New ‘Homepage’: While the blog format used for a little over a year works great as a blog, I find that it is missing a holistic view of the breadth and depth of content which has been built over the almost 7-years. Starting this week readers will land on a new ‘Homepage’. In addition to the holistic view of the content, the ‘Homepage’ will have a contents/abstract paragraph describing the latest post, and a single click access to both the latest post and the old blog format. I hope that regular readers won’t find the extra click intrusive (some might even find it of value), while infrequent and new readers will no doubt benefit from the more holistic view of content via the ‘Homepage’. Happy reading, and keep your emails and comments coming.

Contents: New Homepage, LTCI holders trapped, life settlement- caution! Swedroe: lies of active managers, passives outsell active TDFs, Bogle: 2/3 of returns go to ‘adviser’, don’t invest-to-rent in Toronto condo, states’ pensions dramatically underfunded, OMERS fails in attempt to reduce pension deficit, pensions: higher costs=lower returns, forensic accounting based ETF an opportunity? healthcare load to skyrocket with increase in age 65 life expectancy.

Personal Finance and Investments

Should not come as a surprise, but in the WSJ’s “Long-Term-Care insurance leaves customers groping” Greene and Scism report massive increases in the cost of long-term care insurance after people have been paying for these for years. Pretty toxic products when you figure what’s actually going on; insurance companies low-balling initial premiums to make the sale then increase prices dramatically (25-77%) before most need benefits, trying force policyholders out or to get them to reduce benefits in exchange lower premium increases- all with approval of state regulators. Medicaid will cover Americans’ LTC (“basic level of care”) stay, but only after they completely burn through their savings. Advisers have started recommending hybrid policies which are life insurance policies with a LTC rider, but you’ll typically have to buy them with a single premium upfront payment. (For more background on LTCI see my “Long-Term Care Insurance (LTCI) II- Musings on the Affordability, Need and Value: A (More) Quantitative View”  blog which discusses a long list of issues with LTCI, including unilateral and arbitrary premium increases. Opening an LTC savings account and depositing the premiums there might make more sense to many.)

Also in the WSJ, Tom Lauricella looks at how existing life insurance policies might be of use to meet long-term care and medical costs for the elderly. In “The cost of cashing out life insurance” he suggests that life settlements should be handled with great caution since: the markets are opaque, documentation is complex, tax implications may be significant (both capital gains and income), broker fees/commissions are high and you must be comfortable having some stranger own a life insurance on your life. The article mentions a couple of alternatives to consider: getting a LTC rider to the life policy or selling policy to a family member. (For more information see my “Life Settlements” blog, which points out that life settlements might not be a great deal for investors either.

In IndexUniverse’s “Swedroe: Taking on the lies about active” Larry Swedroe rips apart American Century’s “Six Reasons to Emphasize Active Investment Management” white paper claims. So the bad news is that active managers are still pursuing aggressive tactics with shameless untruths in their effort to attract uninformed investors to active funds; the good news is that people are getting the message about the advantages of passive investing despite these tactics. For example, in InvestmentNews’ “Passive investing movement hits target date funds” Jason Kephart reports that for the first time, in 2012 “passively managed target date funds outsold actively managed ones. “Passive target date funds took in $28.7 billion last year, up from $18.6 billion in 2011, trumping actively managed target date funds’ $26 billion of inflows, according to the research firm.”

In the Financial Post’s “How to make $2M  risk free on a $100,000 portfolio” Martin Pelletier refers to John Bogle who indicated that factoring in the compounding of investment fees over a 50 year period, investors give up two-thirds of their returns to their ‘adviser’. Pelletier gives the example of 7% return (before fees) on a mutual fund with the average 2.42% fees charged in Canada, to convince himself and his readers. $100,000 would grow to about $1M and $3M over 50 years at 4.58% (7%-2.42%) vs. 7%, respectively. (If that doesn’t make you dump your mutual funds for low cost alternative then nothing will; and you’ll be doomed to a much poorer retirement.)

Real Estate

In the Globe and Mail’s “Prognosis grim for Toronto condo investors”  Sheryl King opines that it’s pretty dumb to try to invest-to-rent in the Toronto condo market. She shows that with a 20% down-payment, the prevailing carrying costs (mortgage, maintenance, insurance and property taxes) there is little if any return to be had on a condo investment. So she wonders why an investor would take on risk of buying a condo. Yet last year builders completed 17,000 units and a further 50,000 units are under construction. By the way Toronto condo sales we off 55% in Q1 compared to last year.

Pensions and Retirement Income

In the Economist’s The pot is half full Buttonwood writes that “promises are easy to make, but difficult to keep” in reference to state pension plans which use 7-8% discount rates to calculate their pension plan liabilities, as a way to minimize contributions and offer retirement as early as 50 or 55; according to a New York Post report  “New York pays more police in retirement than to patrol our streets- yet pols do nothing to address our skyrocketing pension costs”. Assuming less aggressive (but still unrealistically low in current environment) 5-6% discount rates, funded status of state pension plans was reduced to an average 48% from 74%. A Moody’s report shows the ratios of “adjusted net pension liability relative to government revenues” as ranging from a low of 6.8% for Nebraska to a high of 241% for Illinois”!

In the Financial Post’s OMERS plan to reduce  pension benefits rejected by board” Barbara Shecter reports that OMERS covering 429,000 employees of over 900 employers proposed change to reduce multiplier factor from 2% to 1.85% for earnings above some unspecified threshold. This proposal intended to deal with the current $10B deficit would have resulted in a 2% reduction in pensions. It was defeated by the 14 member board composed of equal number of employer and employee representatives.

In the WSJ’s “For pension funds, higher fees don’t mean higher returns, study finds” Michael Corkery writes that  recently pension plans shifted to alternative assets which come with much higher fees, but a report on state pension funds shows that the “10 state pension funds paying the most fees had a median five-year annualized return of 1.34%. The 10 state funds paying the least in fees reported a 2.38% return for the five year period.” Corkery adds that this report should force pensions to ask whether it is time to shift away from alternatives and active management into passive indexes.

Things to Ponder

In the Financial Times’ “There is money to be made on forensic accounting” John Authers argues that forensic accounting is a good way to identify market inefficiencies. The idea here is to find the 100 of the S&P500 companies which use the most aggressive “accounting and earnings management”, and just invest in the other 400, as planned by John Del Vecchio of Flag ETF. Back-testing the model to 2000 shows that it worked in all years except 2007 and 2008. Factors considered include: revenue recognition, inventory write-off followed sale of that inventory, “shifts in operating items such as research and development spending and taxes”, share buy-back funding with borrowed vs. internally generated cash.

And finally, in the Economist’s “Eightysomethings” Buttonwood shares some interesting Credit Suisse data on the impact of higher age 65 life expectancy on developed world population distribution. The data indicates “eightysomethings” will in 2050 (vs. 2013) be near15% (vs. 5-7%) of the population in Germany, Italy, and Japan; U.S. and Canada will be near 8% and 10% (vs. 4%), respectively. The healthcare load will increase correspondingly (by a factor 2-3x?) compared 2012.