Contents: Corporate class funds-NOT, decumulation: longevity risk transformed to investment risk, no punishment for fraud in Canada, US house prices up 12% YoY and 2.2% MoM, dengue fever in Florida? Canadian ready or not for retirement- depends who you ask, Bogle: active managers not passive investors are parasites, Coxe: tapering is good for growth/workers/savers/pensions/equities, massive currency manipulation?
Personal Finance and Investments
In the Globe and Mail’s “Corporate class funds: An enticing way to defer taxes” Brenda Bouw writes that corporate class funds are a collection of (mutual) funds which are managed as a corporation allowing investors to move assets between funds “without incurring an immediate tax hit…thus the tax isn’t avoided…it is just deferred until removed from the corporation”. These are sold usually to people who have topped out their RRSP, as a means to additional savings with tax deferral. The article indicates that $100K at 6% over 20 years at 46.4% tax rate result in $320.7K in corporate while only 263.1K outside of corporate class. (Though Bouw mentions the opportunity of benefiting of cheaper ETFs outside of corporate class and that investments shouldn’t be bought for tax deferral reasons, she doesn’t drive home the point that this is a “loser’s game”. Corporate class funds typically come with 2.5-3.0% level of fees, which means your investments would have to return close to 9% a year to leave 6% for you; and if you earned just a corresponding 8.5% after fees in a low cost ETF with no dividend distribution then the resulting asset would become $511K (all numbers are before capital gains taxes deducted). This no longer sounds like such a great deal. I looked at these some years ago and concluded that as with most insurance products designed to ‘save’ you taxes, these come with hefty annual fees/cost which in effect just eat away at your asset year by year and then you still pay taxes at the end. Besides, if I have to share part of my gains with somebody, I rather give it to the government than to an insurance company. Bottom line: “enticing”?- NOT.)
In FPA Journal’s “Modern portfolio decumulation: A new strategy for managing retirement income” Richard Fullmer explains the significant differences between optimal approaches in accumulation vs. decumulation phase and proposes way to transform longevity risk in decumulation into investment risk, by defining a “liquidity horizon” (say 20 years with desired income stream) ending with a “wealth goal” equal to (expected) cost of annuitization at the end of the period; hopefully the assets will exceed the annuitization cost and annuitization never has to be triggered. (In my “Annuity or Lump-Sum (LIF): Upcoming Nortel pensioners’ decision” blog post I suggest that you use cost of the annuity which delivers the required income stream as the trigger when annuitization is required and note that “insurance costs money so it makes sense to buy insurance primarily when you can’t self-insure (low probability catastrophic outcomes) and annuities are insurance (which happens to get cheaper as we age) so you might wish to buy them when you really need them and only as much as you need”). Fullmer’s paper goes further by dynamically adjusting asset allocation depending on “shortfall risk” in addition to using the “annuitization hurdle” to make the “invest or annuitize decision”. Further to discussing the decumulation/accumulation differences, the paper addresses the flawed thinking associated with “time diversification”, the definition of failure in the traditional cash-flow shortfall risk being that of running out of money vs. his proposed approach of not being able to buy an annuity after the “liquidity horizon”, and how his approach can lead to a superior outcome as measured by income and wealth. (The paper is a little complex read, but it has great educational and practical implications.)
In the Globe and Mail’s “’Financial adviser’: Let’s clarify and simplify the use of this term” Preet Banerjee explains the insanity of the current use of the “financial adviser” title. Some can (are licensed to) sell only mutual funds and government bond, others also stocks/ETFs and bonds, still others life insurance/segregated funds/highly complex insurance product, and others who provide general financial advice/education/planning executed by the client but do not sell products require no licensing at all. He also notes the insanity of minimal licensing requirements, some requiring as little as “a few weeks to obtain”, the meaningless and often endless designations on an individual’s name. (and he didn’t even mention the “fiduciary” level of care which should be a requirement for anyone claiming to be an ‘adviser’.) In another adviser story, this one from the U.S., InvestmentNews’ “Florida advisers sue CFP Board” Dan Jamieson describes the direction the some in the U.S. ‘adviser’ community are heading toward as the wind is shifting toward fee-only and ‘fiduciary’ level of care, with some ‘advisers’ attempting to position themselves in hybrid roles (e.g. “I’ll be your fiduciary fee-only adviser except when I sell you some insurance products like GMWB/GLIBs.)
In the Globe and Mail’s “Crime and no punishment: Canada’s investment fraud problem” Gray and McFarland report that “17 per cent of Canadians over 50 believe they have already been the victim of an investment fraud at some time in their lives, a number that jumps to 29 per cent among people who say they are active investors.” The article notes that few if any of these victims get help from regulatory and legal resources. Canada has a “disjointed way fraud is investigated” with overlapping mandates between federal and provincial agencies “it is no surprise that lower-profile cases slip through the cracks”. FAIR’s Ermanno Pascutto recommended a “central fraud clearing agency…separate from the RCMP… staffed with lawyers and forensic accountants as well as investigators with police backgrounds, and he argues it should both investigate and prosecute financial crimes”. The article notes that the OSC is “setting up a new 20-person investigative unit”. Unfortunately, fraud victims are often blamed for their own losses rather than going after the perpetrators, because white collar crimes often come with high powered defense attorney which under-resourced prosecutors find difficult to overcome. Few victims of fraud come forward and even fewer get justice.
The June 2013 S&P Case-Shiller House Price Indices are up 12% Y0Y and 2.2% MoM. S&P commented that “Overall, the report shows that housing prices are rising but the pace may be slowing. Thirteen out of twenty cities saw their returns weaken from May to June. As we are in the middle of a seasonal buying period, we should expect to see the most gains. With interest rates rising to almost 4.6%, home buyers may be discouraged and sharp increases may be dampened”…. Though nothing to do with the month of June performance, “How the cities did- June” has a great table with housing data for the 20 US cities in the index showing Peak-to-through, “through-to-current” “peak-to-current” percentage changes that you might find of interest.
In the WSJ’s “New home sales tumble” Mitchell and Morath report that US new home sales during July fell 13.4%. The drop is blamed on rising mortgage rates. Median new home prices were also off 0.5% during the month.
In Sun Sentinel’s “Florida realtors data released after 5-day delay” Paul Owers reports that existing home sales were up 21% YoY across Florida. In Palm Beach County median prices were $249K up 15% YoY but down from $265K in April. And by the way, in another article he writes that “69% of home sales are cash in South Florida” which one expert called “astounding”.
WPBF TV’s “Martin County tries to combat Dengue fever” reports that mosquito carried dengue fever has reared its ugly head in Florida. Martin County had 7 cases, Miami 1 and St. Lucie County 1. Efforts are under way to minimize mosquitoes in the area.
Pensions and Retirement Income
In the Globe and Mail’s “Ignore the scare tactics. Canadians can afford retirement” Cross and Lee argue against Michael Wolfson’s expanded CPP/QPP proposals as being “a solution in search of a pension problem”. They argue that Canadians earning <$25,000 per year actually retire with a higher retirement income, while those earning up to $50,000 end up with 80-100% of income replacement from pensions. Only those earning over $100,000 end up with a retirement income of less than 2/3 of pre-retirement. The authors state that if one further included other assets of these individuals, like homes and financial assets, then there is certainly no justification for a “massive overhaul of our pension system”. The article also notes that according to a recent Statistics Canada study “The adequacy of household savings” which includes these other assets and concludes that 2/3 of Canadians save too much and the rest under-save by an average of under $30,000. But in the Globe’s “Canada’s boomers woefully short of retirement goals” Bertrand Marotte reports that “Boomers are, on the average $400,000 short of their $658,000 nest egg retirement goal, according to a survey by BMO Wealth Institute.” This was based on StatsCan $54,100 average senior couple’s spend rate and the $1.35M required to generate it. (Whether you agree with the expanded-CPP as the solution to the real or imaginary pension problem, clearly there must be a substantial disconnect somewhere in how the Stats Can data is used to prove that there is or there is no pension crisis in Canada. The numbers indicated in this article need some additional explanation, at least for me. The details/assumptions associated with both of these articles are opaque at best, so it’s difficult to determine the specific reasons they came to essentially conclusions 180 degrees apart. Welcome to “tell me what you want to prove and we’ll torture the numbers until they confess”.)
Things to Ponder
In the Financial Times’ “Vanguard’s Bogle responds to ‘parasite’ tag” John Bogle strikes back after a recent FT article “Passive parasites do not cure all financial ill” called passive investors parasites. In the article Bogle explains again that while some active managers may outperform the index, collectively (U.S.) active managers incur “all-in” costs of 2.27% compared to as low as 0.06% passive investors. Compounded over one’s working life the 2% lower cost with a passive approach can result in 50-90% higher accumulated assets. Bogle adds that the real parasite is not the passive investor, but the active fund manager who is “the greedy parasite that eats away at the host”. And this host is not just the investor in active funds but also public corporations whose returns are ground down by the high costs of active management.
In the Globe and Mail’s “Fed bond tapering is a time for investors to rejoice” Don Coxe explains who were the beneficiaries of the last five years of QE or “financial heroin” (banks, hedge funds and other speculators, private equity LBOs) and why it hasn’t worked (e.g. companies are borrowing money to buy back stock rather than investing in future earnings growth”), the collateral damage inflicted on pension funds (liabilities driven sky-high) by artificially low interest rates, and the damage now inflicted by the threat of tapering (e.g. to emerging markets). Coxe writes about tapering that “the sooner that process begins, the better it will be for economic growth, workers, savers, pension funds–and equity investors”.
And finally, in The Financial Post’s “Enormous currency spikes near market close point to rate manipulation” Bloomberg News reports that “…fund managers and scholars say the patterns look like an attempt by currency dealers to manipulate the rates, distorting the value of trillions of dollars of investments in funds that track global indexes… dealers at banks, which dominate the US$4.7 trillion-a-day currency market, may be executing a large number of trades over a short period to move the rate to their advantage, a practice known as banging the close.. The foreign-exchange market is one of the least regulated and most opaque in the financial system.”