Editors: Carl Spiess, CFP, CIM, FMA, FCSI,
MBA, Director, Wealth Management
Allan McGlade, CFP, CLU, Senior Wealth Advisor
Featured Articles
 Why Diversify?
We all know that chasing last year's winners is not the recipe for
investment success. But what about investing in last year's
losers? Does that help returns, or is there an even better way to decide
how to invest?
Recently, Templeton published fantastic research on this subject, and
the material is on their "Why
Diversify" site. The interactive presentation makes the
point that trying to predict next
year's market is difficult for individual investors (and even the pros
will admit to that.) The presentation is one of the best we've
seen, as you can click on each asset class to see when they have
performed well or poorly.
So what if you just have a disciplined approach, that has you
allocate even amounts among a diversified set of asset classes each year
instead of picking one sector over another? It sounds too simple
to work.
 The
reality is, that a disciplined asset allocation driven portfolio does
generate the best returns in this scenario, and is also the simplest to
manage. In the chart (right), chasing the winners results in
$521,601, chasing the losers from last year, $559,247 but investing
equally in the 9 asset classes each year results in
$622,720.
Why does this work? If you click on the Global Equities legend
title, you will see that asset class is never the best or worst in any
particular year, but longer term, global equities have only had 4 losing
years. Investing in just the winners or losers, completely misses
that asset class. Again, why does this work? Because
diversification works.
Please contact us if you want a review of your overall
diversification.
Income Trust Market
Over the last few years, income trusts have become a phenomenon
in the Canadian investing landscape. Are trusts replacing stocks
as the vehicle of choice for investors looking for income from their
ownership of a corporation?
No, income trusts are simply an innovative structure to allow
investors receive the regular income distributions that a business earns
in a highly tax effective form. So as such, income trusts are not
a fad, they are a corporate structure that will be part of the Canadian
investment market place for years to come.
The appeal of regular income has been strong for investors, who have
driven up valuations of trusts to lofty measures over the last few
years. Virtually any trust (or mutual fund that invests in trusts)
has appreciated handsomely since 1999, and many new issues have come to
market to satisfy demand.
It is however, important to remember that a trust represents ownership
of a business, and in most cases, a stable (e.g. not growing)
business. There is also absolutely no guarantee of a return of
capital, or even that distributions will continue at a given
level. In fact, most resource trusts are based on depleting
assets, e.g. oil and gas fields, so even with rising oil prices, at some
point the well will run dry. This important fact is often
overlooked.
This summer, several trusts are due to be included in the S&P TSX
index ,which will certainly drive demand over the short term, as index
funds buy up the largest trusts for inclusion in the index.
So, like dividend paying stocks, trusts can make up a portion of an
investor's income portfolio. But it is always important to
diversify. It is for this reason, that we recommend funds that own both
stable stocks and trusts. (see our list of recommended
dividend funds). Both the Dynamic Dividend and Maxxum Dividend
funds have income trusts for approximately 25% of their portfolios,
however the managers are not compelled to own trusts should conditions
change in the future. The Scotia Canadian Dividend fund has 11% in
trusts at present.
Investing In China
A question we often receive, is how can I invest in future growth of
China. The answer is easy, as there are several China
funds available to Canadian Investors and there are also a larger number
regional
funds that are exposed to
the area. However, the more important question is, should you invest in such a
sector specific fund?
Most managers we talk to from our
core recommended international funds (Fidelity, Templeton, Trimark etc.) have a very clear grasp on the
opportunities for growth in China, but also speak sanguinely about many
of the risks. Most of the managers prefer to invest in companies
that have operations or sales in China. Therefore, they can be
exposed to the potential profits to be made, but also mitigate some of
the political and company risk, since regulatory reporting and other
standards there are still developing. In addition, by investing in
companies that can shift operations, your investment will always be
exposed to the next developing areas (India etc.) without you having to
time the right moment to move out of China.
So right now may be a good time to consider adding to your foreign
investments. With potential political uncertainty in Canada for
the first time in years, and a rising Bloc Quebecois, calls for the
Canadian dollar to reach $.90 US, now seem far fetched. Owning a
more broadly diversified international portfolio will make sense for
clients who may be too light on foreign investments at present.
Finally, many Canadian investors have benefited from the Chinese
demand for resources, as Canadian resource stocks have done very well
over the last few years. You've been exposed to the growth in
China without having to lifting a finger. Now may be the time to
rebalance, and more importantly, be diversified.
Current Interest Rates
Despite all the talk about rising interest rates, the reality is that
Canadian interest rates remain very low. In fact, 5 year bond and GIC rates
are now under 4%. For higher rates, we need to look out to longer
terms.
| Manitoba |
Mar-05-10 |
$8,370 |
3.71% |
$10,000 |
| British Columbia |
Jun-18-12 |
$7,490 |
4.11% |
$10,000 |
| Ontario |
Aug-07-14 |
$6,620 |
4.52% |
$10,000 |
| Ontario |
Sep-08-16 |
$5,900 |
4.73% |
$10,000 |
Fun With Numbers - Build Your Own Index-Linked GIC
Many investors like the idea of a principal
guarantee. Many banks and trust companies offer investments that
guarantee your initial investments, and a potentially increased return
based on a linked market, fund or stock. Similarly, segregated
funds offer a principal guarantee, but have higher MERs that apply
to the full amount invested.
We offer a simpler, personalized, and cost
effective way to build your own index-linked GIC. Let's take a
client with a $10,000 and a 5 year time horizon. We purchase the
$10,000 Manitoba bond, above, for a cost of $8,370. We then invest
the remaining $1,630 into the investment that we want to link
performance. We now know that the client will receive all the
principal back at maturity, plus whatever the $1,630 is worth. In
a poor market, where the $1,630 loses 10% a year, the $1,630 is still
worth over $960, and the overall portfolio is worth $10,960 for a 1.8%
return. If that is in a fund that grows 10% a year for the 5
years, the $1,630 grows to over $2,425, and the overall portfolio
matures at $12,425, a 4.8% return. The principal has been secure,
and whatever the fund is worth at the end is icing on the cake.
Of course, any portfolio that is a combination of
bonds and funds is a set of individually designed index-linked notes,
custom tailored for you. Please call us for a review of your
investments, and we can discuss if we want to add more principal
guarantees to your portfolio.
ScotiaMcLeod
Exchange Website - With so much to read each month, we realize you may not have read the
insert in your March ScotiaMcLeod statement. If you did miss it,
we would like to draw your attention to the article, which focused on
Treating our Equities like Real Estate. It was written by David
Cork, ScotiaMcLeod advisor and author of the best-selling "The Pig
and the Python", "When the Pig Goes to Market" and the
recently released, "Bulls, Bears and Pigs". David illustrates
why investors need to treat their equities like real estate, and take a
more passive approach to their long-term investing goals.
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