Steadyhand Blog

Ravaged

Mon, 17 Jun 2013 10:41:55 PDT

By Scott Ronalds

The mining sector has been ravaged over the past two years. Commodity prices have softened, financing has dried up and sentiment has tanked. It’s been a minefield for investors.

Nowhere has the pain been more severe than the Canadian small cap market. Stocks in the Materials sector (which includes metals & minerals, gold, and paper & forest companies) comprise nearly 30% of the BMO Small Cap Index. The sector has declined 45% over the last two years (ending May 31st). Energy stocks make up a further 20% of the index (the sector is down 28%), bringing the combined weighting of resource-focused stocks to 50%.

There have been areas of strength, including technology, industrial, financial and consumer stocks, but because of the market’s tilt towards rocks and oil, the index has fallen 15% since the spring of 2011. The average Canadian small/mid cap equity fund fared better, but still declined 5% over the period (source: globefund.com).

The Steadyhand Small-Cap Equity Fund has avoided much of the carnage. In fact, it’s gained over 25%. This has much to do with the fact that the manager, Wil Wutherich, has largely steered clear of the mining sector (the fund only has one direct holding, Primero Mining).

2-Year Returns as of May 31, 2013

	Cumulative	Annualized
BMO Small Cap Index	-15.7%	-8.2%
Materials Sector	-45.2%	-25.9%
Energy Sector	-28.1%	-15.2%
Average Canadian Small/Mid Cap Equity Fund	-4.8%	-2.4%
Steadyhand Small-Cap Equity Fund	25.9%	12.2%

Wil’s investment approach leads him to focus on established companies that generate steady profits and are well-financed, such that they can self-fund their operations and growth. And of course, they have to trade at reasonable valuations. These types of companies are typically not found in the mining sector.

An outcome of Wil’s approach – and all our managers for that matter – is that the fund will often produce returns that are out-of-synch with the market, as illustrated above. They won’t always be on the good side, though. In 2009, for example, the small cap index was up 75% while the fund only gained 14.6%. If the mining sector has a resurgence, the fund will likely lag behind. Since the fund’s inception in 2007, however, Wil’s approach has added considerable value versus the index (with considerably less volatility).

A final note on resources: The manager doesn’t avoid resource stocks altogether. If a company meets his investment criteria, he’ll give it careful consideration. In fact, Wil has a successful record of investing in energy companies and has increased the fund’s exposure to oil & gas producers over the last few quarters (to the point where they make up roughly one-quarter of the fund). As for mining stocks, he’s been kicking around the rocks but still isn’t finding any gems.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The annualized rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

Real Estate Update - Part III: Why so Bearish?

Thu, 13 Jun 2013 09:55:29 PDT

By Tom Bradley

In the previous two posts, I put my perspective on the current news around the Canadian housing market and reviewed the valuation measures. Mercifully, in this final one, I want to talk about what REALLY worries me.

My biggest concerns are what I’ve already talked about - unsustainably low mortgage rates and toppy valuations – but what pushes me over the edge is the simmering combination of leverage, emotion, the marginal seller, contagion and complacency.

Leverage

Leverage worked beautifully on the way up - the bigger the mortgage the better. But when prices are going down and bankers get testier, it works the other way just as powerfully. When a $300,000 home drops to $250,000, the owner’s $50,000 of equity goes to zero. As we learned from the hedge fund world, the biggest surprises and overreactions come from strategies where long-term, illiquid assets are financed with short-term debt.

And there’s the related issue of credit availability. As Chris, my partner and a former banker, likes to say (ad nauseam), "Bankers offer you an umbrella when it’s sunny, but are quick to take it away when it starts raining." To his point, when rates go up and monthly payments get to be a struggle, lenders will be less accommodating.

Emotion

Home ownership is laden with emotion. The combination of emotion and leverage is a potent one. It dramatically increases the chance of exaggerated outcomes and irrational decisions.

Changes at the margin

When markets go through big moves, it’s not because everyone wants to buy or sell at the same time. Indeed, it could be quite a small percentage of market participants who want or need to do something. It’s those few buyers/sellers (i.e. at the margin) who determine prices. The other owners, most of whom are stable and well financed, are innocent bystanders.

What does it look like at the margin? I don’t have data on this, but it appears to me that buyers are increasingly dependent on low mortgage rates, long amortizations and accommodative bankers. On the sell side, there doesn’t appear to be many urgent sellers at this point, which is good. I don’t have a reading on how many deposits on new homes and condos are from speculators.

Contagion

When the sub-prime mortgage market in the U.S. started to melt down in 2006, the first thing we heard from analysts and industry officials was that it was “contained” and would not affect other parts of the mortgage/real estate market. Oops.

There is always contagion, it’s just a matter of how much. In the case of Canadian real estate, it‘s hard to imagine that the inevitable ripple effect won’t create some waves. Think about the connectedness of jobs, banks, CMHC, government revenues, credit card balances, credit ratings, the loonie and ... did I say jobs? Will a market decline be restricted to silly Vancouver or overbuilt Toronto (condos)? Don’t count on it.

Complacency

We’ve been in a secular bull market for real estate since the baby boomers started buying in the 70’s. Who wouldn’t be comfortable owning real estate? What young person wouldn’t want to get in as quickly as possible? Who wouldn’t be smug about having 70% of their net worth in property?

Everyone, that’s who. And that’s what nags at me. The edict, ‘You never lose on real estate', is as strong as ever while the market’s underpinnings are about as weak as they’ve ever been.

Death spiral

Since the 1970’s, real estate has been riding a virtuous circle. Baby boomers buying, more women working, interest rates declining and an increasing comfort with debt has led to prices spiraling higher. It’s always hard to call the end of a long-term trend (40 years ... Yikes!), but certainly the potential is there for the circle to become less virtuous. Baby boomers are moving into the selling years (more sellers than buyers), women’s participation in the work place is maturing, interest rates have more room to go up than down and Canadian consumers are maxed out on credit.

Am I worried? You betcha. Lots of my assumptions will prove to be wrong, whether it be rates, the economy or jobs, but my concerns don’t hang on one individual statistic or measure. What REALLY has me worried about the Canadian housing market is the fact that everything I look at is at an extreme and it’s all very connected.

I believe we’ll look back in 5 years and say, “Wow, what were we thinking? It was so obvious.”

Real Estate Update - Part II: It's all About Mortgage Rates

Wed, 12 Jun 2013 08:51:19 PDT

By Tom Bradley

In this, the 2nd of 3 posts on the Canadian housing market, I address valuation.

Near-zero interest rates are absolutely driving this market. The problem is, low rates are transient, while purchase prices live on forever.

In today’s terms, transient means that it’s almost certain new borrowers will renew their 3 or 5-year mortgages at a higher rate 3 to 5 years from now (I stole that line from Rob Carrick of the Globe and Mail).

As for price, the measures used to value residential real estate haven’t improved despite the good news I reviewed in my last post. They’re still screaming OVERVALUED.

Prices vs. the long-term trends and inflation – House price increases have been running well above inflation and the long-term trends.

Affordability – Depending on the region, the affordability ratios range between ‘average’ and significantly ‘overpriced’. These ratios, however, are highly sensitive to mortgage rates. Higher rates will mean less affordable houses.

Buy vs. rent – These calculations still favour renting.

Consumer debt levels – It’s well documented that too many Canadians have stretched to buy their house or condo, and as a result, have limited ability to deal with higher interest rates and/or job losses.

Housing starts vs. household formation – After years of building houses at a rate well in excess of household formation, we’re seeing some improvement on this statistic. Housing starts have slowed.

Canada vs. U.S. – The U.S. real estate market has bounced back, dramatically in some regions, but prices south of the border are still significantly below Canada.

Despite reassuring headlines and the usual spring enthusiasm, the reasons to be concerned about the Canadian housing market have not gone away. Indeed, if we broaden the context and consider some macro trends, it could be argued that the outlook is even worse. Certainly the market’s dependence on near-zero interest rates and accommodative bankers (“Would you like a home equity loan with your cheeseburger?”) is not good. Neither is the fact that the Canadian economy, which is dependent on resources, home building (hmmm) and unrestrained government spending, is now lagging the U.S. And on the demographic front, we are now entering an extended period when the number of people entering the home buying cohort (over 25 years of age) is declining while the number entering the selling phase of their life (65 plus) is steadily rising (here come the boomers).

My conclusion based on the cold, hard valuation numbers: Despite the spring activity and warmer headlines, it’s not a time to be complacent. In Part III tomorrow, I’ll tell you what I really think.

Yielding

Tue, 11 Jun 2013 17:25:21 PDT

By Scott Ronalds

We’ve had a cautious view on government bonds for several quarters, as yields are unsustainably low. Our current thinking hasn’t changed. We feel bonds are expensive and have been advising clients to keep them to a minimum in relation to their long-term asset mix.

The yield on 10-year Government of Canada bonds has risen over the last six weeks, from under 1.7% in early May to 2.2% yesterday. This is a sharp move in a low interest rate environment and explains why the Canadian bond market is on track for a weak quarter.

It’s anyone’s guess as to which direction bond yields will move over the next day, week or month. We feel that interest rates are likely to rise over the next few years, however, which is why we’ve been advising caution and projecting lower return expectations for this asset class (when interest rates and yields rise, bond prices fall).

Our focus in this area is on corporate bonds, which are typically less sensitive to movements in interest rates and have higher coupon payments. Our Income Fund also has a shorter than normal average term-to-maturity as a defensive measure against rising interest rates.

Real Estate Update - Part I: You Ain't Seen Nothing Yet

Tue, 11 Jun 2013 10:48:19 PDT

By Tom Bradley

Over the last couple of years, I’ve been writing about housing because it’s a big part of our clients’ net worth, it's great fodder for a devoted student of market cycles and ... it’s just so darned interesting. In the first of three posts this week, I’ll try to bring some perspective to the latest real estate news.

Stabilizing from what?

Over the last few weeks, the statistics and commentaries have generally been positive. The Canadian residential real estate market is stabilizing. The number of house sales in April (and likely in the soon-to-be-announced May) was down less than in previous months (-3% vs. April, 2012). In Vancouver, unit sales have stabilized and prices are up since the beginning of the year. And during my travels to Toronto, I’ve been hearing lots of stories about properties selling quickly with multiple offers.

It’s absurd, however, to be using the word ‘stabilize’ to describe the residential real estate market. Why? Because it hasn’t gone down yet. Yes, sales have been softer compared to a previously torrid pace, and some markets have experienced lower prices, but we haven’t even had a month where the Canadian market overall has had a year-over-year price decline. Prices in April were 2% higher than last year.

I looked at the CREA (Canadian Real Estate Association) numbers recently and the charts for the different cities look downright healthy. They certainly didn’t suggest there was anything to stabilize from. If people think the market has been weak (including Vancouverites), they should harken back to that old BTO lyric, “You ain’t seen nothing yet.” Weak real estate markets are characterized by: deserted Open Houses; properties that take months, or even years, to sell; unfriendly bankers; and ‘wipe out your equity’ price drops.

Why so gloomy?

Mixed with the encouraging short-term stats is a continuing chorus of doom and gloom. We’ve read about a U.S. hedge fund manager who is shorting Canada because of our overpriced real estate. Every quarter the house price table in The Economist Magazine shows Canada being severely overvalued. And hell, even this rational, even-handed blog has been trumpeting caution.

This Canadian housing cycle has been a powerful and lengthy one. Depending on who you talk to, it started in the 70’s, 80’s, 90’s or 2000’s (I’m in the 70’s camp – when the baby boomers started buying). Regardless, I’ve never seen a cycle of this magnitude that hasn’t been followed by a significant downturn. Bob Farrell, the former Chief Market Analyst at Merrill Lynch once noted, “Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.” As I’ve said many times, if the ‘soft landing’ scenario that’s often talked about by industry representatives and bank officials were to happen, it would be heroic and unprecedented.

As one of the doom and gloomers, I recognize my view on Canadian real estate may prove to be too bearish, but believe me when I say, what we’re going through now is not a down cycle. It’s a squiggle on a long-term uptrend. If we experience a decline commensurate with the magnitude and length of the up cycle and the market’s extreme valuations, we’ll look back at today and say, B-B-B-B-Baby, we certainly hadn’t seen nothing yet!

In Part II tomorrow, I’ll address valuations and other reasons for concern.

Borrowing From the Future

Fri, 07 Jun 2013 13:27:06 PDT

By Tom Bradley

In his June Investment Outlook, PIMCO’s Bill Gross says that the Quantitative Easing policy (QE) of the U.S. Federal Reserve hasn’t worked. He points out that over the last 5 years there hasn’t been a 12-month period when the economy has grown faster than 2.5%. Thus his conclusion: QE hasn’t worked.

Now, let me first state that I too am of the view that the Fed has gone too far in trying to manage/stimulate the economy. They had to act during the 2008/09 crisis, and thank goodness they did, but they’ve continued to micro-manage ever since. Like Mr. Gross, I think the Fed has got in the way of economic healing, which has to occur before the next up cycle can start. I suspect we’re now behind where we’d otherwise be if the Fed had pulled back and let the cycle play out.

Having said that, I find Mr. Gross’ comment interesting. Yes, the economy has been growing slowly, but it has been growing while the rest of the western world (Europe and Japan) has not. How can he (along with many others who share his view) say it hasn’t been working if he doesn’t know what would have happened without the QE trilogy? It seems to me that the U.S. economy has done surprisingly well in the face of all its challenges. I’d say that the Fed’s meddling has enhanced GDP growth. Unfortunately, it’s borrowed the growth from a time in the future when the necessary healing will need to occur.

Canadian Banks - the Next 25 Years?

Thu, 06 Jun 2013 11:45:05 PDT

By Tom Bradley

It’s confirmed. We have the healthiest banks in the world. They’ve all reported their second quarter earnings and the numbers are spectacular. Industry leader RBC had a return on equity of 19%, while CIBC and National Bank were over 20%. Yes, 20% in a 2% inflation world.

These results are important because Canadian investors are highly dependent on their banks. Bank stocks account for 21% of the S&P/TSX Composite Index and play an even larger role in most investment portfolios (especially when preferred shares and bonds are taken into account).

In contrast to other countries, Canadians have made a potful of money on bank stocks. It’s been a great twenty-five year run in which the Big Six saw their profits grow from $2 billion a year to almost $8 billion a quarter. Before I take a peek into the next twenty-five, it’s informative to look at what’s fueled the growth.

Interest rates have been a significant factor. Rate declines have meant a steady diet of capital gains and trading profits on the banks’ bonds and other security holdings. They also led to rising house prices, which has made the consumer lending business truly hum (in the second quarter, the return on equity of Scotiabank’s Canadian consumer business was 35%).

Indeed, favourable real estate markets, along with the banks’ marketing and product innovation, have helped facilitate the indebtification of their customers. Since the late 1980’s, Canadians’ debt to income ratio has doubled to a world beating 160%.

As for corporate lending, Canadian banks have shown superb discipline after learning from a series of crippling losses on third world and energy loans in the 1980’s (remember the LDC crisis and Dome Pete?).

They’ve also been savvy in buying and developing new businesses that fit their client base – products and services that can be promoted through the branch network. Brokerage and investment banking came in the late 1980’s, followed by the trust companies a few years later. Wealth management started to get traction after the millennium. Each new initiative helped the banks transition from being service providers to where they are today, sophisticated sales organizations.

Like I said, it’s been a good run, which begs the question - What will the next five and twenty-five years look like? Certainly, some of the tail winds I’ve outlined are going to shift, or already have.

The banks’ biggest and most stable money maker, the Canadian retail business, is getting tougher. In aggregate, Canadians have little room to add debt and may indeed be forced to de-leverage if house prices and/or the economy weaken. Competition is sure to intensify because loans, mortgages and credit cards are just too profitable to risk losing ground.

In wealth management, the banks have become dominant players, so market share gains will be harder to come by. Also, profit margins may have seen their peak due to lower fixed income returns and higher regulatory standards for reporting fees and performance.

Other changes are in the wind, including increased capital requirements, but they’re not all bad. At home, the Federal Government continues to be accommodative. It’s put up barriers to foreign competition and hasn’t pressed too hard on conflicts of interest between the banks’ business units. In other words, the oligopoly will be maintained.

Beyond our borders, Canadian banks now have greater opportunities in international and corporate banking, areas where the competition is in full-on, ‘post crisis’ retreat. RBC is building a world scale capital markets and asset management business. TD is already a prominent player on the eastern seaboard and Scotia has a stake in the ground in almost every country with warm weather and a beach.

When all the gusts and swirls are taken into account, it’s hard to bet against these inherently profitable companies. The banks’ ability to generate sales, make acquisitions, pay dividends and buy back stock is unparalleled. And they still have lots of room to reduce expenses, something they haven’t yet fully embraced.

We’ll continue to have healthy banks (thank goodness), but it’s going to be tougher for them to maintain their torrid pace, especially if their most profitable, reliable businesses hit the wall.

Spot Prawns

Tue, 04 Jun 2013 08:55:03 PDT

By Scott Ronalds

It’s spot prawn season on the west coast. The boats are pulling into Granville Island daily (mere blocks from Steadyhand headquarters) and selling their bounty directly to the public. It’s awesome. They’re live, fresh, sweet and local. And you buy them right from the boat. There’s no middlemen. No commissions. No administrative fees. No packaging charges. No transaction costs. For $12-15 a pound, you get a bag of B.C.’s best.

A short walk away in the Granville Island Market, the same product will cost you 30% to 50% more. You’ll get them in a fancier bag and won’t have to take in any pungent dock & diesel fumes, but they’ll hit you harder in the wallet.

Many spot prawn fans love the direct-to-customer option. It’s cheaper, fresher and is a unique experience. Sadly, the season only lasts for 6-8 weeks (a requirement to ensure the crustaceans’ sustainability).

The direct-to-customer movement is taking hold in many other industries as well (think online retailing) but has been slow to catch on in investment management, in Canada at least. That’s what really stinks.

You're Richer Than You Think

Thu, 30 May 2013 15:04:50 PDT

By Tom Bradley

Last year we blogged about bank CEO’s compensation (Can I Join the Club?). We took issue with the fact that they all made about the same last year, despite the fact that the performance and positioning of their respective banks were quite different. We finished the post with the sports analogy: “Should Ed Clark [TD Bank], a 50-goal scorer, be paid the same as a good two-way winger on a deep team, a dependable defenseman, a second-line center and a penalty-killing specialist?”

I’m pleased to report that this year there was some improvement. The compensation committees moved the numbers around a little. Here is the final "Total Compensation" standings:

	Firm	Total Compensation
Gord Nixon	RBC	$13,731,877
Rick Waugh	BNS	$11,101,196
Ed Clark	TD	$10,972,599
Gerry McCaughey	CIBC	$9,931,000
Bill Downe	BMO	$9,600,553

In case any bank directors are interested, I’m still in pretty good shape and come to play every day. I’m also a tenacious back checker and a bit of a character guy in the locker room. My agent says I’ll take $30 million over three years ... with a no-trade clause of course.

Investor Roundtable on Mutual Fund Fees

Tue, 28 May 2013 14:55:01 PDT

By Tom Bradley

On June 7th in Toronto, the Ontario Securities Commission (OSC) is hosting a roundtable on mutual fund fees. It is open to the public and will follow the agenda outlined in this invitation.

We have been a regular contributor on the topic of fees and recently made a submission to the securities commissions on the discussion paper that is the topic of the roundtable.

For those wanting to lean in on the debate, or just learn more about how the industry works, we’d encourage you to attend.

Loyal to a Fault

Mon, 27 May 2013 12:10:46 PDT

By Tom Bradley

Lately I’ve been part of too many conversations that go like this.

What brings you to Steadyhand? “I haven’t been happy with my existing advisor. The returns have been lousy and the service has fallen off to the point where I never hear from him.”

Do you know how you’ve done? Does he provide that info? “Well, I was up last year. That was nice. But no, I guess I really don’t know how my account has done.”

So are you going to make a move? “I know I should, but I feel some loyalty to my broker. I’ve been with him for 13 years and we know each other really well. He’s a nice guy.”

But you said he hasn’t been meeting your needs. “Yah, I know. I should do something.”

This conversation drives me to distraction, not just because I want these investors to join us at Steadyhand (I do), but because I can’t stand seeing such a misalignment of loyalty.

Investors should be loyal. Intensely loyal. But it should be directed to their financial plan, and the philosophy and process behind it.

Investing your hard earned money is too important to let misguided loyalties persist. It’s your money. It’s your future. It will help determine the quality of your retirement. If you’re not happy with your current situation, and don’t have faith in the person you’re dealing with, it’s time to do the research, interview some alternatives, make a decision and then ... make that awkward call.

Rent versus Buy - The Most Misunderstood Financial Decision

Fri, 24 May 2013 09:31:54 PDT

By Tom Bradley

Should you rent or buy?

There are all kinds of reasons to buy a home – making it your own, establishing roots in the community, good schools, basketball hoop on the driveway – and they should be at the top of the list. From a financial perspective, however, the rent vs. buy decision usually lacks rigour (compared to the qualitative analysis) and is often just plain wrong. I cringe when I hear the rationale, “I don’t want to pay all that money for rent. It’s a waste.”

In the Report on Business last week, Rob Carrick wrote about a professor from McMaster University (Frank Tristani) who requires that his students go through a rent vs. buy analysis. This year’s calculation is shown in the column and while readers may not agree with all the assumptions, or the conclusion (in Hamilton, it makes more financial sense to rent than buy ... right now), the process is nonetheless instructive. It considers all the necessary factors and reveals the tradeoffs on both sides.

If you read Rob’s column, you’ll never put wasting money on rent on your ‘Reasons to Buy’ list.

Tom on BNN

Thu, 23 May 2013 14:15:00 PDT

By Scott Ronalds

Prepare for extremes. This is an essential element to being a better investor, and is particularly topical on a day when the Japanese market is down 7%.

Tom expanded on the five essential elements to being a better investor on BNN this morning. You can watch the clip here.

Video: Equity Fund Update

Wed, 22 May 2013 07:49:17 PDT

By Scott Ronalds

We caught up with Gord O'Reilly earlier this month for an update on the Equity Fund. Gord is a founding partner of CGOV (he's the "O"), the firm that manages the fund.

The portfolio has performed well over the last few years and we wanted to provide investors with an update on CGOV's current thinking and the positioning of the fund.

Topics of discussion include the fund's emphasis on high-quality companies, the role of foreign investments, the manager's thoughts on dividends, and their views on valuations.

Download, subscribe via iTunes or RSS, or watch now:

Gord was firing on all cylinders on the day of filming, so we kept the camera rolling and also updated our 'Overview of CGOV' video, which you can watch here.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

Be Better

Tue, 21 May 2013 08:21:49 PDT

By Tom Bradley

Better Investors will experience higher returns, and be more comfortable and confident in the process.

This is our underlying belief and driving force behind a new report we’ve published on what makes a better investor. It focuses on the structural and behavioural elements of investing rather than the nitty gritty of picking stocks and determining an asset mix. As we’ve said many times, this isn’t rocket science. Yet, we’ve seen too many people who don’t have a plan or process, which has led to poor returns and a frustrating investing experience. We wanted to create a simple doctrine to assist investors. Call it a Jerry Maguire moment.

We identify five essential, yet simple, elements to being a better investor. In short, they are: (1) being realistic, (2) having a long-term plan, (3) committing to a routine, (4) being prepared for extremes, and (5) being a good CEO of your portfolio.

Our report expands on these elements in plain-English and is accompanied by sketches from Carl Richards, a contributor to The New York Times, author of The Behavior Gap, and expert at making complex financial concepts easy to understand.

Video: Global Equity Fund Update

Thu, 16 May 2013 11:46:19 PDT

By Scott Ronalds

We met with Edinburgh Partners Limited’s Craig Armour recently for a thorough review of our Global Equity Fund. Craig is an investment partner at EPL and manages the fund.

EPL’s investment strategy has been out-of-favour with global markets and as such, performance was a key topic of discussion. Specifically, we reviewed the factors that have led to the poor relative returns (versus the overall market) and whether there have been any changes to the firm’s basic philosophy or decision-making process.

It was encouraging to hear that EPL’s philosophy and process hasn’t wavered. The team remains focused on investing in companies they believe are undervalued based on their 5-year earnings potential. As for personnel, the key decision-makers remain in place and have lots of gas left in the tank (the core group of analysts are in their mid 40’s to early 50’s).

In the current market environment, EPL is focused on businesses with more cyclical earnings because they are being overlooked by most investors and are trading at attractive valuations. Examples of the types of companies in which EPL is finding value include industrial goods & services (Mitsubishi, ABB, Maersk, Safran), technology (Samsung, SanDisk, Microsoft, Google) and automotive (Bridgestone, Toyota, Dongfeng Motor, Johnson Controls).

Conversely, EPL has had only modest investments in defensive stocks, particularly in the last two years. This has hurt the fund’s performance as these stocks have been driving the market’s returns. EPL believes that these more predictable companies (in industries such as health care, food & beverage, and other consumer sectors) are trading at expensive valuations and will generate sub-par returns in the long run.

Craig and the team in Edinburgh believe the divergence in valuation between predictable and cyclical stocks is at an extreme based on historic measures (predictability is expensive and cyclical is cheap) and a reversion to the mean is inevitable. They feel risk is being misperceived and the so-called defensive stocks are vulnerable to a re-valuation. Cyclical stocks, on the other hand, will benefit from a more normal investing environment, and will really kick in when the global economy picks up.

While we place little weight on short-term returns, it’s heartening to see the portfolio perform better in recent months, with many of the above-noted cyclical stocks being key contributors. Notably, investments in Japan are bearing fruit as share prices in the region are recovering sharply.

To bring EPL’s thinking to life, we spent a fair amount of time in our meeting talking stocks. In the video below, Tom and Craig revisit some of the questions from our review, and discuss a few notable holdings.

Download, subscribe via iTunes or RSS, or watch now:

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

Getting out of the Market Almost Certainly a Losing Long-term Proposition

Mon, 13 May 2013 12:02:10 PDT

Special to the Global and Mail
Published May 13, 2013

By Tom Bradley

"Should I get out of the market?" I'm finding this question is coming up again, prompted either by the Dow hitting all-time highs or the central bankers' perilous high wire act (performed without a net). It depends on the week.

But, while we know all too well what it's like holding stocks in a declining market, we never hear what it's like on the other side of the fence. Sometimes it looks greener to be sitting in cash, but is it such a happy, relaxing place? Let's jump the fence and find out.

When you've sold the last of your stocks and equity funds, you'll likely breathe a sigh of relief. But before you get too comfortable, you need to recognize you're now fighting a long established trend (stocks beat cash), and have made your biggest bet ever. Consider the numbers. If your strategic asset mix calls for you to be fifty per cent invested in stocks, you're now fifty percentage points off a plan that's designed to generate long-term returns well in excess of inflation. Your newly-bulging cash position will generate a real return of zero at best.

The psychological challenge of being out of the market is immense, no matter how things play out. If markets go up meaningfully, it will be agonizing. In a matter of months, you could miss out on one, two or even three years of return. Indeed, of all the possible situations investors can find themselves in, I think sitting on the sidelines while the market is going up is the worst. The lost return is one thing, but more important is the fact that rising prices make it almost impossible to get re-invested.

A financial planner once told me that investors who get completely out of the market will take at least 18 months to get back in. They get entrenched in a doomsday scenario such that the only way out is for the bet to work out - i.e. a meltdown eventually occurs.

What if you're on the right side of the bet? If the stock market drops, it will feel good to be in cash and you'll have preserved capital. But the dreaded second decision will be ever present - when do you get back in? Your initial success makes the decision easier, but by no means easy. You'll still want more certainty than is possible.

If you're seriously thinking about getting out of the market, consider the following.

1. Understand what risk is for you. For investors with a time frame of ten years or more, sitting in cash is much riskier than holding a diversified portfolio of high-potential assets.

2. Seek out other views. I guarantee Mr. Market knows both sides of the argument, you should too.

3. Don't base your decision on an expert's short-term view. No matter how impressive the reasons are, there's no possible way she/he knows where the market is going in the next three, six or twelve months.

4. Go beyond the economic fundamentals. The linkage between the stock market and GDP growth, government debt levels and employment numbers is sloppy at best. If you're going to make a big asset mix shift, you need to know how much of your view is already priced into the market. In other words, pay attention to valuation.

5. Consider the implications of being wrong. You know the impact of holding stocks in a down market, but how damaging will it be if your move to cash is wrong? And what will your re-entry strategy be?

6. Limit yourself. If you're going to make a big shift, establish ranges around your long-term asset mix and stay within them. Don't let yourself cripple your long-term return with one mistake.

7. Don't do it. And definitely don't do it if you're at an extreme time in the market. That's when you're almost assured of doing the wrong thing.

Generating attractive long-term returns requires that you go through periods of negative short-term returns. Knowing that, I prefer to take my lumps on the side of the fence where the long-term trend is greener.

The Dividend Dance

Mon, 06 May 2013 14:31:28 PDT

By Tom Bradley

In Saturday’s Report on Business, there was a remarkable table embedded in Rob Carrick’s article (How to Shelter Your Portfolio From a Housing Decline). It showed the top 10 Canadian equity funds (by assets) and the top 10 Canadian dividend income funds.

What struck me was the puny size of the biggest Canadian equity funds. Outside of the iShares S&P/TSX 60 Index Fund ($11.5 billion), which is an ETF that’s used mostly by institutional investors, the next largest fund was RBC’s Canadian Equity Fund at $2.3 billion. The 10th largest fund was under a billion dollars.

The list of dividend funds, on the other hand, was considerably deeper and shows where Canadian mutual fund investors have focused their portfolios. The largest fund was again RBC’s (RBC Dividend - $10 bln), followed by TD Dividend Growth ($5.5 bln), Scotia Canadian Dividend ($3.5 bln), BMO Dividend ($3.3) and Sentry Canadian Income ($2.5 bln).

I recognize that conventional mutual funds are in decline, but the lists confirm a point we’ve been making over the last year – with the steady shift to stable, income-oriented stocks, Canadian portfolios have become less diversified. For example, the dividend income funds in the table are heavily tilted toward financial services stocks and own few resource, technology and industrial stocks.

With the solid past performance of income-oriented stocks, it’s easy for investors to lose track of where their portfolios have crept. I say that because I firmly believe a portfolio narrowly focused on Canadian banks, pipelines and REITs will significantly underperform a well-rounded one that includes small, medium and large companies in a range of industries and geographies.

A Report from the Front Lines

Fri, 03 May 2013 11:15:57 PDT

By Tom Bradley

I thought a recent report from Mawer Investment Management captured well the opportunity, challenges and complexity of investing in the Asian markets. A paragraph from the conclusion summarizes their balanced optimism.

Overall, we find ourselves among those who believe that the Southeast Asian promise is real. Structural growth opportunities in the region abound and show no signs of abating. The balance sheets and financial systems of these economies are in far healthier shape than their western counterparts today. And while there are a variety of hurdles that face companies that operate in the region, they do not appear insurmountable and in most places appear to be diminishing. This is one of the reason why we anticipate our investments in the region will grow as a percentage weight in in our portfolios over time.

Job Opportunity: Investor Specialist

Fri, 03 May 2013 11:27:01 PDT

We are currently seeking candidates for a permanent, full-time Investor Specialist, either in Vancouver or Toronto. As part of this diverse role, the team member will work directly with clients to help them achieve their investment objectives.

Direct industry experience is a requirement for this position.

To view the full job description, click here (pdf). All interested candidates are asked to submit their resume through jobs@steadyhand.com.

We thank all interested candidates; however, only those selected for an interview will be contacted.

Lessons From a Legend

Mon, 29 Apr 2013 10:24:39 PDT

By Tom Bradley

Lori and I attended a Celebration of Life for Art Phillips last Friday. (There was a wonderful obituary in the Globe and Mail last week.) Art founded Phillips, Hager & North in 1965 with the help of Bob Hager and Rudy North. It was Art’s reputation and wallet that got the firm through the early years, as he was the oldest of the three and had already built an excellent track record.

I had the good fortune of overlapping with Art at PH&N for 5 years before he retired, a period when he managed the firm’s U.S. equities. I didn’t work directly with him, but through observation and conversation, he taught me a lot.

Art kept it simple. There was no analysis paralysis with him. He read extensively (4 or 5 newspapers each morning) and used the Value Line research service to look for stock ideas. He rarely talked to brokers or analysts.

As was evident throughout his storied life, Art was his own man. In the case of investing, this meant he wasn’t ever beholden to market indexes or what people might think about his choices.

When Art bought a stock, he would give us a rundown of his thesis in our daily meeting. At times, his reviews were quite passionate and his conviction was high. That isn’t unique in our industry, but what was unique about Art is that he could turn around a week or two later and sell the same stock. He didn’t let his previous pronouncements and others’ perception of him get in the way of doing the right thing. If he came across new information or just changed his mind, he sold the stock and moved on.

I regularly read articles and books on behavioral finance, all of which point out how fallible and consistently flawed we are in our decision making. I often think of Art when I’m reading, because more than any money manager I’ve met, he was the least prone to letting personal and mental baggage get in the way of sound decision making.

Art traded a fair bit, mostly small adds and trims to existing holdings, but one of his strengths was getting on a good stock and riding it. The nineties was a great time for growth stocks, which were Art’s specialty, and he rode a number of them for a long time. I think it was with Art that I first heard the expression ’10 bagger’ (a stock that’s gone up 10 times - i.e. $5 to $50). We were talking about Home Depot at the time (which ended up being a 20 bagger), but he had many more including Intel, The GAP and GE.

Like the famous Fidelity fund manager, Peter Lynch, Art particularly liked companies that he knew and favoured as a customer.

Art used ‘relative strength’ charts (which don’t track a stock’s price, but rather it’s performance relative to the overall market). I never considered him to be a technical analyst or chartist, but he always wanted to know how his portfolio was trending. He didn’t want to have too much invested in stocks that were trending down. Not every holding had to be in an up-trend, but momentum certainly played a role in his portfolio construction.

Art built an enviable track record and had traits we should all look for in a money manager. He wasn’t always right, but he was never lacking in confidence and decisiveness. He was well informed on a broad range of topics. He didn’t get caught up with benchmarks, but rather, stuck to good companies that made or sold stuff he could understand. And he didn’t let his previous moves or other investors’ perceptions limit his decisions.

As John Montalbano, CEO of RBC Global Asset Management and former colleague of Art’s on the U.S. equity team, said at Friday’s celebration, “If Phillips, Hager & North was headquartered in Eastern Canada or somewhere in the United States, there is no doubt in my mind that Art would have been celebrated as a pioneer and visionary in the investment management business.”

Meet Jennifer

Fri, 26 Apr 2013 13:56:24 PDT

By Tom Bradley

I’m pleased to introduce our newest member of the Steadyhand team, Jennifer Lacuesta. Jennifer is taking on the role of Client Service Administrator. She has close to 10 years of industry experience, having worked at Deutsche Bank (in the Philippines), GrowthWorks, and Haywood Securities.

Jennifer will be playing an important role in many of our client service and trading functions, from processing client trades to opening new accounts and facilitating transfers.

“J-La” (her nickname, as she reluctantly told us) is a great addition to the team. Steadyhand has been growing at a faster pace and her experience will help ensure that our high administrative standards are maintained. Outside the office, Jennifer’s three children keep her busy and she has a passion for arts & crafts and jewelry making. I’ll never find myself scrambling for a last minute anniversary gift again.

Get to know our newest employee a little better:

Favorite restaurant: Top of Vancouver (Revolving Restaurant)
First industry job: GrowthWorks, 2004
Apple or Samsung: Samsung
Maiden name: Jennifer Lopez (no kidding)
Favourite Jennifer Lopez song: Jenny from the Block
Most admired person: Audrey Hepburn
Best TV show: Fashion Star
Favorite thing about Vancouver: The scenery
Guilty pleasure: Shopping

Welcome aboard, Jennifer.

Fixed Income = Broken Sentiment?

Thu, 25 Apr 2013 17:21:23 PDT

By Tom Bradley

My last post on gold spoke to the impact of investor sentiment on security prices. In the case of the shiny metal, sentiment is everything. As for other securities, such as bonds and stocks, it’s a secondary factor - economic fundamentals (profits) and valuation drive the boat.

Having said that, I find the market sentiment in the fixed income markets to be remarkable. I say that because the consensus around interest rates has two elements to it. One speaks to valuation (rates are unsustainably low) and the other to timing (rates won’t rise for a few years to come). In other words, the market thinks bonds are expensive now, but because of macro-economic factors, they’re going to stay that way for a few more years.

I bring this topic up again (and again and again) because investors have to be careful when valuation and sentiment are at extremes. Betting with the consensus is a hard way to make money at the best of times, but when it lines up with valuations being out of line, it can set the stage for a wild ride … in the wrong direction.

Hopefully, gold has served as a wakeup call when it comes to investor sentiment and strong consensus. That is: it will change; we won’t see it coming; and we won’t know why until after the fact.

The catalyst for higher interest rates could be any number of things – higher inflation, a better economy, rising stock markets. When long-term Government of Canada bonds lose 15% of their value, we’ll be saying, “What were we thinking … bonds were ridiculously expensive and everyone loved them!”

So beware of complacency. We are in unprecedented times when it comes to government finances and monetary stimulation. Other than the Leafs making the playoffs, we shouldn’t be too confident about anything right now.

Note: In response to the interest rate complacency, and valuations for the bonds and stocks, we have positioned the Founders Fund (and advised clients in relation to their long-term asset mixes) to carry a minimum weighting in bonds and hold some cash and short-term investments instead (10-15%). As for the bonds we hold, our manager, Connor, Clark & Lunn, is heavily tilted towards corporates, with little or no exposure to Government of Canada bonds. We’re recommending a regular allocation to stocks, but with a tilt towards foreign stocks over domestic.

Gold - A Dizzying Change in Sentiment

Mon, 22 Apr 2013 09:37:14 PDT

By Tom Bradley

I’ll never forget an interview I did with Michael Hainsworth on BNN. It was almost exactly two years ago. Michael started the interview very directly, “Tell me, why no gold?” After I explained why our managers didn’t own any gold stocks, he then asked, “And no interest in base metals?” When I said we had no mining stocks in our funds, Michael was beside himself. “Do you at least own some energy stocks?”

When I walked out of the studio on to Burrard Street, I felt like I’d been hit by a truck. Were our clients’ portfolios really that off base?

I tell this story because it captures the investor sentiment of the time. In 2010/11, if you didn’t own gold, copper and other commodities that were part of a China-driven ‘super cycle’, you were branded a contrarian (as I was that day). It stands in stark contrast to where we are today, and perhaps explains why the downdraft in gold and gold stocks is occurring.

Despite all the headlines and hyperbole, investors shouldn’t find the swing in gold to be particularly remarkable. I say that for a few reasons:

Gold went from $400 to $1,900 over 6 years (2005-2011). That’s a stupendous run and it may just have been time for a breather.
There were lots of violent price moves over the course of those years, mostly to the upside. Commodities, stocks and other assets (including houses) that experience big price increases should be expected to also experience big downswings from time to time.
The investors who want to own gold have had lots of time to get in, which makes it less likely that there will be a big surge of unexpected or untapped demand.
While the price more than quadrupled, there was no change to gold’s ability to generate income. In 2005, a Troy ounce produced no cash flow or dividends. Today, it produces no cash flow or dividends.

Is the bull market over for gold? I have no idea. Amongst the myriad of factors that impact the gold price, I haven’t been able to sort out what drives it. It’s just not as simple as inflation or financial crises.

Is gold no longer a safe haven? It never was (at least, you never read that it was in this space). As a stand-alone investment, gold is highly speculative. It has no income stream to value, so it’s driven by market sentiment. In the context of a balanced portfolio, however, a modest position in gold is a good diversifier. It reacts to different factors and tends to lead and lag at different times. For instance, while the stock markets have been rolling over the last year, gold has been trending down.

Am I surprised by the swing to a negative sentiment towards gold? Given my comments above, I shouldn’t be, but I’ll admit, it has been a remarkable turnaround, especially given how strong views were just two years ago. It’s still rattling around in my head - THIS MAN DOESN’T OWN ANY GOLD!!!

(Note: We currently own two gold mining stocks – Franco Nevada in the Equity Fund and Primero Mining in the Small-Cap Equity Fund.)

Strategizing

Fri, 19 Apr 2013 13:01:41 PDT

By Scott Ronalds

We held our annual strategy session on Wednesday afternoon. Every year we lock ourselves in a room for 4-5 hours (or more), tune out the outside world, review the current state of our business and hash around ideas, thoughts and strategies on the future direction of the company. There’s lots of discussion, debate and of course, caffeine.

Some of the topics and questions on the table this year were:

Helping our clients become better investors – Bringing the concept of Strategic Asset Mix (SAM) to life; setting realistic return expectations; providing more education sessions & tools
Potential long-term investment opportunities for our clients that we’re not addressing
The performance and positioning of the Global Equity Fund
Assessing the Founders Fund’s first year
Identifying key business risks and vulnerabilities, and strategies to mitigate them
Adapting to a new rate of growth and ensuring that we maintain our quality of service and personal touch
Increasing the “network effect” (word of mouth, referrals, etc.)
Should we publish another book? It’s Still Not Rocket Science
Live chat – should we introduce a ‘live chat’ tool on our website?
Enhancements to the client portal
How can we further simplify Steadyhand for our clients? (better forms, account statements, access to new tools & resources)

While we didn’t solve all of the world’s problems, we walked away jazzed about the future of Steadyhand. Tom and Neil will spend a few days digesting all the discussion and prioritizing the action items. We have some cool ideas and projects in the works, all aimed at enhancing your experience as a client.

Ultimately, many of the issues we discuss come from feedback we receive from our clients, and on that note, we’d love to hear from you. If there’s something you think we should be strategizing about, post a comment below.

First Day of the Future

Wed, 17 Apr 2013 09:05:34 PDT

By Tom Bradley

It’s a sunny, spring day.

The cherry blossoms are at their peak on West 3rd Avenue.

Bob Hager’s daffodils are bursting out of our garden.

David (in from Toronto for our annual strategy session) greets prospective clients with an enthusiastic, “Welcome to Steadyhand World Headquarters.”

And the gentleman says, “Isn’t it a wonderful day to plan our future.”

Right on.

Podcast: First Quarter Review

Tue, 16 Apr 2013 16:27:46 PDT

By Scott Ronalds

It was a strong start to the year for stocks around the globe, with the MSCI World Index gaining 10% (in Canadian dollar terms). U.S. and Japanese stocks were among the top performers, while Canada was one of the weaker performing markets (up 3%) as a result of its heavy weighting in gold and mining stocks. Bonds also had a positive quarter, albeit a much more modest one, led by a strengthening in corporate and provincial bond prices.

Our funds fared well in the quarter, with a tilt towards foreign stocks and corporate bonds being key factors. As for asset mix, we continue to recommend a full allocation to stocks (in relation to your long-term asset mix), a below-average position in bonds and a healthy cash weighting. As a reminder, this positioning is best reflected in the Founders Fund.

In this podcast, we review the quarter in further detail and highlight some of the key takeaways from our Quarterly Report.

Download, subscribe via iTunes or RSS, or listen now:

Mutual Fund Fees - Desperate Need for Change

Mon, 15 Apr 2013 14:54:02 PDT

By Tom Bradley

Last week, we filed a submission to the Canadian Securities Administrators (CSA) on their Discussion Paper on mutual fund fees. If you have an interest in this topic, we’d encourage you to give it a read. If you’re a Steadyhand client and don’t have the time or interest in this stuff, be assured that you’re on the right side of low and transparent fees. On your quarterly statement, you can see what you’ve paid ... to the penny (or should I say nickel).

In our submission, we advocate for dismantling the current system of embedded mutual fund fees whereby investment management, advice and sales commissions are all mixed together. There is overwhelming evidence (including recent research conducted by the CSA) that investors don’t understand how much they’re paying in fees or how they’re paying them. By separating the payment of these activities and reporting clearly on each, the system would be less opaque and give clients the opportunity to assess the value they’re receiving in each area. There will also be less opportunity for conflicts of interest between the client and advisor. As the CSA paper points out at great length, the current regime provides far too many opportunities for the system to work against the client.

Our submission is critical of the current regime, but we’re optimistic that new rules will breed some interesting new business models, both within the existing institutions and through the creation of new players. Over the last three decades, the wealth management industry has demonstrated a remarkable ability to innovate. As long as the current subterfuge goes on with mutual fund fees, however, firms have no motivation to change or improve the delivery mechanism for fund management and financial advice.

When the CSA levels the playing field between the client and advisor, the innovation machine will switch on and business models will be created to fit the new landscape. We have to get to a place where clients better understand what they’re paying and will be more empowered to generate better returns.

Bradley's Brief - Q1 2013

Thu, 11 Apr 2013 09:56:19 PDT

By Scott Ronalds

From our Quarterly Report:

“The Dow hit a new high. How much further can the market go? … Alcoa is the first major corporation to report quarterly earnings and will set the tone for what’s to come … the technical indicators are telling us … time for a pullback … the next bull market starts in …”

The only time I watch business television is when I’m travelling and unfortunately, I’ve been on the road a lot lately. I listen to this stuff and it drives me crazy (ask Lori). I find myself talking to the screen, even screaming at it sometimes.

What about the Dow? It’s a ridiculous index to begin with and the new high was overdue. The previous one was getting old (6 years). If the market goes up 20% over the next 3 years (a reasonable expectation), the Dow could hit 80 new highs. And are you kidding me? A highly cyclical aluminum producer is going to tell us anything about the ability of Cisco, CN Rail or BMO to generate long-term profits?

Read Tom's full brief and the rest of our report here.

April Foolin'

Tue, 02 Apr 2013 09:50:23 PDT

By Tom Bradley

What came off as a well-crafted April Fools prank (it was Scott’s genius) has inadvertently served as a reminder of what our clients care about.

In the Monthly Newsletter we sent out yesterday, we announced that Steadyhand had been sold to the Canadian Consortium of Colossal Financial Institutions (CCCFI). Amongst the reasons mentioned for the deal, our Toronto David was quoted as saying, “Canadians love their banks and we want some of that love.”

In the emails that flowed in, there were some great stories, but it also served as a powerful reminder of how much our clients care about our independence, ‘non-bankiness’, and our irreverence towards industry practices.

Geez, that's a scary way to start a Monday morning!

You bastard you completely got me I immediately thought where do I go now??

You got me … my heart sank, I thought oh no after leaving what felt like a CONSORTIUM OF CDN BANKS.

You did “gotcha” me ... Remember, us older guys have weak hearts.

Unfortunately I had popped a couple of Tylenol before finishing the article - well done!!!!

Do that and I'll transfer to the Cyprus Fund!

All joking aside, we know how important our independence and client focus is. It’s important to us too. We apologize if we’ve caused any heart palpitations or mental distress, but I won’t promise that we won’t do it again.

Purchasing Steadyhand through Discount Brokers - Clearing the Air

Wed, 27 Mar 2013 09:18:14 PDT

By Scott Ronalds

We’ve had a lot of calls lately from investors looking to purchase our funds through discount brokers. The questions often relate to availability, fees and fund codes. There seems to be some misinformation on the topic, so we felt it was a good time to clear the air.

Our funds are available through a number of providers (see the complete list here), several of which charge no commissions for purchases, including QTrade, BMO Investorline and Scotia iTrade.

Some institutions charge an upfront commission to purchase our funds, which can range from $9.95 up to 2.5% of the purchase price. Questrade, for example, charges a transaction fee of $9.95, while TD Waterhouse charges a purchase commission which ranges from 1% to 2.5% depending on the size of the purchase. To be clear, this is not a fee levied by Steadyhand. We have no control over it and do not receive any portion of it.

It’s understandable for discount brokers to charge a fee (if reasonable), as they make no money by offering our funds. This is also why it may be more cumbersome to purchase our funds through certain providers. For example, trades may have to be placed over the phone, rather than online, and investors may be required to know the fund codes when making transactions (see below).

A few discount brokers, unfortunately, have chosen not to offer our funds because we don’t pay trailer fees, which are ongoing commissions meant to compensate financial advisors for their services (discount brokers by regulation do not provide advice). RBC Direct Investing falls into this camp; they do not offer funds from several other no-load, low-fee companies as well. Their decision has not been a popular one among investors and industry observers (more here).

Many investors choose to purchase and hold our funds through discount brokers so they can have all their investments under one roof, which is perfectly understandable. As a reminder, though, our funds can be held directly with us, and the process of opening an account isn’t that painful. Direct Investors may benefit from: (1) greater fee rebates (we consolidate all household accounts when calculating rebates), (2) clear-cut advice at no charge, and (3) transparent reporting and account statements.

For reference, our fund codes are as follows:

Steadyhand Savings Fund – SIF110
Steadyhand Income Fund – SIF120
Steadyhand Founders Fund – SIF125
Steadyhand Equity Fund – SIF130
Steadyhand Global Equity Fund – SIF140
Steadyhand Small-Cap Equity Fund – SIF150

Distributions: Cut it Out

Tue, 26 Mar 2013 09:23:43 PDT

By Scott Ronalds

It’s stingy times for income investors. Government of Canada bonds are yielding less than 2% (5-year maturities are at 1.3% and 10-year maturities at 1.8%) and high quality corporate bonds are only 1-1.5% higher. Dividend-paying stocks are paying relatively attractive yields, but come with greater risk.

All of this to say that income-focused investors should be prepared for lower income payouts on their funds, and in some cases distribution cuts. Products that pay distributions north of 5% are most at risk. In today’s environment, it’s simply not feasible for a fund to pay out such a high distribution without (1) investing primarily in junk bonds or high-yielding stocks (which comes with its own set of risks), or (2) returning a portion of the original investment (known as return of capital, or ROC).

A case in point is the $4.3 billion BMO Monthly Income Fund. The fund, which invests in a combination of bonds and stocks, has been paying a monthly distribution of $0.06/unit, which equates to an annual yield of close to 10%. Industry expert Dan Hallett (HighView Financial) has been writing about the fund for two years (as have we) and has questioned the sustainability of its distribution. Well indeed, in a post last week Dan highlighted that BMO intends to cut the distribution by 60% to $0.024/unit. He noted that this is a good news/bad news story – good because it will improve the sustainability of the distribution; bad because it will hurt investors who have come to rely on the payout.

This brings us to the Steadyhand Income Fund. This fund has historically paid a fixed distribution of $0.10/unit for the first three quarters of the year (March, June, September) and a variable year-end distribution which has ranged between $0.10 and $0.53/unit. In annual terms, the distributions have added up to a yield of between 4% and 8%.

In determining the fixed distribution, we try to anticipate the interest and dividend income that the fund will generate over the year, as well as the amount of capital gains or losses that may be realized. We’re trying to find a balance between conservatism (we don’t want to have to lower the year-end distribution) and not having excessive gains build up in the fund. Picking a distribution rate is more art than science due to the variability of capital gains/losses.

We feel the Income Fund’s current quarterly distribution of $0.10/unit is appropriate for the time being. The fund’s pre-fee yield is running around 3.5%. While there is no guarantee that capital gains will supplement the interest and dividend income, the fund is in a strong position in this regard. As always, we will revisit our estimates throughout the year to determine if the fund is still on track to meet its payout. If the yield on the portfolio drops further and/or we determine that the fund is unlikely to generate any capital gains, we will cut the distribution. (Note: The Founders Fund, which currently pays a fixed quarterly distribution of $0.05/unit plus a variable year-end payment, is in the same boat.)

Investors in our Income Fund and Founders Fund who take their quarterly distributions as cash payments (rather than reinvesting them into additional fund units) should thus be prepared for a potential distribution cut as a reflection of the current low interest rate environment. Again, these are stingy times for income investors.

25 in Action

Thu, 21 Mar 2013 10:20:07 PDT

By Scott Ronalds

Quick background: CGOV Asset Management is the manager of our Equity Fund. The firm has a distinct investment process, one facet of which is that they won’t own more than 25 stocks. We love this discipline as it ensures they focus on their best ideas and don’t dilute the fund with ‘filler stocks’. If they are at the upper limit of holdings and see a new investment opportunity they want to add to the portfolio, it has to be more compelling than one of the existing investments in the fund.

This situation recently unfolded with Westshore Terminals (buy) and Rogers Communications (sell). Westshore is the largest coal loading facility on the west coast of North and South America. It generates revenues based on volumes of coal exported through the terminal to 20 countries around the world (with heavy volumes to Asia). It is one of the few ‘pure-play’ infrastructure stocks in North America and has promising growth prospects given the rising levels of resource consumption in Asia. The company has been on CGOV’s watchlist for a while but the stock’s valuation had never been compelling enough to add it to the fund (and displace another holding).

Along came Cape Apricot, a cargo ship that crashed into one of Westshore’s two berths in December and put it out of service for several weeks (sending the stock down too). By mid-February, the company had made sufficient repairs to permit resumption of normal operations, but at this time Westshore announced a $210 million capital expenditure program which will replace some older equipment and enhance operational efficiencies. To fund the program, the company announced that it plans to fix its dividend (at $0.33/quarter) until 2017 and issue short-term debt. This disappointed investors, as Westshore has historically paid a high, rising dividend (albeit volatile at times) and has been a popular holding for income investors. The stock slid on the news and by late February had fallen close to 15% since December.

Around the same time as the Westshore cap-ex announcement, Rogers was reaching a new high. In fact, the stock had risen about 50% over the past two years. It had been a profitable holding in the fund, but was no longer cheap in CGOV’s view. Considering the price decline in Westshore and the fact that the business remains solid and will have a fully modernized facility in a few years’ time, the manager decided that Westshore represented a more attractive investment than Rogers. The former was bought and the latter was sold – an example of the 25 rule in action.

America - Cheer Up

Tue, 19 Mar 2013 16:46:09 PDT

By Scott Ronalds

The latest edition of The Economist has a special report on America’s competitiveness, titled Cheer Up. It examines the areas which are the “source of the most hand-wringing” among observers: innovation, energy, education, immigration, infrastructure and regulation. The six-part report argues that America’s growth prospects are brighter than they seem, despite the glaring and well publicized problems the nation faces – namely crippling debt and dysfunctional politics.

Much of the media coverage on the American economy tends to be negative. The Economist report attempts to look beyond the problems in Washington and provides a more balanced assessment, acknowledging both the challenges and opportunities that the U.S. faces. It’s a good read for investors with questions and concerns about our southern neighbour. Some interesting takeaways:

Innovation – The U.S. remains the world’s biggest spender on R&D (research and development), which as a share of GDP remains close to an all-time high.

Energy – New technologies, specifically hydraulic fracking and horizontal drilling, have led to a boom in the oil & gas industry, with key outcomes including new jobs, tax revenues and cheap energy (American factories pay a third of the German natural gas price and a quarter of the South Korean price).

Education – American schools are getting the biggest overhaul in living memory, with the emergence of charter schools, new pay structures and incentives for teachers and principals, and new curriculums.

Infrastructure – With federal and municipal funding squeezed, creative solutions are arising in the area of public-private partnerships to encourage investment in roads, bridges and tunnels.

The report is available in print and on The Economist’s website.

A Strong Consensus on Interest Rates

Mon, 18 Mar 2013 08:58:37 PDT

By Tom Bradley

I recently attended a pension seminar. As part of the program, the organizers used a cool interactive polling system to gauge where the audience stood on certain issues. While there was plenty of good information provided throughout the morning, what stood out the most for me were the results from one of the questions: “When will interest rates rise in earnest?”

Of the 100 plus trustees and consultants in attendance, only 3% thought rates would ‘rise in earnest’ in 2013. By far the most respondents (63%) said rates would rise in 2015 or beyond, while 20% said they would not go up significantly.

I understand the reasons why people expect rates to stay low (weak economies, stimulative monetary policy and overextended governments). Indeed, the manager of our Income Fund, Connor, Clark & Lunn Investment Management, doesn’t expect rates to rise significantly over the next year.

But that doesn’t change the fact that the consensus around interest rates is truly remarkable (Read: extreme). Think about it. We’re coming off a period when rates have steadily declined while inflation has been remarkably stable (call it 1.5-2.5%). We’re now at a point where short to medium-term government bonds trade at negative yields (the yield is not enough to offset inflation). So with bond valuations as stretched as they’ve been in 30 years, investors have never been more confident that rates will remain low.

To my way of thinking, only 3% in the rising rate camp screams complacency. Near-zero rates may be here for years to come, but the chance of them being significantly higher sometime in the next few years is not 3%. It’s considerably higher than that.

3% also tells us that we need to understand where we’re sensitive to interest rates and how our assets (real estate, bonds and high-yielding stocks), liabilities (mortgages, credit lines) and cash flow will be impacted by higher rates. As a good control measure, we should all assume higher rates when calculating the affordability of a house or future returns on our portfolios.

We shouldn’t be complacent about the current state of credit markets. It’s not sustainable. Bond investors will eventually demand yields in excess of inflation. Maybe it won’t happen until 2015 or beyond, but we should prepare in earnest today.

What About Stocks?

Wed, 13 Mar 2013 15:58:19 PDT

By Tom Bradley

I’ve been a bit of a downer lately, writing negatively about bonds and real estate, and pointing out that risk premiums (the opportunity to generate returns in excess of government bond yields) have narrowed for many other investment strategies. (Note: The opinions expressed in this post are strictly the views of one man and should not be interpreted as fact or reflective of what other market participants are thinking.)

These views on valuation come at a time when pension funds and other institutional investors are increasing their allocation to real estate and alternative investments (including everything with a high yield). In most cases, the money is coming out of plain vanilla stocks. Now I realize I’m comparing a short-term phenomenon (narrow risk premiums resulting from near-zero interest rates) to a longer-term, strategic shift, but nonetheless, it does beg the question, what do equity risk premiums look like right now? What are the potential returns in the asset class they’re selling?

Well, as I look across the spectrum of possible investments, I think that stocks will produce the best returns over the next 3-5 years (6-8% per year). Here is my reasoning:

In a world that’s burdened with too much debt and is generally spending more than it’s earning, corporations are solidly profitable and awash with cash. Indeed, Bank Governor Carney has been complaining that companies are sitting on too much cash.
Investors’ focus on dividends is forcing management teams to be more disciplined in their capital allocations. This can only be a good thing.
Companies that aren’t growing their dividends (or don’t pay one) and have a few warts on them are being severely punished. The valuation gap between predictable, dividend-growing companies and the less shiny, more cyclical ones is unusually wide. ‘Unusually wide’ anything in the investment management business is also a good thing.
High quality corporations are able to borrow at ridiculously low interest rates. Some are raising money even though they don’t have anything to spend it on. Needless to say, they’re ready for whatever opportunities or challenges come at them.
Price to earnings multiples (P/E’s), which are key valuation tools for stock investors, have moved up over the last four years. They’ve gone from being ridiculously low in 2009 to pretty average today. There’s a great debate on where the overall market is trading, but most measures show P/E’s are still in normal territory (the teens). The measure I lean on the most (the Valueline P/E, which covers a broad array of companies, mostly in the U.S.) shows stocks trading at 16 times earnings, which is dead on its long-term average.
By definition, a period of average valuations means half the market is expensive based on history and the other half is ... you guessed it ... fertile ground for active managers.
It’s also important to consider that while P/E’s are in a normal range on an ‘absolute’ basis, they are jumping off the page on a ‘relative’ basis. In other words, when comparing stocks to bonds, the valuation gap favouring stocks is as wide as any time in my budding career (it’s been 30 years since I got hired out of grade school).
And finally, from a sentiment point of view, I don’t mind scouring for bargains in an asset class that people are reluctant to own.

How are stocks going to do over the next few months, or 2013 overall? I have no idea. This year could turn out to be a pleasant surprise or a total bummer. But if we want to avoid owning expensive assets (the best risk control measure I know) and have a majority of our portfolios invested in securities with the highest potential return, then it seems to me stocks have to be a significant part of the mix.

Nice Shirt!

Fri, 08 Mar 2013 11:07:03 PST

By Tom Bradley

The latest Steadyhand T-shirt minces no words. In bold white letters on a black shirt are the words Scott came up with to describe our philosophy around stock investing – concentrate dammit!

We’ve had lots of interesting reaction to the shirt, but the best comes from Winnipeg. Lori and I gave everyone in the family (who we thought might wear it) a shirt for Christmas, including our nephew Branton. Brant is in grade 11 at a private school, which requires that he wear a jacket and tie four days a week. On Fridays, he can be himself.

A couple of Fridays ago, Branton was wearing his Steadyhand t-shirt when he was abruptly pulled out of class and sent to the Vice Principal’s office. Contrary to what you’re thinking, it wasn’t because he was wearing an offensive shirt, but rather because he’d had 4 minor infractions in less than a month. He was being reprimanded for leaving the top button of his shirt undone (twice), chewing gum in class and forgetting an assignment at home.

But Steadyhand did fit into the story. As Branton was getting up to go back to class, the Vice Principal looked at him and said, “Nice shirt”.

Commercial Real Estate - Not Lost in Translation

Thu, 07 Mar 2013 15:48:36 PST

By Tom Bradley

I’ve been highlighting a number of asset classes where the risk premiums - the opportunity to achieve returns above government bonds - have narrowed. My focus has been on income securities, but I’ve poked my nose in on residential real estate as well. From my research and discussions with other investment managers, however, it seems that near-zero interest rates have pushed risk premiums down almost everywhere, including most areas of the hedge fund universe. (Note: I think stock valuations are still close to normal and offer potential returns that are similar to historical levels, but that’s for another post coming soon)

Lately I’ve found myself in front of a number of commercial real estate managers, another area that is all about income and is highly sensitive to changes in interest rates. I don’t know nearly as much about this asset class, but thought I’d try to apply some of the tricks of the trade I’ve learned from almost 30 years of interpreting bond and stock presentations.

The format below takes some of the phrases I’ve heard in formal real estate presentations and translates them into what I imagine might be discussed around the water cooler or over beers.

Pricing is good.
Coors Light: Things are expensive right now. I can’t believe what people are willing to pay us for our buildings.

It’s competitive.
Moosehead: But if we sell, we’ll find ourselves in a bidding war with pension funds and REITs to buy something else.

We’re looking to build some multi-residential buildings [apartments].
Molson Canadian: Apartment buildings are in such demand that transaction prices have risen above replacement cost. In some areas, it now makes more sense to build than to buy.

Pension plans are increasing their weighting in real estate.
Budweiser: This is not an undiscovered asset class. The returns have been terrific … and steady. It happens every time - returns are good and everybody wants more. Maybe it’s time to feed the hungry wolves.

We’re finding opportunities to upgrade the quality of our portfolio without sacrificing much on valuation.
Moosehead: The market isn’t discriminating between high quality and lesser quality to the degree it usually does. It’s a great opportunity for us, but it’s also a little worrisome. This usually signals the peak of the cycle.

Financing is not a problem. Spreads are reasonable and we’re able to get 10-year loans.
Coors Light: If we can get 8-10 year money at 3%, then we can afford to buy at 6% cap rates, or even less. As long as the banks and insurance companies are there for us, we can keep buying, even if it feels expensive.

The capital appreciation will vary from year to year, but the rental income provides a nice cushion.
Budweiser: Rental income has provided about half the return over the last few years. It’s coming down a little, but should hold up. But when rates go up and the spread narrows [between cap rates and interest rates], rents aren’t going to matter much. Prices are coming down. I’m not sure our investors are ready for lower property valuations.

As I said earlier, I’m not an expert in commercial real estate, but reading between the lines, it sounds like investors need to adjust their return expectations just like other asset classes. It’s never an easy conversation to have, so maybe more than beer is required. Scotch anyone?

Wien's Wisdom

Wed, 06 Mar 2013 07:42:26 PST

By Tom Bradley

I came across a wonderful piece on the Blackstone Blog last week (I apologize, but I can’t remember who pointed me there). It’s entitled, ‘Byron Wien Discusses Lessons Learned in His First 80 Years’.

As the title implies, Mr. Wien is an industry veteran and has lots to offer on investing, business and life in general. I’d encourage you to sit down with a cup of tea or glass of wine and give it a read. The reading part won’t take long, but the quiet contemplation to follow should.

Two Sides of the Coin

Thu, 28 Feb 2013 11:34:31 PST

By Tom Bradley

In a ‘Live from the Desk’ posting on the Vertex website (a Vancouver-based fund manager), readers get to experience a typical day on the bond desk from the perspective of new issues. Bond investors are seeing corporation after corporation coming to market with new offerings. All shapes and sizes. A wide range of quality.

The Vertex team makes the point that there is a good side to the bond boom/bubble/whatever. And that is ... it’s great for the stock market! Companies are issuing bonds at low interest rates and extending out their overall term-to-maturity. Lower interest payments flow through to shareholders in the form of higher profits, and perhaps dividends. Extended terms mean companies have more certainty around their financing, which allows them to do more capital spending and hire more workers. More certainty also lets investors relax a bit and value stocks more positively.

Yes, I’m concerned about what happens when interest rates rise, but in the meantime, today’s low rates and liquid markets are fueling future gains ... in the stock market.

Bringing a Knife to a Gun Fight

Wed, 27 Feb 2013 11:30:39 PST

By Tom Bradley

I’m hearing rumblings that the investment industry is going to fight back on some of the new regulations that the Canadian Securities Administrators (CSA) are proposing around performance and fee disclosure.

Last week’s full page ad in the National Post by the Investment Industry Association of Canada (IIAC) may be evidence of this. The ad summarized an IIAC-sponsored survey that provided evidence that Canadian investors highly value their investment advisors. It stated:

77% say their advisor adds value above and beyond market performance
63% say they receive high value relative to fees paid
86% feel confident they will reach their goals
86% say the advice from their advisor is important or critical to reaching their most important financial goals
84% have a high level of trust in their primary advisor

There are a number of reasons why we should take this survey with a huge grain of salt - the sponsor being one and the survey company another (Advisor Impact is a company that helps financial advisers and accountants maximise their profitability and productivity; it works with advisers in the UK, U.S. and Canada). But what really makes the findings meaningless, and perhaps dangerous (if it slows down regulatory reform or encourages investors to blindly trust their advisors) is the likelihood that a large portion of the 1,018 investors surveyed don’t know how they’re doing or have no idea what they’re actually paying their advisors.

The state of client reporting for a vast majority of the industry players is appalling. Indeed, the CSA initiative to improve disclosure around mutual fund fees and performance reporting (the very initiatives that have everyone stirred up) is a result of surveys done by the Ontario Securities Commission that reveal just how little most investors know.

If the industry is going to launch a public campaign to slow down the CSA, it better come up with some better material. Before we put any faith in surveys like the IIAC one, we need to be confident that investors truly understand what they’re paying and how they’re doing.

Steadyhand vs ETFs

Tue, 26 Feb 2013 09:09:22 PST

By Scott Ronalds

Exchange traded funds (ETFs) are now a fixture on the investment landscape and are among the fastest growing investment products. There’s good reason for their rise in popularity: they’re simple, low cost, transparent and provide market-like returns. But ... they’re not for everyone.

In a newly updated paper, we compare the experience of an ETF investor (Jake) to that of a Steadyhand client (Julie). There are notable differences between the two experiences and it’s important that investors are aware of the trade-offs. The paper focuses on four areas: administration, communication, advice and most importantly, returns (as of December 31, 2012).

For those who are frustrated with the returns and business practices of the traditional wealth management companies, ETFs are a good option. For those who strive to beat the indexes and want more advice and service, Steadyhand may be an even better fit.

Ill-equipped for the Job

Mon, 25 Feb 2013 14:25:18 PST

By Tom Bradley

Mohamed El-Erian, the CEO and Co-chief Investment Officer of PIMCO, is a regular contributor to the Financial Times. In his piece today, he opines that the U.S. Federal Reserve will not seek an early end to quantitative easing (QE). For me, the most interesting part of the article was not the reasoning behind his view, but the preamble. He states something that has been lost in the constant commentary about the Fed and what it’s going to do next.

He says, “As a result of varying degrees of political dysfunction, monetary institutions have been thrust into leadership roles for which they find themselves ill-equipped. As such, they are pursuing too many objectives using tools that are too few, too indirect and too imperfect.”

Throughout my career, I’ve always found Fed watching to be ridiculous. As Mr. El-Erian says, trying to manage an economy with interest rates and liquidity (the tools) is like trying to sew a silk blouse wearing ski mitts. Way too much is expected of the Fed and the short-term market volatility its announcements cause is always overdone (i.e. a big deal today, forgotten tomorrow).

Admittedly, as the Fed and other central banks have significantly expanded their balance sheets and pumped liquidity into the system, their impact has been far greater. But we shouldn’t kid ourselves - the Fed’s impact on an important sector like housing (as an example) is about 8th on the list of important factors, coming after prices, inventories, consumer debt levels, household formation, demographics, rental rates and the mood of the local bank’s CEO. Oh, I forgot to mention the weather. I guess that bumps Fed actions down to number 9.

The QE programs have been an important element of the post-crisis recovery, but they are losing their effect now, such that we’re back to where we were early in my career. In other words, the Fed is a big part of the news flow, but a small part of what drives portfolio returns. As Mr. El-Erian said, it has more objectives today, but its impact is ... like, totally 80’s man.

Just the Right Thing to do?

Thu, 21 Feb 2013 16:07:14 PST

By Scott Ronalds

The Canadian clients of Ally Financial got news this week that the sale of the firm to RBC has been completed, the interest rate on their high-interest savings accounts is being reduced from 1.8% to 1.2%, and their accounts will be closed on April 30th, as reported in the Globe and Mail. The notice has caused outrage with many Ally clients and lit up the twittersphere:

@Greggwfg: RBC buys Ally and lowers the Ally client account interest rates from 1.8% to 1.2%...could it be any more obvious how greedy these banks are?
@jacquiemcnish: There goes competition, again in banking sector. RBC to shut down Ally’s high-interest savings accounts
@GailVazOxlade: Bite me RBC! Check out the options peeps: http://t.co/ItjO7t9KrV

Contrary to Ally’s tag line, it’s clear that many of their clients don’t think this move is “Just the right thing to do.” It’s funny, but I feel like I’ve lived this story before. It reminds me of a clever ad I saw a year or so ago.

Shop and Compare

Wed, 20 Feb 2013 09:37:37 PST

By Tom Bradley

As we’ve worked to build our firm over the last six years, one of the frustrations we’ve had is that people don’t know we can manage ‘their’ money. They are aware of us, may follow our writing and even buy into our philosophy, but they think we only work with institutional clients and wealthy families. Our frustration comes from the fact that Steadyhand is suitable for a wide range of individual clients.

This communication barrier has been gradually breaking down, but to help it along, we’ve put together a Feature Comparison tool. Placed prominently on our home page (hint: it’s an apples to apples comparison), the tool compares the Steadyhand offering to four other common providers – full service advisors (brokers), ETFs (via a discount broker), investment counsellors and other no-load mutual fund companies.

The tool lets investors drill into seven categories:

Firm
Investment Philosophy
Product Offering
Service Offering
Cost
Performance Reporting
Miscellaneous

Obviously, we’ve tried to put our best foot forward, but we’ve also made every effort to be complete and balanced in laying out the features of the other players. Having said that, if you see any omissions or feel we’ve misrepresented the experience you’ve had with other firms, please let us know.

Income Investing: Stay Balanced and Don't Reach

Tue, 19 Feb 2013 10:11:54 PST

By Tom Bradley

The team has been working hard to keep client expectations in check. Markets have been good and the Steadyhand funds have performed well, so it’s natural that clients start to expect more from their portfolio.

We’re being a particular downer in the area of income investing. In my view, it will be difficult to generate the kind of returns in the next 5 years that the Income Fund did over the last five (7.4% per year). Interest rates are much lower today and the risk premiums (the potential for extra return) on investment grade and high-yield corporate bonds have shrunk.

In our client presentations earlier this month, we talked about the dangers of ‘reaching for yield’ without considering other factors such as valuation (what the business is worth) and diversification. Right now, it feels like there’s a lot of reaching going on and little consideration being given to the other factors.

I wouldn’t call it a bubble … yet … but there are warning lights flashing on my dash board. For instance, the return gap between income-oriented stocks and other types of stocks has been unsustainably wide over the last 5 years. There isn’t a day goes by that I don’t receive an email announcing a new fund or product that has income, dividend, guarantee or yield in the name. It’s boom times in the new issue market for corporate and high-yield bonds. And I’m even starting to see young investors (who have no need for income) with portfolios that look like those of their parents or grandparents.

While not a bubble, I do think the insatiable thirst for yield will produce some nasty surprises over the next few years, particularly in products that have ‘promised’ unsustainably high monthly payments. The surprises will likely take the form of distribution cuts and/or unexpected declines in the capital value.

What’s more important than a few surprises, however, is the fact that portfolios are steadily getting narrower in their scope and more specialized in their pursuit of income (like the one we discussed in a recent post). Income securities should be part of a well rounded portfolio, but not the whole thing. I firmly believe that over the next 5+ years, the better performing and less risky portfolios will be the ones that also hold small and medium sized companies, non-dividend paying companies in sectors like technology, resources, consumer products and healthcare, and companies based in the U.S., Europe and Asia.

My thinking on this issue is heavily influenced by the following:

1. The yield of the overall bond market (as measured by the DEX Universe Bond Index) is now 2.4%, as opposed to 4.5% five years ago. The regular income from bonds is perceptively lower, and the potential for capital gains is limited (bond prices go up when yields go down).

2. While bonds are most directly impacted when interest rates change, other income-oriented securities like high dividend stocks and real estate are also highly sensitive to rates.

3. On the stock side, two of the big income sectors, banks and REITs, have benefited mightily from strong tailwinds over the last decade. At best, those winds are dying down, but it’s possible they’ll shift 180 degrees and become headwinds.

4. The Canadian banking industry is one of the best oligopolies in the world and will continue to be extremely profitable. But banks have been the chief beneficiary of rising house prices, increased home ownership and the rapid expansion of consumer debt. If Canadians do as Bank Governor Carney and Finance Minister Flaherty want them to - lower their debt and start living within their means - then the competition for mortgages and consumer loans will escalate. And if the equity in their homes goes down due to price declines, the banking system will grind to a halt pretty quickly.

5. Like the banks, REITs are sensitive to interest rates, just way more. The valuation tool used by home buyers is a mortgage calculator (how much can I afford?). For institutional real estate buyers, the measurement used is the capitalization rate or cap rate, which is keyed off of interest rates. The lower bond yields are, the lower cap rates are and as a result, the higher prices are. But when rates go up, property values will drop and the industry will become a lot less fluid. When that happens, it will be a test for investors – will the income flow be enough to keep them in when asset prices are dropping?

As we’ve said (yes, we are repetitive when we feel strongly about something), income securities belong in a diversified portfolio as long as their business fundamentals and valuations make sense. But to generate a reasonable, above-inflation return over the next 5-10 years, we think it makes sense to hold a broader array of assets. Not only do we think returns will be higher, but given where interest rates are today, the risk of capital loss will be lower.

The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

Presentation Summary: Where to From Here?

Fri, 15 Feb 2013 14:01:20 PST

By Scott Ronalds

We wrapped up our cross-country client presentations this month after visiting five cities.

If you weren’t able to attend one of our sessions, or are looking to revisit some of the themes we touched on, we’ve produced a summary of the event that hits on the key topics of discussion (click here to download).

If you have any questions about the presentation, we encourage you to call us at 1-888-888-3147.

I'm Still Here

Thu, 14 Feb 2013 09:11:59 PST

By Tom Bradley

Sher took a call yesterday from a woman who wondered where I’d gone. She was a regular reader of my biweekly column in the Saturday Globe and Mail and noticed it wasn’t there anymore. Indeed, the Globe has been freshening up the Investor section of the Report of Business and as a result, the column has been replaced with some new features.

I’ve enjoyed my association with the paper and may continue to contribute in another way and/or on another schedule. I’ll admit to feeling a little like Trevor Linden when his consecutive game streak ended at 482. I hadn’t missed filing a column for 6½ years. It had become a big part of my life.

The point of this post, however, is to say that I’ll continue to express my views (there’s no turning back) in this space and in other forms. I enjoy writing and have lots to say about picking stocks, building portfolios, hiring fund managers, running investment firms, setting client expectations, assessing market cycles, allocating assets and calling out the wealth management industry for its sometimes appalling practices. (For those of you who aren’t familiar with our website, you can receive everything we write by subscribing to the blog or see the highlights by signing up for our monthly email newsletter, which you can do on the homepage of our site.)

I also want to thank those of you who have followed the column and the blog over the years, and who have encouraged me to keep calling it the way I see it. You don’t know how important your feedback (good and bad) has been for me.

Don't Read Too Much Into an Address

Tue, 12 Feb 2013 10:16:29 PST

By Scott Ronalds

The Asia Pacific is the fastest growing economic region in the world. Not surprisingly, many multinational companies are increasingly focusing on selling their goods and services in countries such as China, Indonesia, Singapore, Vietnam, and the Philippines among others, where populations, consumption and incomes are growing.

A result of this increasing globalization is that a company’s physical headquarters may say little about where it generates its revenues. This is illustrated clearly in our Global Equity Fund. The chart below shows that over 33% of the fund’s revenues are generated in the Asia Pacific (excluding Japan), yet only 20% of the fund’s investments are headquartered in the region. Many U.S., European and Japanese-based holdings, however, generate a large share of their sales in Asia as opposed to their domestic market.

Another takeaway from the chart is that the Global Fund remains heavily focused on Asian and European markets, as opposed to North America. This is a reflection of where the manager (Edinburgh Partners) is finding the best opportunities – i.e. cheap stocks.

RRSP Truths

Fri, 08 Feb 2013 10:01:45 PST

By Tom Bradley

In the current edition of MoneySense magazine, there’s an article on RRSPs entitled, ‘Surprising Truths about Your RRSP’. There is a ton written about RRSPs at this time of year, but I thought this piece did a good job addressing some key issues. In the magazine, there are seven truths, while the on-line version has been trimmed to the most important three.

The article serves as a reminder that reinvesting your tax refund (versus spending it) is key, there are taxes to pay when you start dipping into your RRSP (or likely RRIF) and bear markets are a great time to top up your contributions.

For those who are new to RRSPs, or just need a refresher, give it a read.