Hot Off the Web– March 29, 2010
Personal Finance and Investments
In the Financial Times’ “Reveal the ‘true cost’ of the croupier’s take” Jonathan Davis writes about the lesser known cousin of the ‘efficient markets hypothesis’, named ‘costs matter hypothesis’. “Like death and taxes, which are anything but hypothetical, fund costs are one of nature’s few sure things. Mr. Bogle likes to call them the “croupier’s take”. As in the casino, they are capable of imposing a serious drag on performance. Costs are irrecoverable and compound over time.” A study quoted concludes that “large-cap funds taken as a whole consume 7 per cent of the assets being managed as expenses and then generate another 2 per cent of losses beyond that”. (Wow!)
Steve Johnson writes in the Financial Times’ “Alarm over commodity ETP returns”that relatively recent, and increasingly popular, commodity-based exchange traded products’ performance “can dramatically undershoot that of underlying spot commodity prices, a factor not all investors may understand… The discrepancy arises because most of these ETPs, with the exception of some precious metal funds, invest in futures contracts that are rolled over before expiry. When the forward curve is upward sloping, known as contango, investors lose money every time the contract is rolled forward.” “Investors really shouldn’t be buying into ETPs when the market is in contango. Many commodity ETPs are short-term trading vehicles and investors should avoid them if they want long-term exposure to commodities.”
In WSJ’s “Why fund managers’ hot performance isn’t so hot”Jason Zweig writes that the recent apparent out-performance of more managers relative to indexes does not deserve “a round of applause”. The outperformance is due to taking on excess risk (lower credit quality bonds in bond funds and a higher proportion of smaller than market average stocks in stock funds). In conclusion he states that “So the world hasn’t been turned upside-down. Fund managers haven’t become a flock of Einsteins, and low-cost index funds remain the best choice for most investors.”
Rob Carrick in the Globe and Mail’s “Active ETFs add a new spin to low-cost product” reports that “Almost all the things you don’t like about mutual funds have been fixed in a new investing product called the actively managed exchange-traded fund”; better managers, lower fees than mutual funds (1-1.25%). (I am not persuaded and not rushing to buy actively managed ETFs.)
Tara Siegel Bernard in the NYT’s “How to self-diagnose your financial health” looks at some questions (used by financial advisers) that you might use to assess how you are doing financially: (1) Do you have a growing net worth? Is your debt-to-income ratio declining (from 30% toward 0%)? Is your savings rate in the 15-25% range? Do you have 6 months of expenses worth of cash emergency funds? Are you spending more than you earn? What are recent changes in your life? Are you adequately insured? Is your estate plan up to date? Do you sleep well with your current level of portfolio risk? Have your goals changed?
MoneySense has a list of fee-only financial planners in Canada’s various provinces (e.g. “Find a fee-only planner in Ontario”) This is not intended as a recommendation for the firms mentioned on the list, but I do get a lot of questions on where to find a fee-only planner, and this might be as good a list as any from which to start doing your due diligence.
WSJ’s Jonathan Burton in “How a pro handles his family’s finances” looks at how one particular Chartered Financial Analyst approaches his own financial affairs: “With clear priorities, patience, and long-term plans that center around stocks, savings, controlling expenses, avoiding debt, and sharing with those less fortunate.” They save about 20% of income, keep expenses low, do not put themselves under undue financial pressure, being more than ten years from retirement they have a heavy emphasis on equities (those retired, should have 5-10 years “worth of income needs in fixed income”, they are bargain hunters and thrifty.
Also in the WSJ, Tom Lauricella warns of “The risks of rising interest rates”. “Because markets often move in advance of events, now’s the time to do a little homework and take inventory of how interest-rate increases could affect your portfolio, especially areas where you may have reached for extra yield.” Readers are advised to pay attention to: ‘duration’, historical changes in interest rates and bond prices, risk with preferred securities which “respond to rate changes more like long-term bonds than stocks” and closed-end funds which often use leverage.
In WSJ’s “Canada: Little confidence in the pension system” Monica Gutschi reports the results of a recent survey whereby “Most Canadians support some kind of pension reform as they become increasingly skeptical the current system will provide them with a comfortable income once they stop working.” Two-thirds indicated that the current system “doesn’t meet the needs of the average Canadian and should be reformed” (Thanks to Ken Kivenko for pointing out the article.)
James Daw in Toronto Star’s “Budget slips $500M to Nortel pension guarantee”writes that “Ontario has quietly provided a $500 million backstop for pensions from Nortel Networks Corp. that are owed to residents of this province. The politically sensitive grant to the Pension Benefits Guarantee Fund (PBGF) was revealed without fanfare – or mention of Nortel – in the back pages of the province’s latest deficit budget.” (To clarify again, what is in fact happening is that the Ontario government is just doing its obligation under a pension insurance contract by which it undertook to guarantee the first $12,000/year of pension should a plan sponsor go bankrupt with an underfunded pension plan. This is not a gift to Nortel or its pensioners; however it will prevent many pensioners with low pensions from falling further into poverty.)
Bert Hill writes in the Ottawa Citizen’s “Judge rejects deal to extend Nortel pension benefit”that (shockingly) “Ontario Superior Court Justice Geoffrey Morawetz agreed with lawyers representing major U.S. and Canadian creditors (junk bondholders) that it would be unfair to approve a key condition, which allows Nortel pensioners, long-term disability recipients and others to demand a bigger share of Nortel assets if federal bankruptcy rules change.” Not that the negotiated settlement agreement was of much value to pensioners (since it required them to forgo much of their rights to sue those who failed to do their duty toward pensioners in exchange for about $2,000 value in 2010 health and life insurance benefits- and I formally objected to this), but the judge has even disallowed the included right to benefit should the remote possibility of the law of the land, the Bankruptcy and Insolvency Act, be changed to give pensioners some priority over other unsecured creditors. (There is only one word that I can think of to describe the way the court is dealing with the pensioners’ rights- sad.)
In WSJ’s “Gurus urge bigger pension cushion”Gina Chon reports that state and local governments in the U.S. are cooking the books?!? The state of their pension plans is even worse than the already published numbers. “According to a recent study by Wilshire Consulting, the average funding level of state public pension plans was at 65% in 2009, compared with 85% in 2008…The (proposed) accounting changes generally focus on the entire amount of underfunding, rather than the status of a typically smaller annual contribution, and move away from using a fund’s expected investment return to calculate pension liabilities.” Can you imagine calculating liabilities based on discount rates derived from ‘expected returns? This is the same lunacy used by Nortel pension plan actuaries, and it basically says that the more risk you assume with pensioners’ plan assets, the lower is the present value of the plan liabilities. Can you imagine that the extent of liabilities to be determined by the amount of risk you take on your assets? It’s totally insane!
In the NYT’s article “Some see a real estate bubble forming in Canada” Ian Austen asks about a potential real estate bubble developing in Canada. The questions arise due to perceived low inventory, 19.6% increase in prices over (admittedly mid-crisis) January 2009 prices, and prices driven by very low interest rates. However experts quoted suggested that “Certainly the underlying economy isn’t strong enough to support the prices we’ve seen over the last few weeks.”
Kimberly Miller writes in the Palm Beach Post’s “Florida’s existing home sales up 14% while prices continue to fall”but “Palm Beach County and Treasure Coast sales remained mostly flat”. “Nationally, home sales have been declining since November, troubling economists who note the unprecedented steps taken by the government to support the housing sector.” “Median sale prices for existing homes continued to fall in February, with Florida’s overall price dipping 7 percent from last year to $131,300.”
In the Herald tribune’s “Have home prices hit bottom?” Michael Braga explores the possibility that house prices on Florida’s west coast may be nearing the bottom. Some signs quoted are: inventory at 10.6 month level, stabilized lower end market prices, however >$500,000 properties still in turmoil. Some believe that there is “pent-up demand from Northern buyers who were priced out of the market during the boom”. (Yes, but some potential buyers have indicated to me that they are looking elsewhere than Florida unless the punitive property tax regime applied to non-homesteaded owners is changed.)
Things to Ponder
John Dizard describes the debate between Jim Grant and David Rosenberg, that he moderated, in the Financial Times’ “Treasuries are for losers- you decide”.Despite his personal inclination to support the affirmative side, Dizard shares Rosenberg’s arguments for the contrary: deflation is everywhere, new government spending has associated with it front end loaded levies, wages are not increasing, “The technical recession may have ended, but the depression is ongoing.”, and baby boomers keep on buying bond funds. And, the most recent historical example to consider is the “Japanese fixed income returns from the 1990s. Every time there was a squiggle upward in rates, deflation came out of its lair and crushed the coupon.”
In the Financial Post’s “Sir John’s prophetic memo”Jonathan Chevreau brings attention to John Templeton’s recently surfaced 2005 memo in which he predicts the “likelihood of reduced profit margin at the same time as acceleration in cost of living”, yet he hasn’t lost his faith in “shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits. Earning power is likely to continue to be valuable, especially if diversified among many nations.”
Steve Johnson in the Financial Times’ “Jury out on top fund persistence”reports on two studies which have apparently different conclusions. One study “concluded (reconfirmed) that past performance is no guide to future returns in the fund industry because successful, skilled fund managers jump ship and the highest returning funds attract sizeable inflows that render them less nimble. In contrast, poor performing funds that suffer significant outflows and fire their fund manager tend to improve their performance.” However, for institutional investors “buying the previous year’s winners was a successful strategy.” The explanation given may be related to “a degree of momentum in performance from one year to the next, as well as the fact that life (institutional) funds are less susceptible to damaging “hot money” flows than (retail) mutual funds.”
In the Financial Times’ “My traditional feast of hot financial dishes” John Authers uses the annual Jewish Passover tradition to ask four questions. He answers four financial questions related to: rallying stocks, low yields, strong dollar, and China’s lagging stock market.
In the Globe and Mail’s “Prime the printing presses” Jeff Rubin brings some historical context to governments using the printing presses to “finance their mountains of newly minted public debt”. “Without fail, monetizing large government deficits has triggered massive rises in inflation in the United States and elsewhere”. He argues that this is particularly attractive to the United States since foreign creditors are willing to be repaid in U.S. dollars. “The easiest way to stiff your foreign creditors is to devalue your exchange rate, and the fastest way to do that is to stoke your inflation rate.”
And finally, in the BBC’s “German pensioners guilty of abducting financial adviser” it is reported that being a financial advisor nowadays comes with some unexpected risks, like being kidnapped, tied up, gagged, beaten and ending up with broken ribs. Those taking the law into their own hands were themselves victims in their 60s and 70s, after the advisor refused to refund them millions lost in investments gone bad. (Thanks to Liz Crompton of Good Times who brought the article to my attention.)