Archive | October, 2014

Do You Have the Advisor Six-Pack?

When people criticize the financial industry in Canada, the target of their wrath is usually high fees and underperformance. These are huge issues and, of course, they go hand-in-hand. But the more I work with new clients who arrive after using other advisors, the more I’ve come to appreciate a different problem. I can’t understand why so many mutual fund advisors seem incapable of building a portfolio with a coherent strategy.

This seems almost ridiculously easy. Is it so difficult to pick one fund for each of the major asset classes (bonds, Canadian stocks, US stocks, international and emerging market, real estate) and then assign a target weight to each? Instead I see what I’ve dubbed the “advisor six-pack.” No, not the guy at Investors Group with the ripped abs. I’m talking about the portfolio built from a half-dozen mutual funds thrown together randomly. It’s like the advisor swallowed the Morningstar database and then threw up in the investor’s account.

“Hmm, how about a few thousand bucks in the Mackenzie Growth Fund (the sales rep just visited and gave me Leafs tickets), a few more in the CI Canadian Investment Fund,

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Three Reasons to Ignore Market Downturns

“Long-term investors shouldn’t worry about daily or weekly blips in the markets.” How many times have you heard that? It’s true of course, but most investors don’t heed the advice. And to be fair, it’s hard to ignore the financial markets when there’s non-stop commentary in the news and on social media.

Since markets began falling early last month—the S&P/TSX Composite Index shed more than 11% in the six weeks following September 3—some investors are starting to get spooked. As one wrote to me recently: “A word of encouragement would be appreciated for those of us who recently began the Couch Potato plan and are now seeing our ETFs going down.”

Words of encouragement are helpful, but “don’t worry, be happy,” doesn’t cut it. So here are three specific reasons why a falling stock market shouldn’t shake your confidence in a balanced index portfolio.

1. Downturns are ridiculously normal. A reasonable expected rate of return for a global equity portfolio might be about 7% to 8%. But this is an annualized average over the very long term. In any given year, equity returns are likely to be much lower or much higher.

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An Interview With Wealthsimple: Part 2

Earlier this week I published an excerpt from my interview with David Nugent, portfolio manager of the online investment service Wealthsimple. In this second part of our interview, Nugent goes into more detail about the firm’s investment strategies, including the individual funds they use in their portfolios.

Let’s say you’ve determined an investor’s appropriate asset mix is 60% equities and 40% fixed income. Can you describe how you would divide that across various asset classes?

DN: Our asset classes are Canadian equities, US equities, foreign developed market equities, emerging markets, dividend stocks and real estate, and then there is a component of tactical stocks. The fixed income piece is Canadian investment-grade corporate bonds, Canadian government bonds, US high-yield bonds and cash.

When it comes to choosing ETFs, we try to get the broadest exposure in each asset class. We’re looking to try to capture large caps, mid caps and small caps because we believe that over the long term there is value in having some exposure to that small cap space: they tend to outperform large caps over extended periods. So for Canadian, US, foreign developed and emerging market equities we use total-market cap-weighted ETFs.

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An Interview With Wealthsimple: Part 1

Wealthsimple is one of several online investment firms that have launched in Canada this year. They’ve often been referred to as robo-advisors, though they reject that name, and with good reason. While some parts of the process are automated, clients of these new firms do interact with humans, and all the trades are made by a flesh-and-blood portfolio manager.

At Weathsimple, that portfolio manager is David Nugent, and we recently sat down to discuss the firm’s advice model and investment strategy. Here’s the first part of our interview.

The first step in building a client’s portfolio is determining an appropriate asset allocation. How do you do that?

DN: The first step is a 10-question risk assessment clients do online when they sign up for an account. After that they book a call with me—or, as we grow, someone else on our team. We try to get an understanding of their past investing experience and any biases they might have, and then we talk about the asset mix. The real conversation happens over the phone.

Surprisingly, we’re more likely to see people increase their risk level after the phone call.

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Vanguard Makes Its Move

You knew it was coming: Vanguard Canada has dramatically reduced the fees on 11 of its ETFs. The announcement came this week, and it affects some of the most popular funds in the Vanguard lineup:

ETF
Ticker
Old fee

New fee

Vanguard FTSE Canada
VCE
0.09%
0.05%

Vanguard FTSE Canada All Cap
VCN
0.12%
0.05%

Vanguard FTSE Canadian High Dividend Yield
VDY
0.30%
0.20%

Vanguard S&P 500
VFV
0.15%
0.08%

Vanguard S&P 500 (CAD-hedged)
VSP
0.15%
0.08%

Vanguard FTSE Developed ex North America
VDU
0.28%
0.20%

Vanguard FTSE Developed ex North America (CAD-hedged)
VEF
0.28%
0.20%

Vanguard FTSE Emerging Markets
VEE
0.33%
0.23%

Vanguard Canadian Aggregate Bond
VAB
0.20%
0.12%

Vanguard Canadian Short-Term Bond
VSB
0.15%
0.10%

Vanguard Canadian Short-Term Corporate Bond
VSC
0.15%
0.10%

Normally the leader when it comes to low costs, Vanguard actually got scooped by its competitors in Canada this year. iShares slashed fees on several ETFs back in March, and BMO followed up a month later with dramatic cost cuts of its own. In a blog post last spring comparing the core equity ETFs of the three providers I wrote: “Surprisingly, the Vanguard counterparts are now the most expensive in the group.

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How Taxes Can Affect ETF Performance

In our recent white paper, After-Tax Returns, Justin Bender and I introduced a methodology for measuring the effect of income taxes on ETF returns. Justin also created a downloadable spreadsheet you can use to estimate the after-tax returns of funds in your own portfolio.

As we explain in the paper, funds with similar pre-tax returns can look quite different when you compare their performance after the CRA has taken its cut. Remember that on a pre-tax basis investment gains are reported in the same way whether they’re Canadian dividends, fully taxable income or capital gains. If you’re investing in a tax-sheltered account, it’s all the same. But in a non-registered account, distributions are taxed in different ways, and this can dramatically affect the amount of money you actually keep.

Here’s a real-world example that illustrates how large the difference can be. Justin collected the distribution and price data for the iShares Core S&P/TSX Capped Composite (XIC) and the DFA Canadian Core Equity Fund (DFA256) over the nine years ending in 2013. Both funds track the broad Canadian stock market, so you would expect similar returns. And indeed,

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