Contents: what ‘fundcos’ won’t tell you, fiduciary standard required, passive beats active-again,  long-term care costs, when RRSP withdrawal is sensible, global diversification, downside of joint asset ownership, US housing up, shadow housing inventory well managed-so far, pooled assets for Ontario public sector, expanded-CPP trumps PRPP, demographics drive stock returns, end of bond bubble inevitable but when? asset allocation to protect against calamities of the herd, not pension but savings crisis- NOT, luxury retirement on the cheap, elder fraud protection ineffective in Canada.

Personal Finance and Investments

In MarketWatch’s “10 things mutual fund companies won’t say”John Kwan’s list includes: “cheap funds often outperform pricey ones”, “we can’t beat the market”, “when skill fails, we just double (or quintuple) our odd” by creating many more funds, “people aren’t buying our product…except when we pay them kickbacks”, and others. (Thanks to JP for recommending.)

In the Globe and Mail’s “It’s time we made financial advisers live up to that title” Rob Carrick does a very forceful piece in support of the fiduciary standard for financial advisers. He calls the “adviser” title devalued to near nothing. He calls on all investors to make their voices heard with regulators. While he admits that “a best interest standard won’t stop (all) abuse of investors, but it will give new authenticity to the term adviser. Advisers would actually have to talk to clients about their needs and goals, then recommend appropriate investments.” He writes that “such a standard will make it more difficult for advisor to tell client to borrow money to invest in stocks or persuade client to buy expensive in-house (or any other) mutual funds”.

In Investing’s “Modern fool’s gold: Alpha in recessions” Pfeiffer and Evensky provide additional evidence that “active portfolio management is not superior to a passive investment strategy in either expansions or recessions. We also find that persistence is weak across business cycles. Collectively, the findings support a low-cost passive investment strategy for retail investors across all business cycles”. (Thanks to Ken Kivenko of Canadian Fund Watch  for recommending.)

On the subject of the cost of long-term care Bloomberg’s “The real cost of long term care” looks at various dimensions of costs such as: (1) the $240,000 estimated cost of medical expenses in retirement for a 65 year old couple, (2) $450B “estimated value of caregiving by family and friends in 2009, (3) $18,200 “national average annual cost of (five time per week) adult day care services”, (4) $20,800 average annual home care services cost (4 hours per day, 5 days per week), (5) $20,000 modification cost of a “bathroom for elder care”, (6) $41,000 average annual cost of assisted living facilities and (7) $88,000 annual nursing home costs.On LTC insurance in WSJ’s “Women face higher costs” Kelly Greene reports that LTC insurance companies are planning to “start charging women applying for coverage as much as 40% more than men… to better reflect the risks involved in covering women, who are paid two out of every three benefit dollars from long-term-care insurance, in part because they live longer and often have no caregivers at home”. (I am still waiting for credible evidence with shows the LTCI is cost-effective way to protect against the cost of long-term care.)

In the Financial Post’s “When withdrawing money from RRSP makes sense” Ted Rechtshaffen writes that the golden rule of RRSPs is: “Make sure that you are getting a better tax refund on the money you put into an RRSP than the tax bill you will pay when you take the money out — usually in retirement.” He gives some examples contrary to “traditional wisdom” when, he argues, it actually makes sense to withdraw money from the RRSP. One example is when on expects to have very high income (taxed a high marginal rates) in one year and very low (or no) income the following year; here one would avoid 40-50% tax rate in year one on contributed funds and pay only perhaps at the 20% when funds are withdrawn in year two. Another example is when individuals who retired before age 71 might be able to withdraw from RRSP by first converting some or all to a RRIF and withdrawing at much lower tax rates, as compared to if significant funds remained in the RRSP (say $500,000) upon the death of the second to die spouse.

Michael Nairne in the Financial Post’s  “Wealthy investors go global” writes that major “pension plans, endowments and wealthy families… allocate 71% of their public equities to U.S., international and emerging markets and only 29% to Canada itself. This is the opposite of Canadian fund investors, who still have the majority of their equities invested domestically.” He then proceeds to explain why this makes sense for Canadians. (Of my equity allocation, I allocate about 30% to Canada, 25% to the US, 25% to EAFE and 20% to emerging markets.)

In MoneySense’s “Sidestepping probate can be dangerous” Gail Vaz-Oxlade argues that “While there may be instances where joint ownership does make good sense, doing it simply to avoid probate is a fool’s game.” She explains the difference between holding assets jointly as “tenants in common” and “with rights of survivorship” and then warns about the implications of joint ownership: the relinquished control, potential tax implications when adding an owner and often better approach of “testamentary trust”.

Real Estate

The September 2012S&P Case-Shiller Home Price Indices “…showed that (US) home prices continued to rise in the third quarter of 2012. The national composite was up 3.6% in the third quarter of 2012 versus the third quarter of 2011, and was up 2.2% versus the second quarter of 2012. In September 2012, the 10- and 20-City Composites showed annual returns of +2.1% and +3.0%. Average home prices in the 10- and 20-City Composites were each up by 0.3% in September versus August 2012.” “Home prices rose in the third quarter, marking the sixth consecutive month of increasing prices.” Cities with highest one year increases were Phoenix at 20.4%, followed by Minneapolis, Detroit, San Francisco, Miami, Denver, Tampa in the 6%-9% range.

In Bloomberg’s “Foreclosure wave averted as doomsayers defied”  Gittelsohn and Gopal report that the lingering concerns about the shadow inventory overhang held by US banks have not materialized (so far). “Banks have stepped up foreclosure alternatives to avoid legal challenges. They’re forgiving debt, modifying payment plans and approving short sales that allow homeowners to sell for less than they owe… Slowing the foreclosure process has allowed banks to avoid booking losses on non-performing loans… The goal all along — from the banks, the servicers and the government — was sort of to slow walk the whole thing, bleed it through over time”. “The inventory of potential foreclosures remains a threat across the U.S. and could result in a new wave of defaults and depress home values, especially if the economy slows, said Robert Shiller…”

Pensions

The Blakes’ Bulletin’s “Morneau report: Facilitating pooled asset management for Ontario’s public-sector institutions” reports that “…the Government of Ontario announced its intention to create a framework that would facilitate the pooling of pension fund assets for investment management purposes… The pooled structure would offer a family of unitized pooled funds and would: (1) permit participating institutions to retain fiduciary responsibility and control over asset allocations, (2) operate at arm’s length from government, and (3) have “world-class” governance, professional investment and risk management.

The Financial Post had a couple of articles advocating for the superiority of the expanded-CPP over the PRPP.  Barbara Shecter’s  “Keep expanded CPP on the table, says David Dodge” reported that ex-governor of Bank of Canada David Dodge “…floated the idea of an expanded CPP that would raise the percentage of income returned to as much as 40%, with the potential for voluntary contributions to top up future income for higher earners” instead of the current 25%.Jason Heath’s“CPP ‘economies of scale’ make it a cheaper alternative to PRPPs” piece argues that he sees the “PRPP as nothing more than an RRSP by a different name”, and (despite the fact that some of the CPP costs quoted are much lower than the ones I have seen) he concludes that “average Canadians who can’t afford to see their invaluable retirement savings siphoned away by high fees and un-valuable advice could be better served by the fiduciary duty of the CPP than by their non-fiduciary financial advisor”.

In the Financial Post’s “Lifestyle cutbacks on horizon for Canadians as retirement gaps grow” Barbara Shecter quotes some pension experts who argue that “It’s not a pension crisis, it’s a savings crisis”. The most vulnerable group is seen to be those in the $30,000-$80,000 income range without a company pension plan. The situation continues to deteriorate and “nearly 25% of the population won’t be able to afford to maintain their standard of living when they leave the workforce.” (So far so good, but) …then the article shifts into suggesting that the PRPP is the answer to the crisis. (Unfortunately the PRPP doesn’t even solve the savings crisis given that participation for the employer and employee are voluntary. In any case, the savings problem is only one of four key requirements for real pension reform, none of which are addressed by the PRPP adequately or at all. To see my take on these requirements read my article “PRPP: An agreement to kick the can down the road and deliver more fees to Canada’s financial industry”in CARP Advocacy.

Things to Ponder

In the Financial Times’ “The population conundrum” Norma Cohen argues that the stock market boom of the 80s and 90s was not as a result of globalization, deregulation and productivity increases but  demographics was likely the key driver. Various studies from the UK and the US suggest a strong correlation between p/e ratios and the percentage of the “population aged 35 to 54 – considered a prime age group for pension savings – as a percentage of the total population”. Those counting on the massive savings rates in China to come to the rescue of equities will be disappointed since “its working age population is set to peak in 2020 and begin to fall quickly thereafter”. Governments hope that retirement systems can still be rescued from the expected lower returns of equities by “later retirement ages, greater compulsion to save, higher taxes”, but not only are the politically unpalatable but would also be insufficient. (If conclusion is valid, this could have significant long-term equity return rate implications.)

The Financial Times has at least three articles addressing the inevitability of the end of the bond bubble. In Dan McCrum’s “GMO abandons bond market” he reports that GMO “has “given up” on the bond market, deciding to ditch long-dated sovereign debt” and they are re-allocating funds to cash (and to a lesser extent to Europe, Japan and emerging markets stocks).  In the “Bond party is over, says Canadian fund” Alexandra Stevenson writes that one of Canada’s largest pension fund managers indicated that the bond “party is over” and they are planning major re-allocation of assets away from fixed income to less liquid assets such as  “private equity, real estate and infrastructure”.  John Plender in “Few will flout the cult of the bond”argues that, even with negative real returns on bonds, few pension funds will go back to their previous overweight on equities because of the equity volatility is perceived as too high for today’s mature pension plans; instead they are “de-risking” with bonds. Unfortunately as pension funds keep on buying bonds, they push overall interest rates down thus driving their liabilities up! Plender then asks “what will happen when central banks start selling the bonds they have been buying through quantitative easing and other unconventional monetary measures?” and he argues that reversion to the mean is inevitable, only the timing is uncertain. (If demographics, as the previous paragraph suggested for equities, is also the driver of bond returns then timing of the bond bubble collapse might be later than anticipated by some of us.)

The Economist Buttonwod’s “Earning a bob or two with Dylan” reports that Dylan Grice thinks that calamities that follow when investors pile into an asset class (like stocks in the 90s and bonds today) proposes diversification by a “four way split – 25% equities, 25% government bonds, 25% cash and 25% gold” might save the day. Since 1971 this strategy returned a “respectable” 5% real compared to 5.5% for equities and 4% for bonds, and it did it with much lower volatility and lower maximum drawdown.

MoneySense’s “Retire in luxury on next to nothing” lists “Eleven amazing places where you can retire just on government money” (It’s still worth perusing even if you are not planning to relocate to a cheaper foreign land.)

And finally, in the how pathetic and ineffective is the protection against elder fraud inflicted by the financial industry in Canada watch this short CBC video  (Thanks to Ken Kivenko for recommending)