Hot Off the Web- September 9, 2013

Contents: Short-term bond funds? global home price comparisons: US cheap and Canada expensive relative to past experience, accessibility of “longevity insurance” improving in US but still non-existent in Canada, ETFs “at least as safe as the underlying assets”, financial and personal cost of caring for a relative, low interest rate risk.


Personal Finance and Investments

In the Globe and Mail’s “How safe are short-term bond funds?” Rob Carrick looks at short-term bond funds which are usually considered “conservative way to hold bonds in a rising rate world” and asks “how safe are they, and are there alternatives?”  He considers bond funds and ETFs most of which had less than stellar recent performance; while the average 3-year return was 2.27%, the 1-year return was a meager1.16% and YTD-return was just 0.24% reflecting the recent capital losses due to (fear of) rising rates (all returns are “total return”). He also notes the relatively high fees associated with many of these funds, especially considering the meager expected return for this asset class. The alternative he suggests is “investment savings accounts that can be traded like a mutual fund and currently yield 1.25% available from various banks, are CDIC insured and are completely liquid. (While most of my non-cash fixed income holdings are in GICs and some provincial bonds bought years ago, I still have some iShares XSB ETF. On the iShares website this is indicated to have had a total, YTD, 1-yr and 3-yr,  NAV return of 0.56%, 1.34% and 2.44% respectively as of end of July; and a -0.6% loss over 3-months. However you might want to also consider some forward looking key parameters of bond funds (beside costs/fees which are essential) and these are yield-to-maturity ‘YTM’=1.85% Duration=2.72 for XSB; YTM is the return if all the bonds are held to maturity while ‘duration’ is a measure of the loss in fund value with each 1% increase in interest rates.) Another option mentioned in’s “Floating rate note funds can mitigate rate risk” are floating-rate notes which are “issued by large corporations where the coupon payment is determined based on the prevailing rate of interest in the economy”; but in it Dave Petersen notes that these should only be used at the margin because they come with potentially significant risk (often un- or minimally- secured as well as being issued by corporations of less than the highest of credit ratings).  In WSJ’s “How not to get burned with bonds” Carolyn Geer addresses a related topic of losses in bond funds notes that “the majority of investors don’t know that when interest rates rise, bond prices typically fall”.  She suggests a “ladder of individual bonds of different maturities, held to maturity so price fluctuations can be ignored, but pay attention to bond markups by dealers. And in InvestmentNews’ “Ignorance is not bliss” editorial suggests that after a 30 year bull-market for bonds one should not discount an extended period of bond bear-market. They also mention short-term bond funds, bond ladders and individual bonds to be held to maturity (or some of the new target-maturity bond funds perhaps); for some even some high-yield bonds might be appropriate.  (Just make sure you understand the purpose of your fixed-income allocation in your portfolio and act accordingly-i.e. if the purpose is capital protection then reaching for yield is inappropriate.)


Real Estate

The Economist’s “Mixed messages” has a table showing house prices-to-disposable income and house prices-to-rent ratios as a means of determining whether prices “relative to long-run average” have over- or under-shot sustainable levels. U.S. looks in good shape but Canada is the 2nd most overshot in terms of rents and the worst in terms of income. The Economist’s “Location, location, location” also has an “interactive guide to world housing markets”, allowing comparison of price indices, real prices, prices-to-average income ratio, price-to-rent ratio, and percent change in over 20 countries. Canada not only looks completely out of step with the US, but is in step with some of the most over-stretched markets.

Pensions and Retirement Income

In InvestmentNews’ “Lincoln National jumps into new fixed annuity business” Darla Mercado reports that Lincoln National joins New York Life, Mass Mutual, Northwestern Mutual and Met Life in offering what sounds like (though I haven’t been able to see the details to confirm)  a flexible “longevity insurance” product. Sales of these “deferred income annuity” products still represent just $1B of the 2013 YTD $35B US annuity market, but it has grown by150% since 2012. (Still no such product exists in Canada-pity! This is a very sensible and relatively low-cost tool for dealing with longevity risk whereby a single payment at say age 65 is transformed in to a lifetime income stream typically starting at age 85. )


Things to Ponder

In the Financial Times’ “ETF plumbing is no simple matter” Chris Newland discusses the sustained attack on ETFs about their “plumbing problems” resulting from having tried to “create liquid funds out of potentially illiquid securities”. Many of these warnings come from self-interested parties who would benefit from slowing down or reversing the move to ETFs. ETF industry experts argue that “ETFs continue to perform as they are designed to do, allowing investors to move quickly and efficiently in and out of investment exposures…and (are) at least as safe, as the underlying assets”.

In the NYT’s “Assessing the cost of caring for an aging relative” Ann Carnns reports that high cost of in-home care drives many to care for aging parents or sick relatives. The collateral damage on the caregiver (aside from the emotional/personal one) is estimated to be an average of $324K if they leave the workforce. “The average caregiver is a 49-year-old woman who works outside the home and spends almost 20 hours a week providing unpaid care to her mother for nearly five years, according to a study from the caregiving alliance and AARP.” Adults “caring for someone with a significant health issue” increased from 30% to 40% since 2010. “Those who care for an older family member are more likely to report poor health themselves, and to shortchange their own financial future.”

And finally, in the Globe and Mail’s “Harper’s advisers dismiss warning about low interest rates” Dean Beeby reports that a C.D. Howe Institute paper by economist Paul Masson argued earlier this year that “the Bank of Canada should nudge rates higher to forestall real-estate bubbles (see Real estate section above), excessive household debt, pension-fund woes (regular readers of these blog posts no doubt are aware of this) and other dangers”. However, a briefing note to PM Harper argued against such an increase out of step with other developed countries, and that “the costs of raising Canada’s interest rates would outweigh the benefits”. (By the way, the Bank of Canada rate was left unchanged today.)


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