Contents: Rent vs. buy in Toronto, target maturity corporate bond ETFs, Canada/US wealth gap, Palm Beach County home prices up 28%? Changes to existing variable annuities, tontines, collateral damage, documentary slams brokers, gold: buy or sell? fundamental and equal weighted indexes, wealth a result of hard work or luck?

Personal Finance and Investments

In the Globe and Mail’s “Why Preet Banerjee is choosing renting over buying” Preet Banerjee looks at the financial advantages of renting vs. owning in Toronto. Even at the currently ultralow interest rates the $550,000 condo with 5% ($27,500) down payment and almost $20,000 closing costs, would still result in monthly costs of $3,300 when buying vs. $2,200 if renting. For those not planning to live there for 10 or more years, but having the discipline to save the extra $1,100/mo and adding in the risk that Toronto condo valuation might actually decrease (and that mortgage rates might be significantly higher in 5 years), renting may be a no-brainer.

In Investment News’ “Blackrock launches ETFs for fixed income laddering” Jeff Benjamin reports that BlackRock launched target maturity (2016 IBCB, 2018 IBCC, 2020 IBCD and 2023 IBCE) corporate bond funds. “While BlackRock is touting its new lineup as being geared toward institutional investors, the ETFs are also ideal for financial advisers looking to build laddered-bond portfolios. The rollout of these types of target-maturity ETFs adds a fresh endorsement to the traditional bond-ladder strategy as a mean of protecting principal.” The advantage of these types of ETFs is that (unlike typical bond funds which never mature) these mature on the indicated maturity date. Annual fees are 0.1%.

Real Estate

In the Financial Post’s “Canadians enjoy a large wealth gap over U.S. counterparts, but will it last?” John Shmuel reports that “Canada’s net worth is a “very healthy” 648% of gross domestic product, compared to 550% of GDP in the United States…(with housing being the main contributor) “The value of U.S. households’ net housing wealth has slumped from a peak of 180% of GDP in 2006 to only slightly more than 100% of GDP now…In contrast, Canadian households’ net housing wealth has continued to trend higher and now stands at more than 130% of GDP.” That could change soon. Capital Economics estimates that, based on the ratio of house prices-to-per-capita-incomes, U.S. housing prices are 20% undervalued while Canadian homes are 30% overvalued.”

In the Palm Beach Post’s “County home prices soar 28 percent in March” Kim Miller reports that according to the Realtors Association PBC existing home prices were $249,894 or 28% higher in March 2013 than those sold in March 2012. “The number of closed sales on existing single-family homes in Palm Beach County last month showed a 12 percent increase to 1,266. Sales of existing single-family homes statewide jumped 9 percent in March from last year to 19,631, with the median sales price showing a 15 percent gain to $160,000.” (At least some of the differences likely have to do with differences in the type of homes sold in the two periods and differences in the proportion of the homes sold being distressed sales. Furthermore the visible inventory is likely just the tip of the iceberg of the shadow inventory held by banks and private sellers waiting for better prices.) In fact USAToday’s “Home sales dip as demand outstrips supply” addresses some of the “apples and oranges” difference between the sales last month and previous March.

Pensions and Retirement Income

In the WSJ’s“They are changing our annuity!” Greene and Scism report that “In the past decade, Americans heading into retirement have racked up a total of $661 billion in an estimated six million variable annuities with benefit guarantees… After four years of cutting benefits in products sold to new customers, insurers now are going after contracts held by longtime customers. The changes include clamping down on fund choices, raising fees, blocking additional account contributions and even trying to buy back the contracts.”   The article includes some valuable advice to those who already own such variable annuity contracts, the changes being made and options available are not necessarily to advantage of the investor, stay invested in aggressive funds otherwise what’s the point of the guarantees don’t trade it in without thorough independent analysis. (Most of these variable annuities with assorted guarantees are mostly pretty lousy deals given their very high annual costs as I indicated in a series of blog some many years old GMWBs)

In the WSJ’s “Want financial security? Look to the Renaissance” in which Moshe Milevsky explains the 360 year old history of tontines and how they work. In the tontine he describes, 1000 participants each contribute $1,000 to buy a $1M 30 year 3% Treasury bond; each year the $30,000 interest paid by the bond is equally shared by survivors, thus the death of some would result in an increased payout to survivors. (Great idea! In fact tontines are a great way to explain/sell a tontine related product already available in the U.S. (though not in Canada) which solves what happens to the principal once all participants die. It is called “longevity insurance” or “longevity annuity” or “delayed payout annuity” see some of my blogs on the subject of longevity insurance. If sourced from a low overhead source (perhaps a mutual life insurance company) or perhaps even offering such an option for part of one’s Social Security or CPP payout, retirees could protect their income security from longevity risk.)

Things to Ponder

In The Financial Times’ “Misuse of collateral creates systemic risk” Satyajit Das explains how collateral practices, rather than reducing risk just shift risk potentially creating systemic risk. He points to the sources of (no pun intended) collateral damage that people tend to overlook: shifts emphasis from borrowers’ creditworthiness to the collateral, overlooks risk in value and liquidity changes of the collateral, “asset liability mismatches” and more. Das writes that “Collateral use creates undesirable linkages between banks and sovereign debt, which compound crises. It encourages the creation of high quality securities that lenders are willing to lend against.”

In InvestmentNews’ “Brokers slammed in PBS documentary” Jason Kephart reviews the PBS documentary aired this week entitled “The retirement gamble” in which “advisers are blamed for steering investors into high-fee investments such as actively managed mutual funds in order to boost their own income”. Among those interviewed were: Helaine Olen (“the term “financial adviser means almost nothing”), Teresa Ghilarducci (“It’s one of the products Americans buy that they don’t know its quality. It’s one of the products Americans buy that they don’t know its danger.”),  John Bogle (“The magic of compound returns is overwhelmed by the tyranny of compounding costs,” he says. “Do you want to invest in a system where you put up 100% of the capital, take 100% of the risk and get 30% of the return?” and Jason Zweig (“One of the ultimate dirty secrets of the fund industry is, a lot of people who run other fund companies own index funds in their own accounts and don’t talk about it — unless you put a of couple beers in them.”) (I haven’t seen the documentary as yet, as I’ve been on the road for the past several days, but certainly sounds worthwhile to watch.)

In the Financial Times’ “Gold: losing its charm?” Jack Farchy writes that not everyone is losing faith in gold despite of the $243 drop in price “from Friday morning to Monday evening” the previous weekend. On one hand Farchy writes that investors shouldn’t be surprised given the rapid rise of gold price to $1,920, George Soros’s recent warning that this was “the ultimate bubble” and Warren Buffett ridiculing investment in gold, India imposing import taxes on gold, the announcement that Cyprus will sell gold reserves to pay to help dig out of its crisis. But many others are sitting tight given that “governments have been printing money at an unprecedented rate” and they believe that they will be ultimately proven right. In fact this week the Financial Times reported that “Asian bargain hunters pile into gold”.

In the Globe and Mail’s “Is it worth making the shift to fundamental indexes?” Andrew Hallam discusses the clash between Bogle (advocating capitalization weighted indexes) and Arnott advocating fundamentally weighted ‘indexes’) and while back-testing suggests that in the past fundamental indexes may have outperformed, “back-tested studies are theoretical…(because) they don’t compare actual products available to investors”. Hallam writes that he won’t be changing his investments to fundamental indexed ones before watching them for another five years, though he might start adding some. (I haven’t even started adding some.) And speaking of alternative indexing approaches in IndexUniverse’s “RSP turns 10; Returns nearly twice SPY” Cinthia Murphy reports that Guggenheim S& 500 Equal Weight ETF (NYSE: RSP) almost doubled the performance of the capitalization weighted SPY over the past ten years. The article explains that “It’s the idiot savant of outperformance—you take the stocks in the S&P 500, you weight them equally and you rebalance. It’s translated into huge outperformance over the years, and you can say that’s because of the tilt toward small and midcaps, which is true…” “That tilt is known for delivering outperformance in bull markets, but is also known for underperforming the broad stock market when things go south.” The article points to other issues with the equally weighted portfolio like more frequent rebalancing and higher costs and taxes.

And finally, in the BloombergBusinessweek’s “How did the world’s rich get that way? Luck” Charles Kenny discusses some of the potential sources of income inequality and that much of it may be attributable to the good fortune of where you were born, the wealth and value system of your parents rather than to your hard work.