Summer 2010 Newsletter amazonaws com
Summer 2010 Newsletter 202 – 4450 Chatterton Way, Victoria, BC V8X 5J2
Phone: 250-475-6700
Fax: 250-475-6777
Email: [email protected]
After turning in a strong first quarter in 2010 markets are becoming increasingly volatile.
This follows the strong recovery of 2009 and the precipitous downturn of 2008 and investors had hoped that 2010 would be a continuation of the recovery started in 2009. However, in the immortal words of Yogi Berra, "It's tough to make predictions, especially about the future", and the degree of indebtedness of European, British, and American governments will most likely lead to attempts to reduce debt or de-leverage which will likely stifle potential returns for the next few years. A recent article in the Globe & Mail outlined bond managers concerns about the ability of the world economy to continue its rebound in the absence of stimulus. Yet the article also observed that given the serious state of European finances, the bond market in general is balking at funding any more stimulus. Canada is on record as advising the more developed countries to begin cutting their deficits which would reduce government spending at a time when the global economy is in a somewhat weakened condition. Some economists are saying this runs the risk of triggering deflation – something reminiscent of the 30’s and something Japan has been grappling with for the last decade and more. This market uncertainty is occurring when interest rates are low with little apparent upward pressure on rates. Concurrent with the market volatility has been a steady rise in the price of gold. It has been interesting to watch the ascent of gold prices during the past year and many feel it has become a defacto currency as the Euro’s prospects have dimmed. We are entering a period when fiat currency is impacted by governments’ high debt levels and this will probably keep gold prices high. That being said it is important to remember that commodity prices can change rapidly so I would not recommend having a major position in gold but it may make sense to have a gold fund as part of your overall portfolio (perhaps 5- 10% of your holdings) depending on your investment objectives and risk tolerance. What are the implications of these trends when it comes to choosing your investments and determining your investment strategy? Greater uncertainty and volatility means the income producing capability of your investments becomes critical. Many market commentators feel that going forward the markets will be much more range bound reducing the likelihood of significant capital gains. On the other hand, quality income-producing investments, like income trusts, corporate bonds, and dividend-bearing stock will continue to produce decent returns for their unit holders. Paying attention to income should result in lower volatility and give investors the comfort of knowing that regardless of market movements they can still receive a steady flow of income. Indeed it is these investments that have performed solidly over the past few years when compared with growth oriented investments.
Income Producing Investments There are a handful of funds in Canada which do a very good job of producing a steady stream of monthly income to investors. The unit values of these funds will vary over time, but a significant advantage of this type of investment is that units of the fund do not have to be sold to produce the income; the monthly income is produced by the underlying securities held in the portfolio. If business conditions deteriorate and income trust distributions and bond interest decline, then the monthly income may be adjusted, but it doesn’t vary with the daily stock market fluctuations. Historically, the monthly income has been quite stable and in 2008 when stock markets were very volatile these investments maintained their payouts. These investments can be an effective way to increase your income provided you are comfortable with investments that can fluctuate in value. Listed below are four of our favourite choices:
Fund Name
Manager
C.I. Signature High Income GGOF Monthly High Income Sentry Cdn. Income
Eric Bushell
TD Monthly Income
John Priestman Kevin Hall Sandy McIntyre Michael Simpson Doug Warwick Geoff Wilson
Asset s 3.6 b.
YTD
1 yr
3 yr
5 yr
MER
Yield
1.8%
21.5%
-0.7%
4.3%
1.52%
6.76%
749 m. 749 m.
1.6%
26.9%
-1.9%
4.5%
2.30%
6.30%
1.2%
25.1%
0.4%
6.2%
2.67%
6.76%
2.5%
18.1%
0.0%
5.4%
1.40%
5.60%
Please note that the yield figures contained in the above table are historic figures and not guarantees of future performance. All mutual fund performance data provided by Globeinvestor as of July 1 s t, 2010.
Tax Free Savings Accounts These are simply marvellous investment vehicles for investors young and old. Where else can you completely eliminate tax on capital gains, dividends and interest. The name is somewhat misleading and many investors mistakenly think that money put into a TFSA can only be invested in the equivalent of a daily interest account at their bank. However, the full scope of investment options is available ranging from GIC's to mutual funds. The annual contribution limit of $5,000 can add up. For example, a couple who shifts the maximum each year from their regular investments to TFSA's over a period of 10 years will have moved $100,000 into tax-free accounts which generate non-taxable interest . This represents a huge benefit from a tax planning standpoint and it also has some nice estate benefits. A TFSA allows you name to a beneficiary, typically a spouse, which means on your death the account passes probate- free to your survivor. 2
There are a few wrinkles that you need to be aware of particularly if you want to re-contribute a portion withdrawn earlier; if you don't do this re-contribution in the next calendar year you may receive a penalty tax notice from CRA for an over contribution. TFSA's can be a great way to build additional savings tax-free and they can also be used to meet immediate needs should the occasion arise. These plans should be part of your portfolio and next time you review your investments consider adding TFSA's if you have not already done so.
Declining RRIF Balances Today’s low interest rate environment poses challenges for RRIF investors. Current legislation stipulates that you must withdraw a specified minimum each year from your RRIF as income. This minimum amount is much higher than the current guaranteed interest rates as the table below illustrates. Age 71 75 80 85 90 94 or older
Annual Minimum Regular RRIF 7.38% 7.85% 8.75% 10.33% 13.62% 20%
Annual Minimum Qualifying RRIF* 5.26% 6.67% 8.75% 10.33% 13.62% 20%
*A qualifying RRIF is one established prior to 1993.
It is easy to see from this table that from the start a RRIF invested in only guaranteed investments will erode the investor’s capital since guaranteed rates are much lower than the required withdrawals. The following chart illustrates the difference that the annual rate of return can make in this rate of decline. RRIF Capital Values at different interest rates
6% 4%
3
Not only do the different interest rates affect the rate of decline of the investor’s RRIF capital, but they also significantly affect the total income paid out by the RRIF over time. Predictably the higher the annual return the more income the RRIF holder receives; what is interesting is that this is not a straight-line relationship. Consider the following table: RRIF Income Total Income Paid between age 71-91
4 % Annual Return $ 126,566
6% Annual Return $ 147,095
8% Annual Return $ 190,767
The higher the rate of return, the greater the increase in total income received. Now clearly the risks associated with an investment yielding 8% are different than those associated with something generating 4% so it is critical to consider the risk/return trade-off. However, since most people are retired for 25 to 30 years or more, it is important to consider the impact of different yields on your RRIF income and capital and perhaps consider some moderate risk, higher yielding options for some of your RRIF capital.
Ethical Investments Socially responsible investing (SRI) is receiving more and more attention these days. People are growing increasingly aware of the impact their investment choices can have over time on the environment. This category of investing is growing rapidly in Europe, the United States, and Canada. As a consequence companies are increasingly realizing that they can mitigate risk and increase profitability by doing right by all their stakeholders, being conscious of the resources they consume, and protecting their reputations. In the accompanying chart we have listed some of the more popular SRI mutual funds. You will notice that most of these funds have not performed as well as the income funds listed earlier in this newsletter; there still seems to be a performance “cost” to investing ethically. Fund Name Acuity Social Values Balanced Desjardins Environment Ethical Canadian Dividend Meritas Monthly Div. & Income
Assets $ 58m $166 m $246 m $ 22 m
YTD -4.70% -6.60% -0.40% -3.60%
1 yr 7.60% 5.70% 14.30% 5.70%
3 yr -5.20% -3.20% -5.00% -4.80%
5 yr 1.90% 7.10% 3.10% n/a
MER 2.91% 2.35% 2.53% 2.47%
Yield 2.70% 3.10% 3.20% 3.60%
Please note that the yield figures contained in the above table are historic figures and not guarantees of future performance. All fund information from Paltrack as of June 30th , 2010.
Our Services In a recent conversation with a long-time client I was reminded that many of our clients may not be familiar with all the services we provide. In addition to managing our clients’ GIC portfolios and investment fund portfolios we provide either directly or through strategic partnerships with other professionals the following products and services: 4
GIC’s, Term Deposits, Hi-Yield accounts Annuities – single life, joint life, and term certain RRSP’s & RRIF’s – a full range of investment options ranging from GICs and bonds to equities Mutual funds, Discretionary Managed funds, Pension Funds Stocks and bonds through a referral service with National Bank Financial Life, Critical Illness, Disability, and Long-Term Care Insurance Complete pre-retirement and post retirement planning Will and Estate planning For our financial plans we use the latest software from CCH which allows us to project the financial impact of different planning scenarios. These results can be illustrated graphically and changed in real time with our clients. We discuss our clients’ Business and Estate planning strategies and options and then work with lawyers and accountants to bring these plans to completion. I think one of the most valuable roles we play is that of a financial quarterback for our clients; we play a key role in coordinating their financial decisions and investments. Their ability to manage their financial affairs may diminish during retirement, but our relationship is one that they can count on to safeguard their best financial interests in the years ahead. Current Interest Rates (as of July 15, 2010) Institution Credit Union Insurance Co.
1 year 2.00% 1.15%
2 years 2.60% 2.05%
3 years 3.10% 2.70%
4 years 3.50% 3.00%
5 years 3.65% 3.55%
The ING High Yield Account is currently at 1.30% with no minimums and unlimited withdrawals. Please note that insurance company GIC’s allow you to name beneficiaries thereby, eliminating probate fees when the estate is settled.
This newsletter is provided with the understanding that it does not render legal, accounting or other professional advice. T his information is provided for general education purposes and should not be considered as advice with regard to the purchase or sale of securities, which the members of Halsey Financial Group Ltd. and Assante Financial Management Ltd. are not licensed to sell. The information and opinions contained in this newsletter are obtained from various sources believed to be reliable, but their accuracy cannot be guaranteed. Readers are urged to consult their professional advisors before acting on the basis of the material contained in this newsletter. Commission, trailing commissions, management fees and expenses all may be associated with mutual fund investing; please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and
5
past performance may not be repeated. Mutual funds, sales and advice provided through Assante Financial Management Ltd. . Financial planning and other services provided by Halsey Financial Group Ltd.
6
Phone: 250-475-6700
Fax: 250-475-6777
Email: [email protected]
After turning in a strong first quarter in 2010 markets are becoming increasingly volatile.
This follows the strong recovery of 2009 and the precipitous downturn of 2008 and investors had hoped that 2010 would be a continuation of the recovery started in 2009. However, in the immortal words of Yogi Berra, "It's tough to make predictions, especially about the future", and the degree of indebtedness of European, British, and American governments will most likely lead to attempts to reduce debt or de-leverage which will likely stifle potential returns for the next few years. A recent article in the Globe & Mail outlined bond managers concerns about the ability of the world economy to continue its rebound in the absence of stimulus. Yet the article also observed that given the serious state of European finances, the bond market in general is balking at funding any more stimulus. Canada is on record as advising the more developed countries to begin cutting their deficits which would reduce government spending at a time when the global economy is in a somewhat weakened condition. Some economists are saying this runs the risk of triggering deflation – something reminiscent of the 30’s and something Japan has been grappling with for the last decade and more. This market uncertainty is occurring when interest rates are low with little apparent upward pressure on rates. Concurrent with the market volatility has been a steady rise in the price of gold. It has been interesting to watch the ascent of gold prices during the past year and many feel it has become a defacto currency as the Euro’s prospects have dimmed. We are entering a period when fiat currency is impacted by governments’ high debt levels and this will probably keep gold prices high. That being said it is important to remember that commodity prices can change rapidly so I would not recommend having a major position in gold but it may make sense to have a gold fund as part of your overall portfolio (perhaps 5- 10% of your holdings) depending on your investment objectives and risk tolerance. What are the implications of these trends when it comes to choosing your investments and determining your investment strategy? Greater uncertainty and volatility means the income producing capability of your investments becomes critical. Many market commentators feel that going forward the markets will be much more range bound reducing the likelihood of significant capital gains. On the other hand, quality income-producing investments, like income trusts, corporate bonds, and dividend-bearing stock will continue to produce decent returns for their unit holders. Paying attention to income should result in lower volatility and give investors the comfort of knowing that regardless of market movements they can still receive a steady flow of income. Indeed it is these investments that have performed solidly over the past few years when compared with growth oriented investments.
Income Producing Investments There are a handful of funds in Canada which do a very good job of producing a steady stream of monthly income to investors. The unit values of these funds will vary over time, but a significant advantage of this type of investment is that units of the fund do not have to be sold to produce the income; the monthly income is produced by the underlying securities held in the portfolio. If business conditions deteriorate and income trust distributions and bond interest decline, then the monthly income may be adjusted, but it doesn’t vary with the daily stock market fluctuations. Historically, the monthly income has been quite stable and in 2008 when stock markets were very volatile these investments maintained their payouts. These investments can be an effective way to increase your income provided you are comfortable with investments that can fluctuate in value. Listed below are four of our favourite choices:
Fund Name
Manager
C.I. Signature High Income GGOF Monthly High Income Sentry Cdn. Income
Eric Bushell
TD Monthly Income
John Priestman Kevin Hall Sandy McIntyre Michael Simpson Doug Warwick Geoff Wilson
Asset s 3.6 b.
YTD
1 yr
3 yr
5 yr
MER
Yield
1.8%
21.5%
-0.7%
4.3%
1.52%
6.76%
749 m. 749 m.
1.6%
26.9%
-1.9%
4.5%
2.30%
6.30%
1.2%
25.1%
0.4%
6.2%
2.67%
6.76%
2.5%
18.1%
0.0%
5.4%
1.40%
5.60%
Please note that the yield figures contained in the above table are historic figures and not guarantees of future performance. All mutual fund performance data provided by Globeinvestor as of July 1 s t, 2010.
Tax Free Savings Accounts These are simply marvellous investment vehicles for investors young and old. Where else can you completely eliminate tax on capital gains, dividends and interest. The name is somewhat misleading and many investors mistakenly think that money put into a TFSA can only be invested in the equivalent of a daily interest account at their bank. However, the full scope of investment options is available ranging from GIC's to mutual funds. The annual contribution limit of $5,000 can add up. For example, a couple who shifts the maximum each year from their regular investments to TFSA's over a period of 10 years will have moved $100,000 into tax-free accounts which generate non-taxable interest . This represents a huge benefit from a tax planning standpoint and it also has some nice estate benefits. A TFSA allows you name to a beneficiary, typically a spouse, which means on your death the account passes probate- free to your survivor. 2
There are a few wrinkles that you need to be aware of particularly if you want to re-contribute a portion withdrawn earlier; if you don't do this re-contribution in the next calendar year you may receive a penalty tax notice from CRA for an over contribution. TFSA's can be a great way to build additional savings tax-free and they can also be used to meet immediate needs should the occasion arise. These plans should be part of your portfolio and next time you review your investments consider adding TFSA's if you have not already done so.
Declining RRIF Balances Today’s low interest rate environment poses challenges for RRIF investors. Current legislation stipulates that you must withdraw a specified minimum each year from your RRIF as income. This minimum amount is much higher than the current guaranteed interest rates as the table below illustrates. Age 71 75 80 85 90 94 or older
Annual Minimum Regular RRIF 7.38% 7.85% 8.75% 10.33% 13.62% 20%
Annual Minimum Qualifying RRIF* 5.26% 6.67% 8.75% 10.33% 13.62% 20%
*A qualifying RRIF is one established prior to 1993.
It is easy to see from this table that from the start a RRIF invested in only guaranteed investments will erode the investor’s capital since guaranteed rates are much lower than the required withdrawals. The following chart illustrates the difference that the annual rate of return can make in this rate of decline. RRIF Capital Values at different interest rates
6% 4%
3
Not only do the different interest rates affect the rate of decline of the investor’s RRIF capital, but they also significantly affect the total income paid out by the RRIF over time. Predictably the higher the annual return the more income the RRIF holder receives; what is interesting is that this is not a straight-line relationship. Consider the following table: RRIF Income Total Income Paid between age 71-91
4 % Annual Return $ 126,566
6% Annual Return $ 147,095
8% Annual Return $ 190,767
The higher the rate of return, the greater the increase in total income received. Now clearly the risks associated with an investment yielding 8% are different than those associated with something generating 4% so it is critical to consider the risk/return trade-off. However, since most people are retired for 25 to 30 years or more, it is important to consider the impact of different yields on your RRIF income and capital and perhaps consider some moderate risk, higher yielding options for some of your RRIF capital.
Ethical Investments Socially responsible investing (SRI) is receiving more and more attention these days. People are growing increasingly aware of the impact their investment choices can have over time on the environment. This category of investing is growing rapidly in Europe, the United States, and Canada. As a consequence companies are increasingly realizing that they can mitigate risk and increase profitability by doing right by all their stakeholders, being conscious of the resources they consume, and protecting their reputations. In the accompanying chart we have listed some of the more popular SRI mutual funds. You will notice that most of these funds have not performed as well as the income funds listed earlier in this newsletter; there still seems to be a performance “cost” to investing ethically. Fund Name Acuity Social Values Balanced Desjardins Environment Ethical Canadian Dividend Meritas Monthly Div. & Income
Assets $ 58m $166 m $246 m $ 22 m
YTD -4.70% -6.60% -0.40% -3.60%
1 yr 7.60% 5.70% 14.30% 5.70%
3 yr -5.20% -3.20% -5.00% -4.80%
5 yr 1.90% 7.10% 3.10% n/a
MER 2.91% 2.35% 2.53% 2.47%
Yield 2.70% 3.10% 3.20% 3.60%
Please note that the yield figures contained in the above table are historic figures and not guarantees of future performance. All fund information from Paltrack as of June 30th , 2010.
Our Services In a recent conversation with a long-time client I was reminded that many of our clients may not be familiar with all the services we provide. In addition to managing our clients’ GIC portfolios and investment fund portfolios we provide either directly or through strategic partnerships with other professionals the following products and services: 4
GIC’s, Term Deposits, Hi-Yield accounts Annuities – single life, joint life, and term certain RRSP’s & RRIF’s – a full range of investment options ranging from GICs and bonds to equities Mutual funds, Discretionary Managed funds, Pension Funds Stocks and bonds through a referral service with National Bank Financial Life, Critical Illness, Disability, and Long-Term Care Insurance Complete pre-retirement and post retirement planning Will and Estate planning For our financial plans we use the latest software from CCH which allows us to project the financial impact of different planning scenarios. These results can be illustrated graphically and changed in real time with our clients. We discuss our clients’ Business and Estate planning strategies and options and then work with lawyers and accountants to bring these plans to completion. I think one of the most valuable roles we play is that of a financial quarterback for our clients; we play a key role in coordinating their financial decisions and investments. Their ability to manage their financial affairs may diminish during retirement, but our relationship is one that they can count on to safeguard their best financial interests in the years ahead. Current Interest Rates (as of July 15, 2010) Institution Credit Union Insurance Co.
1 year 2.00% 1.15%
2 years 2.60% 2.05%
3 years 3.10% 2.70%
4 years 3.50% 3.00%
5 years 3.65% 3.55%
The ING High Yield Account is currently at 1.30% with no minimums and unlimited withdrawals. Please note that insurance company GIC’s allow you to name beneficiaries thereby, eliminating probate fees when the estate is settled.
This newsletter is provided with the understanding that it does not render legal, accounting or other professional advice. T his information is provided for general education purposes and should not be considered as advice with regard to the purchase or sale of securities, which the members of Halsey Financial Group Ltd. and Assante Financial Management Ltd. are not licensed to sell. The information and opinions contained in this newsletter are obtained from various sources believed to be reliable, but their accuracy cannot be guaranteed. Readers are urged to consult their professional advisors before acting on the basis of the material contained in this newsletter. Commission, trailing commissions, management fees and expenses all may be associated with mutual fund investing; please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and
5
past performance may not be repeated. Mutual funds, sales and advice provided through Assante Financial Management Ltd. . Financial planning and other services provided by Halsey Financial Group Ltd.
6
