months have basically been flat.””
M. P. McQueen’s WSJ article “Doubling down on housing” discusses how many homeowners with underwater mortgages don’t walk away from their homes, instead they sink in additional moneys and secure new lower cost and/or shorter term mortgages on the same or larger properties.
In news about which you might ask if people are perhaps unwarrantedly excited, in WSJ’s “Supply of homes set to grow”Robbie Whelan reports that “In June, new-home sales were running at a seasonally adjusted annual rate of 330,000 units, the Commerce Department said Monday. While that was up 23.6% from the all-time low of 267,000 in May, the June figures were the second lowest on record.”
In WSJ’s “Housing market stumbles”Timiraos and Whelan report that in “major markets across the country, home sales are deteriorating, inventories of unsold homes are piling up and builders are scaling back construction plans”. Reasons include: expiration of home-buyers tax credit, “sluggish labor markets, global economic turmoil, and falling stock prices”, “too many homes and falling demand’, underwater mortgages prevent upgrade trade, rising inventories due to “unrealistic sellers flooding the market Some effects include: single family home permits issuance is “at post World War II lows”, “newly signed contracts plunged in May and June”.
Kimberly Miller reports in the Palm Beach Post’s “Florida home sales up in June, despite dip nationally”that June sales in Palm Beach County were up 23% compared to May and 27% compared to June 2009, and were up in Florida 10% compared to May and 17% compared to previous year; Florida prices continued to fall despite increased volume. Nationally, sales in June decreased 5% compared to May but increased 10% over May 2009.
In the NYT’s “If it causes stress, is it really a vacation home?” Paul Sullivan looks at some of the main reasons of second-home misery: the time and money required to maintain vacation (or rental) homes hundreds or thousands of miles away, and why a second home is not an investment.
WSJ’s Tara Siegel Barnard reports in “401(k) fees gain a bit of clarity” that currently not just plan members often don’t know the fees/costs associated with their 401(k)s, but surprisingly neither do their employers. “U.S. Labor department released rules last week that take a first step toward more clarity. The rules make it easier for employers to make apples-to-apples comparisons when shopping for 401(k)-type plans”. The new rules are expected to require annual disclosure of all investment and administrative costs, as well as indicate which investments are managed actively and passively, their performance relative to benchmarks and costs associated with them. (Sunlight is a great disinfectant, more clarity is great. Hopefully Canadian plans will follow suit.)
Mark Scott in Bloomberg BusinessWeek’s “Pension reform: Europe wants later retirements” reports on how European countries are heading toward increasing “retirement ages as a way to trim pension deficits and cut deficits”. Europe’s generous public retirement benefits are in for some nip-and-tuck in France, Greece, Spain, U.K., etc
On the Nortel pensioners’ front, in Ottawa Citizen’s “Nortel’s Canadian, U.S. creditors face different experiences” Bert Hill exposes the radically different treatment Nortel’s U.S. and Canadian pensioners are receiving: on health and life insurance the U.S. court ordered that they must be negotiated with the pensioners whereas in Canada these benefits’ will be terminated by year-end with court’s approval and the cost is onerous conditions essentially forced on the Canadian pensioners (“drop right to sue directors and officers and drop hopes to benefit from changes to bankruptcy legislation”), “U.S pension plan guarantees and social security benefits are significantly stronger than in most (all!?!) Canadian jurisdictions”, the $3B U.S. tax overhang accepted by the Canadian court against Canadian assets, U.S. pension guarantees up to $60,000 annually compared to Ontario guarantees of $12,000 and no guarantees in other provinces, etc, etc
Things to Ponder
In the Financial Times’ “Stimulate no more – it is time for all to tighten” and “A double dip is a price worth paying” Jean-Claude Trichet and Martin Feldstein, respectively argue for fiscal restraint even at the risk of a double dip; also Andy Xie argues an interesting perspective in “More stimulus won’t stop Asia’s rise”, that despite of difficulties in the west with levelling or potentially even somewhat decreasing standard of living, the reality is that compared to average emerging country living standards the West still looks great and will continue to do so in the foreseeable future, but Asia’s continued rise is unstoppable, with or without western stimulus.
In the Financial Post’s “’Emotionless’ investors are probably fibbing” Jonathan Chevreau reports that mark Mobius still sees value in emerging markets and indicated that Canadians are underinvested in them at 3-8% of their portfolios instead of the current 31% emerging markets world market cap.
Some of you may think that this is a joke, but in WSJ’s “Bond sale? Don’t quote us, request credit firms” Shrivastava reports that “Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law…The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately.” (Is it unusual for professionals to be held accountable for their professional opinions?) In a related article “SEC grants Bernanke wish: a break on ratings”by breaking the logjam and permitting unrated securities to be issued under “Regulation AB”.
The Financial Times’ Steve Johnson argues that “The real value of active managers”is for society as a whole rather than individuals. “No matter how large the passive sector gets, we are still left with the underlying truth that active investors, as a whole, cannot beat the index. At the same time we are also left with the realisation that once passive investment gets beyond a certain level, investment, and thus capital allocation, becomes increasingly inefficient. Herein lies the real truth about active management. More often than not an active manager does not create value for their own investors per se but, by virtue of their behaviour, they do create value for investors in general. In industry parlance, they may not be able to generate alpha (index-beating returns) on any consistent basis, but they do improve the beta (index return) of the overall market.”
And finally, the Madoff story’s twists and turns continue. The WSJ’s Michael Rothfeld reports in “Madoff investors brace for lawsuits” that the court-appointed trustee recovering money for Bernard L. Madoff’s victims is preparing a new lawsuit seeking to wrest “funds away from investor who were duped by the Ponzi scheme” if they were among the half who were “net-winners”; i.e. the withdrew more than they invested. While this may seem fair to some, it appears patently unfair to others unless these ‘winners’ had access to inside information. (Time will tell which way the decision will go. The judge may reject the case, she might rule to recover funds from ‘net-winners’ (I gather there is legal precedent for this) or might choose some middle path where the ‘net-losers’ would get preferential access to remaining Madoff assets without additional recoveries from ‘net-winners’?)